2000 (base year)
$1,350 divided by $1,000
multiplied by 100
our price index is 135 (prices has increased 35% from 2000 to 2007)
given that the base year is always 100
Using a price index is a good way to gauge current inflation levels, it also functions as an early warning tool if prices are way far from equilibrium and a market correction might be underway. However, as the name implies, the index measures only the surface or what is visible within the bounds of mathematics. It doesn't measure human satisfaction whether the reason for the increase in price is because of an improvement in quality of the good or a service.
In that case, it should cancel the increase in price as an improvement in quality doesn't really result in a change of the cost of living.