A market basket is a group of consumer goods and services used to create the consumer price index (CPI). By comparing prices in the CPI from one year to the next, economists can determine if inflation is rising or falling. Market baskets are also used by investors to create indexes and mutual funds from stocks and bonds.
These various market baskets are used by economists, retailers, and investors alike. Retailers use the CPI to predict impulse buys by consumers. As mentioned above, economists create a permanent mix of goods that are bought and sold. Investors create a market basket from bonds, stocks, and even of other indexes, such as the S&P 500.
CPI is a macroeconomic indicator and a reflection of spending patterns. That is why it is useful to retailers. It is not a cost-of-living index. The government uses CPI to adjust monetary policy. Through feedback from consumer surveys, officials are able to put together spending patterns and average prices for items. To provide an accurate representation of the economy, the CPI covers a broad range of goods and services categories. These categories include recreation, apparel, housing, transportation, and education.
In addition to consumer-related goods and services, CPI also includes government fees of public goods such as water and sewage. Any taxes levied on the products and services that are in the CPI are also included.