Transcript United Nations Economic Commission for Europe Statistical Division UNECE Workshop on Consumer Price Indices Istanbul, Turkey,10-13 October 2011 Session 1: CPI as a measure.

United Nations Economic Commission for Europe
Statistical Division
UNECE Workshop on Consumer Price Indices
Istanbul, Turkey,10-13 October 2011
Session 1: CPI as a measure of inflation or
cost of living?
Presentation by Carsten Boldsen, UNECE
Overview
1.
Different uses of the CPI
2.
CPI as a measure of inflation or cost of living?
3.
Practical differences - COLI and inflation index
4.
Target indices for the CPI
5.
Some useful links
6.
Conclusions
UNECE Statistical Division
Slide 2
1. Different uses of the CPI
Most CPIs are used for many purposes:
as a measure of the general rate of consumer price
inflation
as a measure of changes in the cost of living
deflation of national accounts series
indexation of wages, pensions and the like
indexation of private contracts
UNECE Statistical Division
Slide 3
2. CPI as a measure of inflation or cost of living
The literature distinguish between two types of
consumer price indices:
Inflation or fixed basket price indices
Cost of living indices (COLIs)
UNECE Statistical Division
Slide 4
2. CPI as a measure of inflation or cost of living
Inflation or fixed basket index:
Measures the average price change of a basket of goods and
services that is kept constant over time
A fixed basket index is a Lowe price index:
I
Lo
0:t


p
pti qbi
i
0
qbi
Lowe is a general type of basket index – the basket can refer to
any period or combination of periods
The index compiler needs to select the weight reference period
and use expenditure shares rather than quantities
UNECE Statistical Division
Slide 5
2. CPI as a measure of inflation or cost of living
Cost of living index:
I
COLI
0:t



C U , p 
C U , pti
i
0
C(U,P) is the cost of maintaining the reference level of utility, U,
in period 0 and t
The quantities are allowed to vary in the periods compared
Cannot be calculated in practice – needs to be approximated
UNECE Statistical Division
Slide 6
3. Practical differences between COLI and inflation index
Types of acquisition
Inflation index
COLI
Purchases in monetary transactions
May also include own-account
production and social transfers in
kind
Include only actual observed market
prices
May also use imputed prices –
necessary when there are no market
transactions
Should be reflected in both weights
and prices! Weighting data may
include non-monetary consumption
Should be reflected in both weights
and prices! Imputed prices not
always easy to obtain!
UNECE Statistical Division
Slide 7
3. Practical differences between COLI and inflation index
Population coverage
Inflation index
COLI
Domestic concept
National concept
Include consumption on domestic
territory by households, also
consumption by foreign
households/tourists, and by
institutional households
Include consumption by the resident
population home and abroad
Consumption by foreigners difficult to
measure: Usually not included in the
HBS; estimates may be obtained
from NA or other sources
Difficult to follow price development
abroad! In practice consumption
abroad is usually left out
UNECE Statistical Division
Slide 8
3. Practical differences between COLI and inflation index
Owner-occupied housing
Inflation index
COLI
Net acquisition approach
Rental equivalent or user cost
approach
Include the actual purchase of
dwellings by the households: Newly
build houses, houses bought from
other sectors and self-constructed
houses. Excludes the use of houses!
Include the consumption of house
service (shelter) by equivalent rents
or by estimating the user costs.
Excludes the acquisition of houses
Should be reflected in both weights
and prices! Difficult to obtain good
and timely data
Rental equivalent: difficult if the rental
market is small or little/no connection
between markets.
User cost: What costs should be
included?
UNECE Statistical Division
Slide 9
3. Practical differences between COLI and inflation index
Own account production (OAP)
Inflation index
COLI
Goods and services produced by households for their own consumption.
Includes food, particular Important in rural households, services of OOH and
other services, cooking, child caring, washing, cleaning etc.
Actual market prices are not available
but has to be estimated.
There are no monetary transaction
Imputed prices does not add new
information to inflation calculation
Price changes influence the
opportunity costs of household for
consuming their own production.
OAP of goods and OOH services
included in household final
consumption expenditure (SNA)
Should be excluded
Should be included. Other services
(cooking, washing etc.) excluded
because suitable prices cannot be
found.
UNECE Statistical Division
Slide 10
4. Target indices for the CPI
Steps in developing the CPI
1.
2.
3.
4.
5.
Consultation with main users of the CPI
Define the (main) purpose of the index
Define the scope and the actual coverage of the
index
Select an ideal target price index
Decide which calculation formulas to apply in
practice
UNECE Statistical Division
Slide 11
4. Target indices for the CPI
What is a target index?
An ideal index that in principle may be calculated on
the basis of information of prices and quantities/
expenditures
Why is a target index useful?
It provides a reference frame for the practical
compilation of the CPI
Necessary with a measurable target to quantify the
size of any potential bias:
bias = target CPI – actual CPI
UNECE Statistical Division
Slide 12
4. Target indices for the CPI
Walsh and Marshall-Edgeworth are good fixed basket indices
I 0W:t 
Walsh
p
i
t
i
p
 0
wWi
q q
i


p
i
t
  wW   i 
q0i  qti
 p0 
i
0
i
t

w  w 
/ p p 

/ p p 
 w  w 
i
0
i
t
i
0
i
t
i
t
UNECE Statistical Division
i
0
i
t
i
0
Slide 13
4. Target indices for the CPI
I 0:ME
t 
ME
w
i
ME
i
i
i
q

q
p
 t  0 t  /2
i
i
i
q

q
p
 0 0 t


i


p
i
t
  wME  i 
 p0 
/2
v0i  vti /  pti p0i 



v0i  vti /  pti p0i 

vti  pti qti
UNECE Statistical Division
Slide 14
4. Target indices for the CPI
Fisher and Törnqvist price indices are good COLIs:
I
F
0:t
I
p q

p q

T
0:t
i i
t 0
i i
0 0
p q
p q
i i
t t
i i
0 t
 p 

  
p 
i
t
i
0
1/ 2




w  w 2
i
0
i
t
UNECE Statistical Division
Slide 15
4. Target indices for the CPI
The CPI Manual concludes:
“Fisher, Walsh and Törnqvist price indices approximate each
other very closely using “normal” time series data. This is a
very convenient result since these three index number
formulae repeatedly show up as being “best” in all the
approaches to index number theory. Hence, this approximation
result implies that it normally will not matter which of these
indices is chosen as the preferred target index for a consumer
price index.”
(The CPI Manual, 17.3)
UNECE Statistical Division
Slide 16
The Danish CPI compared with an ideal index
120
115
110
105
100
95
1996
1997
1998
CPI
1999
2000
2001
2002
2003
Walsh
UNECE Statistical Division
Slide 17
The Danish CPI compared with an ideal index
Danish CPI - Annual rate of change (%)
1997
1998
1999
2000
2001
2002
2003
Av %
change
CPI
2,13
1,87
2,51
2,91
2,37
2,44
2,08
2,33
Walsh
2,05
1,77
2,44
2,77
2,34
2,52
2,05
2,28
Diff.
0,07
0,10
0,07
0,15
0,03
-0,08
0,03
0,05
Conclusion:
The CPI exceeds Walsh by 0,05 % point on
the annual rate of change, on average
UNECE Statistical Division
Slide 18
The Canadian CPI compared with an ideal index
Canadian CPI – annual rate of change (%)
1996-2001
2001-2005
1996-2005
CPI
2,01
2,37
2,17
Walsh
1,97
2,17
2,10
Diff.
0,04
0,20
0,07
-
Computers are excluded
Walsh identical to Fisher and Törnqvist
The Canadian CPI is a Lowe index
UNECE Statistical Division
Slide 19
5. Some useful links
CPI Manual in English is available from
www.unece.org/stats/archive/02.07.e.htm
Supplementary Handbook: Practical Guide to
Compiling Consumer Price Indices. Aavailable on
www.unece.org/stats/documents/2008.05.cpi2.htm
Papers from Joint UNECE/ILO Meetings on CPI are
available on
www.unece.org/stats/archive/docs.date.e.htm
Papers from meetings in the Ottawa Group on Price
Indices are available from www.ottawagroup.org
UNECE Statistical Division
Slide 20
6. Conclusions
A clear definition of the main purpose(s) of the index
is useful for the users and for the statistical office
and provides guidance on geographical, population
and product coverage
Selection of an ideal target index provides a
reference frame and is needed for calculation of bias
Whether the purpose is to measure pure price
changes or the cost of living Fisher, Walsh and
Törnqvist (superlative indices) are best options
For practical purposes the three indices can be
expected to give very similar results
UNECE Statistical Division
Slide 21
6. Conclusions
The superlative indices all uses weights from current
period, which are not available in real time!
The CPI has to be calculated on basis of available
weighting and price data
CPI 0:t   wib Pi 0:t
Superlative indices can be calculated retrospectively
for evaluation of the CPI
UNECE Statistical Division
Slide 22