The Impact of the Price Index Formula on the Consumer Price Index Measurement

Abstract

The Consumer Price Index (CPI) is a common measure of inflation. Similarly to the Harmonised Index of Consumer Prices (HICP), it is determined using the Laspeyres index, thus data on the consumption of the basket of goods do not have to be current. The Laspeyres index, using weights only from the base period, may not reflect changes in consumer preferences that occurred in the studied year. In the ideal case, the CPI should be measured by one of the so called superlative price indices, such as the Fisher, Törnqvist or Walsh index formulas. The main problem with such indices is that they need expenditure data from the current period. The aim of the article is to assess the impact of the choice of the price index formula on the CPI measurement. We verify differences among known index formulas at the lowest and some higher data aggregation levels. We use known bilateral unweighted and weighted formulas together with their chained versions.

Keywords

• Inflation measurement
• Consumer Price Index (CPI)
• price indices
• elementary price indices
• chain indices
• formula bias
• scanner data