How can you tell whether purchasing prices increased when quantities change every month? Comparing invoice totals measures expenditure, not price alone. Average unit prices can also mislead when the business switches from economy products to higher specifications. A practical alternative is to ask what a defined basket from a reference period would cost at today's comparable prices.
This internal index does not replace inventory costing or measure the whole purchasing function's performance. It is a focused tool for examining price movements consistently. It can sit beside GASTAT wholesale price data, provided the report makes clear that the business's basket and weights do not represent the entire Saudi market.
Build the basket before drawing the trend
Select recurring products with stable specifications and units of measure. Choose reference quantities that reflect their importance during a suitable purchasing period. Avoid an exceptional month dominated by emergency orders or clearance purchases unless that choice is deliberate and explained. Preserve the basket version and its effective date so that changing weights do not silently change the result.
Consider an illustrative two-item basket: 100 packing cartons at a base price of SAR 20 each, and 50 protective rolls at SAR 40 each. Its reference cost is SAR 4,000. Comparable current prices become SAR 22 per carton and SAR 38 per roll, with specifications and comparison terms unchanged.
| Item | Fixed basket quantity | Basket cost at base prices | Basket cost at current prices |
|---|---|---|---|
| Packing cartons | 100 | 2,000 | 2,200 |
| Protective rolls | 50 | 2,000 | 1,900 |
| Total | — | 4,000 | 4,100 |
The current index is 4,100 ÷ 4,000 × 100 = 102.5. With the base period set to 100, the basket has become 2.5% more expensive. Actual expenditure need not have risen by that percentage: the business may have purchased more rolls and fewer cartons. Nor did every supplier increase prices. The carton increase was partly offset by cheaper rolls.
If the next period's index reaches 105, the increase from 102.5 to 105 is approximately 2.44%, not 2.5%. The increase since the base period is 5%. Always label the comparison period; a difference in index points is not necessarily the percentage change between those values.
Three things that can create a false increase
- Pack size changes. If a supplier replaces a carton of 100 pieces with a carton of 80, convert to a per-piece price or document the specification difference rather than comparing carton prices directly.
- Delivery terms change. A quotation including freight cannot be compared with one excluding it without an explicit adjustment. Decide whether the index measures supplier prices or landed cost, then maintain that boundary.
- Current prices are missing. Do not enter zero for an item not purchased this month, as that invents a price reduction. Obtain a comparable quotation or flag the observation as missing, explaining how any exclusion changes coverage.
Also separate an earned discount from a conditional volume rebate whose entitlement has not yet been established. For foreign-currency purchases, state whether the objective is to measure prices in the original currency or costs in Saudi riyals. Showing both can distinguish supplier negotiations from exchange-rate effects instead of assigning the entire movement to purchasing staff.
Turn the result into a specific question
When the index rises, inspect each item's contribution to the monetary difference. In the example, cartons add SAR 200 while rolls save SAR 100. Commercial investigation therefore starts with cartons rather than a blanket demand for reductions from every supplier. Check quality, lead times and contracted quantities before judging the negotiation outcome.
GASTAT describes the Wholesale Price Index as a measure of price changes in locally produced and imported goods in wholesale markets between periods. For an external comparison, select a relevant group and matching period, then explain how your basket differs. Do not present the internal index as an official statistical release or treat divergence from the headline index alone as proof of staff underperformance or supplier overcharging.
Alongside the result, disclose coverage by items with usable comparable prices, material exceptions and any basket changes. If the basket is rebuilt, show the break or link the periods using an explained comparison method. An attractive trend line is not informative when its definition changes without the reader knowing.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
