What is a 'Market Basket'
A market basket is a subset of products or financial securities that is designed to mimic the performance of an overall market.
For investors, the market basket is the principal idea behind index funds, which are essentially a broad sample of stocks, bonds or other securities in the market; this provides investors with a benchmark against which to compare their investment returns.
Another popular market basket relates to the Consumer Price Index (CPI), which tracks a variety of consumer goods and looks at the price levels of consumer products, providing an estimate for inflation.
BREAKING DOWN 'Market Basket'
A market basket refers to a permanent mix of goods and services that are consistently purchased and sold throughout an economic system. Economists, politicians and financial analysts use a market basket to track price changes over time and determine inflation levels. The financial system uses market baskets like the S&P 500. However, the most well-known and widely used market basket is used in the CPI, which helps economists predict consumer purchase trends.
Consumer Price Index (CPI)
The CPI is an economic measure that looks at the average change in prices paid for a specific basket of goods and services over time. The CPI is used as a macroeconomic indicator, a deflating tool and a way of adjusting monetary values. The CPI is not a cost-of-living index; instead, it is a measure of spending patterns and price levels for urban consumers and urban wage earners. The index, unlike various employment measures, takes into account the unemployed and the retired.
CPI Market Basket of Goods
The market basket that the CPI uses is derived from information given by people regarding their spending habits. Over 200 categories of consumption within the CPI structure is analyzed to produce a mix of goods and services that is most representative of average purchases. Each category selected is give a weight regarding its proportion in the basket of goods. Some of the categories included in the CPI's market basket include housing, transportation, recreation, apparel and education.
The market basket used for the CPI also includes things outside the scope of consumer goods and services. Government fees of public good, for example, like water and sewage, are included in the market basket. Taxes levied on the products and services already included in the market basket are also included. However, financial products like stocks and bonds are not included in the market basket. Essentially, the market basket represents all goods and services bought and sold by the population represented by in CPI, roughly 87% of the country.