What Is a Market Basket?

A market basket is a group of products designed to track the performance of a specific market segment. Market basket economics focuses on the Consumer Price Index (CPI), which tracks various consumer goods and uses their price levels to provide an estimate of inflation. However, for investors, a market basket relates to financial securities and is the principal idea behind index funds

Key Takeaways

  • A market basket is a permanent mix of goods and services that inform investors and analysts of the performance of a specific market segment.
  • A popular market basket is the Consumer Price Index (CPI), which provides an estimate for inflation based on the average change of price paid for a specific basket of goods and services over time.
  • The CPI uses over 200 categories, including education, housing, transportation, and recreation, as an economic measure.
  • A market basket analysis is used by retail stores to predict and increase impulse purchases based on groups of items a customer buys.

How a Market Basket Works

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 market baskets to track price changes over time and determine inflation levels. The most well-known and widely used market basket is CPI, which helps economists predict consumer purchase trends.

The financial system uses market baskets like the S&P 500 and 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.

Special Considerations 

A market basket analysis is generally used in retail. It is based on the idea that most purchases are impulse buys, and the analysis attempts to predict what a customer might have purchased had the idea occurred to them.

Market basket analysts look at a group of items purchased by a customer and then try to determine what else that customer might buy if it was presented to them. Analysts use this information to decide where to locate items in a store, what demographics make certain purchases, what days of the week these purchases may be made, and what times of the year these customers spend the most money, among others. 

Market basket analysis can be used to predict credit card purchases, phone calling patterns, insurance fraud, and more.

Types of Market Baskets 

The CPI is an economic measure that looks at the average change in the price 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.

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 most representative of average purchases. Each category selected is given a weight regarding its proportion to the basket of goods. Some of the categories in the CPI's market basket include housing, transportation, recreation, apparel, and education.

The market basket used for the CPI also includes components outside the scope of consumer goods and services. Government fees of public goods, 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.