UNECE Workshop on Consumer Price Indices Istanbul, Turkey,10-13 October 2011
description
Transcript of UNECE Workshop on Consumer Price Indices Istanbul, Turkey,10-13 October 2011
United Nations Economic Commission for EuropeStatistical DivisionUnited Nations Economic Commission for EuropeStatistical Division
UNECE Workshop on Consumer Price IndicesIstanbul, Turkey,10-13 October 2011
Session 1: CPI as a measure of inflation or cost of living?
Presentation by Carsten Boldsen, UNECE
UNECE Statistical Division Slide 2
Overview
1. Different uses of the CPI2. 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 3
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 4
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 5
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:
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
i
bi
ib
itLo
t qpqp
I0
:0
UNECE Statistical Division Slide 6
2. CPI as a measure of inflation or cost of living
Cost of living index:
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
i
itCOLI
tpUC
pUCI
0
:0,
,
UNECE Statistical Division Slide 7
3. Practical differences between COLI and inflation index
Types of acquisitionInflation 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 8
3. Practical differences between COLI and inflation index
Population coverageInflation 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 9
3. Practical differences between COLI and inflation index
Owner-occupied housingInflation 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 10
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 transactionImputed 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 11
4. Target indices for the CPI
Steps in developing the CPI1. Consultation with main users of the CPI2. Define the (main) purpose of the index3. Define the scope and the actual coverage of the
index4. Select an ideal target price index5. Decide which calculation formulas to apply in
practice
UNECE Statistical Division Slide 12
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 CPINecessary with a measurable target to quantify the size of any potential bias: bias = target CPI – actual CPI
UNECE Statistical Division Slide 13
4. Target indices for the CPI
Walsh and Marshall-Edgeworth are good fixed basket indices
Walsh
iit
it
i
iit
it
iiW
i
iti
Wit
ii
it
iitW
t
ppww
ppww
ppw
qqp
qqpI
00
00
000
0:0
/
/ w
UNECE Statistical Division Slide 14
4. Target indices for the CPI
ME
00:
00 0
0 0
0 0
/ 2
/ 2
/w
/
i i i it tME i t
t ME ii i it
i i i it ti
MEi i i i
t t
i i it t t
p q q pI w
pp q q
v v p p
v v p p
v p q
UNECE Statistical Division Slide 15
4. Target indices for the CPI
Fisher and Törnqvist price indices are good COLIs:
2/1
000
0:0
it
i
it
it
ii
iitF
t qpqp
qpqp
I
2
0:0
0it
i ww
i
itT
t pp
I
UNECE Statistical Division Slide 16
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 17
The Danish CPI compared with an ideal index
95
100
105
110
115
120
1996 1997 1998 1999 2000 2001 2002 2003CPI Walsh
UNECE Statistical Division Slide 18
The Danish CPI compared with an ideal index
Danish CPI - Annual rate of change (%)
Conclusion: The CPI exceeds Walsh by 0,05 % point on the annual rate of change, on average
1997 1998 1999 2000 2001 2002 2003 Av % change
CPI 2,13 1,87 2,51 2,91 2,37 2,44 2,08 2,33Walsh
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
UNECE Statistical Division Slide 19
The Canadian CPI compared with an ideal index
Canadian CPI – annual rate of change (%)
- Computers are excluded- Walsh identical to Fisher and Törnqvist- The Canadian CPI is a Lowe index
1996-2001 2001-2005 1996-2005
CPI 2,01 2,37 2,17Walsh 1,97 2,17 2,10Diff. 0,04 0,20 0,07
UNECE Statistical Division Slide 20
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 21
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 22
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
Superlative indices can be calculated retrospectively for evaluation of the CPI
0: 0:t b ti iCPI w P