Indexes may be utilized to deflate time series so that comparisons among periods may be made in real terms.
This is a process of decreases a value measured in current period prices to its equivalent in the base period prices. The deflated value is what would have been essential to purchase the similar amount of goods as the present value can purchase in the current period.
Deflation Factor =
The technique or method of index number construction
While preparing index numbers it is significant to define
a) The choice of the weights
b) How the items are to be selected
c) The exact purpose of the index
d) The type of average to be used
e) The choice of the base
The base year must be as close to the general trend as possible. The best methods must be utilized for collection of data. The items must be selected in a way such that they are a fair representation of all the relevant items.
Due consideration must be described to the weighting of all items selected