PIETER WEIDEMAN
Summary of discussion
Compilation of the CPI involves a number of measurement issues which are discussed in greater detail in the background issues note and the individual contributions. In particular, the main issues and challenges in the computation of the CPI were seen in four broad areas: the coverage of the CPI, data collection methods, the aggregation of micro prices into the composite index and, the treatment of specific types of prices such as administered prices.
In terms of coverage, typically, the products included in the basket of goods, the reference population, and the retail outlets used in the sample are key aspects of the methodology of CPI compilation. The second issue is about the way in which data are collected. One possible focal point related to the use of scanner data for the compilation of the CPI and whether these data had the potential to solve some of the measurement issues. The third issue relates to the aggre-gation of micro prices into the overall CPI and, in particular, the question of the appropriate aggregation method. Finally, the issue of treatment of administered prices poses a significant challenge to many countries. The discussion dealt with the treatment of certain types of admin-istered price changes which may need to be excluded from the CPI formula precisely because they are so specific and therefore not very informative for analytical purposes. These types of price changes include changes in indirect taxes, changes in administrative prices and price changes of seasonal goods. More generally, administered prices are not a collection issue, but an interpretation issue for users of CPI data.
The coverage of the CPI sample poses several issues. First, there is the question of bias-outlet bias illustrates this issue well; the appearance of new outlets has to be taken into account in the data collection. Indeed, if those new outlets are cheaper, a substitution effect will occur. In the US, Jerry Hausman, had argued that the BLS was not appropriately taking into account the appearance of Wal-Mart. This could result in a measurement bias, if the new estab-lishments are not included in the data collection procedure.
Using multiple sources of data collection can help to better understand the price differentials of products in different markets. For instance, INSEE conducted an analysis of price movements of products that were bought by consumers in supermarkets and discount shops and noticed dif-ferent price evolutions in difdif-ferent kinds of outlets. Similarly, changes in the sources of data (reference population or geographical coverage) can have marked effects on the CPI. For instance, the Indonesian statistical office had collected prices only in traditional markets before 2001. The subsequent inclusion of supermarkets resulted in a downwards pressure on inflation.
Furthermore, the increase in geographical coverage (new cities added to the survey) could bring changes to the CPI level. In cities with infrastructural problems there is a persistently higher level of CPI as compared to national CPI. It is also it is important to remember that usually sam-ples are collected in big cities which tend to have a higher price level compared to the newly added smaller cities (located near rural areas). When such changes occur, it would be necessary to link back the series with the old sample at hand so year-on-year changes can be computed on a consistent basis.
The process of collection of prices data at the micro level has its share of complications.
Most countries resort to a sample coverage based on direct collection of price data from retail outlets. Methods like postal survey as in South Africa are being replaced by more direct ways of collecting the information as the former is considered less satisfactory in terms of the quality of the information obtained. More recently, some countries have adopted newer modes of collec-tion such as collecting the prices from the Internet. This could become a standard in the future as it can be cost-effective, timely and accurate. Moreover, it would allow monitoring the appear-ance of new outlets. Price collection from the Internet should be included in the CPI calculation as soon as the presentation of prices on the Internet has become standard.
Aggregation of the micro prices into sub-groups and into a composite index has both pract-ical and methodologpract-ical implications. For a start, the sample should be large enough to provide reliable estimates of elementary aggregates. Moreover, it is necessary to account for substitution when, for instance, consumers switch from relatively expensive items to relatively cheaper ones as a result of changes in relative prices. The use of the geometric mean was seen as an impor-tant aggregation tool at the micro level which could more appropriately handle substitution bias.
It was widely accepted that one had to discriminate between administered prices and other prices in order to have a proper assessment of price development. The concept could be more or less defined but the implementation was considered to be extremely difficult (at least among
EU-countries) as countries apply concepts in different ways. This was becoming a real issue due to the high share of administered prices in the HICP in some countries. On the treatment of rent (which are usually classified as administered prices), it was suggested that only social housing and housing offered by governments at low rents could be considered as administered prices.
Rents on the private housing markets should be treated with care: what is sometimes regulated is the increase in rent, but not the level. Tenants can enter into contracts with landlords at any (unregulated) level.
It was also noted that, as central banks are mostly interested in monitoring inflation, it was important to avoid having different sets price indicators to measure the level of inflation. This is important in the context of administered prices. Two things should be distinguished: there is some government influence on price setting (examples include rents, electricity, theatre tickets) and there are other items where the out-of-pocket expenditures of households are much smaller than the “true” price of these goods. The share of out-of-pocket expenditures, however, may vary over time. For instance, due to the changes to the health care reform in Germany, con-sumers have to pay a higher price for health services, but the producer price of health services has not changed and thus the impact on the GDP deflator was close to zero. In such cases, con-flicting signals are received by the consumers: consumer price inflation accelerated, whereas a hypothetical PPI for health service would not have increased. As a tool for measuring price sta-bility the CPI would then not be the most informative indicator. As alternative measures for inflation, the GDP deflator or the PPI would be more appropriate in such specific cases.
If the share of administered prices in the CPI is high, these prices tend to increase much faster than the market prices in periods of high inflation (two times), as in Brazil or Argentina.
It was an open question whether the inflation rate would have been lower without administered prices.
In conclusion, there was a general agreement that while it is difficult to reach a consensus on which part of the administered prices should be excluded from the CPI, there was need for more discussion on this issue.