The term market basket refers to a bundle or group of products that can be indicators of the overall performance of a specific industry, sector, or market segment. Market baskets can be classified such that they enable traders and investors to track the performance of a given sector. The most common technical indicator used to determine the same is known as the Consumer Price Index (CPI).
The term market basket refers to a bundle or group of products that can be indicators of the overall performance of a specific industry, sector, or market segment.
The most common technical indicator used to determine the same is known as the Consumer Price Index (CPI).
The concept of market baskets is also used in financial markets and retail.
Market Baskets and CPI
The Consumer Price Index (CPI) analyzes the price levels of multiple consumer goods in a market in order to estimate inflation levels in an economy. The index includes over 200 categories of goods and services. They include fast-moving consumer goods, agricultural products, education, recreation, housing, transportation, etc.
The CPI is usually used by economists, monetary policy formulators, politicians, and even financial analysts to track price changes over a given period of time and determine the level of inflation. Each of the products considered is classified into different segments, and each of the segments is assigned different weights to arrive at the CPI.
The CPI only considers inflation in terms of changes in the selling price of a product to the final consumers. It means that it is not a reliable indicator of all types of inflation, such as inflation in the production process and inflation in the labor market. The latter is measured by the employment cost index, while the producer price index (PPI) measures inflation in the production process.
Inflation for imports and exports is displayed by the international price program. Inflation, as experienced by governments and other institutions, is shown by the gross domestic product figure. Unlike other indices, the CPI takes into account the unemployed as well, given that it considers the purchases made by both the urban and rural populations.
Market Baskets for Financial Markets
For most investors, a market basket is one that considers financial securities, not consumer goods. And in place of indicating inflation levels, it uses index funds to predict future price movements in the stock market. In such a system, an index fund, such as the S&P 500 or the NIFTY 50, can be considered a market basket. An index fund provides investors with a benchmark, and they can compare the returns on their investments to the relevant benchmark.
Under a basket order, multiple trades can be executed simultaneously. The trades are done using sophisticated software and hence can only be executed using program trading strategies. It makes basket trading accessible only to hedge funds, institutional investors, exchange-traded funds (ETFs), mutual funds, etc. Most retail brokers will enable their customers to place basket orders and execute those trades for their clients.
Market Baskets in Retail
In retail, a market basket analysis is used to predict and increase the percentage of impulse purchases made by consumers. It is because most of the sales at retail stores are generated because they are impulse purchases. So, a market analysis considers a group of products that were previously purchased by a customer and tries to predict what other goods the customer might’ve purchased if they’ve been presented with it.
The information is used to determine the location and of products in a store, right down to how the product is displayed on the shelves. It also analyzes which demographic makes a certain type of purchase most, which enables product selection may retail employees. For example, a retail store close to a university may carry microwavable meals.
Other seemingly irrelevant details can be useful in market analysis, such as what purchase is made on which day of the week, what time of the year attracts the most customers, or when customers are willing to spend a larger amount of money (such as the holiday season), etc.
Even outside of physical retail stores, market analysis can be used to predict patterns in credit card purchases, insurance fraud, phone call patterns, etc.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
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