A price index turns the cost of a fixed basket of goods into a single number, set to 100 in the base year. To read it, compare any later value with 100, or with another year’s value, using percentage change. This appears whenever a data response gives you a consumer price index table.
The skill sits at the start of inflation and unemployment and supports every later lesson.
How does an index work?
Take the fictional economy of Lestari. Statisticians choose a basket of goods that a typical household buys: rice, bus fares, electricity, school supplies and so on. In the base year the basket costs RM500, so the index is 100.
In a later year the same basket costs RM630. The index is calculated as:
Index = (cost of basket now ÷ cost in base year) × 100 = 630 ÷ 500 × 100 = 126
Because the basket stays the same, the change comes from prices, not from buying different things.
How do you find a percentage change between two years?
Use the standard form: change ÷ starting value × 100. The starting value is the earlier year in the comparison, not the base year, unless the base year is the earlier year.
Worked example
Lestari’s index for three years is shown.
| Year | Index (base year = 100) |
|---|---|
| 2023 | 120 |
| 2024 | 126 |
| 2025 | 129.78 |
Step 1, 2023 to 2024: change = 126 − 120 = 6 points.
Step 2, divide by the starting value: 6 ÷ 120 = 0.05, so the rate is 5%.
Step 3, 2024 to 2025: change = 129.78 − 126 = 3.78 points. 3.78 ÷ 126 = 0.03, so the rate is 3%.
Step 4, compare with the base year: 129.78 means prices are 29.78% higher than in the base year.
Notice that the point change (6 then 3.78) and the percentage change (5% then 3%) tell different stories about size, because the starting values differ.
The mistake to watch for
A common slip is to treat points as percent.
Mistaken answer: “The index rose from 120 to 126, so inflation was 6%.”
The student wrote the point change as a percentage. That only works when the starting index is 100.
The correction is to divide by the starting value: 6 ÷ 120 = 5%. If a question gives a base-year-to-now index such as 126, then reading it directly as “26% higher than the base year” is correct, because the starting value there really is 100. Check which comparison the question asks for.
Check yourself
1. An index rises from 150 to 162. Calculate the percentage change.
Show answer
Change = 162 − 150 = 12 points. 12 ÷ 150 = 0.08, so 8%.
2. In a base year the basket costs RM800. Now the index is 135. What does the same basket cost now?
Show answer
Index 135 means 35% higher than the base year. 800 × 1.35 = RM1,080.
3. An index was 125 in 2022 and 140 in 2026. Is the rise 15%? Explain.
Show answer
No. The rise is 15 points, but the percentage is 15 ÷ 125 = 0.12, so 12%. The 15 points would equal 15% only if the 2022 index were 100.
Where this leads next
Next, distinguish a price level from its rate of change, which uses the same table to explain why slower inflation does not mean cheaper goods. Practise with the percentage-base explorer, then test yourself on the mixed practice set.
Students who read the table correctly in class but slip under time pressure often benefit from a teacher watching the working, which is what online one-to-one Economics tuition offers.