Methodology Manual for the (National) Consumer Price Index (CPI) Base Year: 2009=100 (Preliminary version)

Transcription

1 Methodology Manual for the (National) Consumer Price Index (CPI) Base Year: 2009=100 (Preliminary version) National Statistical Institute Office of the Director of Operations Department of Price Statistics Santiago - February 2009

2 TABLE OF CONTENTS Pages 1. Introduction 4 2. Definition of the Index Definition and objectives of the index Index time frame Index reference period Price reference period Reference period of weights Geographical coverage of the index 7 3. Expenditure considered in the weighting of the index Expenditure included/excluded in the CPI basket Treatment of taxes and subsidies Exceptional situations regarding transaction prices 9 4. Definition of the consumption basket The COICOP classification system Basic concepts Selection criteria for groups, products and varieties Definition of weights Updating of weights according to the base period Weights of the divisions Price registration Monthly distribution of the Index Calculation of the index Data collection Price collection procedure Collection and treatment of prices One observation a month More than one observation a month Special cases: household price survey Housing rental Domestic service Special cases: prices collected from companies Housing, water, electricity, gas and other fuels Maintenance and repair of the dwelling Health Transport Communications Recreation and culture Educational services Miscellaneous goods and services Special cases: Treatment of missing prices Treatment of missing prices when an item is out of stock Treatment of seasonal and temporary missing prices Goods or services provided on a free-of-charge basis Quality adjustments Techniques and criteria used to guarantee quality Series linking Basket: CONSUMER PRICE INDEX (CPI) Annual Base 2009=

3 12. Glossary 13. Appendices Appendix 1: Features of the CPI Base 2009=100 compared to the CPI Base December 2008=100 and December 1998= Appendix 2: Classification comparison of CPI base 2009=100 with CPI Base December 1998= Appendix 3: Classification of individual consumption according to purpose (COICOP), Examples Appendix 4: Variety examples Appendix 5: General algorithm used for CPI calculation Appendix 6: Aggregation towards higher levels Appendix 7: Calculation of index variations Appendix 8: Calculation of impacts Appendix 10: Sample of establishments Sample frameworks used Selection from the sample of establishments Appendix 10: Exceptional situations regarding transaction prices Discount prices or promotions Changes in the presentation format Prices of missing varieties Appendix 11: Data validation Appendix 12: Statistical quality of the Index Appendix 13: Calculation of the base year Appendix 14: Quality adjustment method for motor-vehicle options Appendix 15. List of special calculations Appendix 16: Analytical indices Appendix 17: Programme of CPI improvements Appendix 18: Examples of imputation exceptions 14. Bibliography 3

4 1. Introduction The National Statistical Institute of Chile (INE) presents the Consumer Price Index (CPI) Methodology Manual 1, with annual base 2009= The geographical coverage of the new CPI now includes all regional capitals and their urban zones. In contrast to previous indices, which were based on a month, 3 the reference period for the new CPI is the year The CPI base 2009=100 represents the conclusion of a process to expand the geographical coverage of the CPI, moving from price collection in the Greater Santiago area to one that includes all of the country s fifteen regional capitals and their urban zones. The purpose of this document is to make the changes, improvements and decisions involving the CPI base 2009=100 available to all interested parties. The document is organised as follows: index definition; types of expenses included; definition of the basket; monthly publication of the index; calculation of the index; data collection and treatment; techniques and criteria to guarantee CPI quality; linkages between the new CPI and the previous indices; bibliography, glossary and appendices. This work would not have been possible without the joint effort of professionals, price researchers, data typists, supervisors, coordinators and IT professionals, together with the contributions and revisions undertaken by national and international experts Previous Consumer Price Indices used the base December 2008=100, December 1998=100 and April 1989=100. See National Statistical Institute of Chile (1999) pp for a more comprehensive explanation of the historical background associated with the construction of the CPI in Chile. Hereafter referred to as base 2009=100. The calculation procedure for the annual base can be found in Annex 14. 4

5 2. Definition of the Index 2.1. Definition and objectives of the index The Consumer Price Index (CPI) base 2009=100, measures price variations of a basket of goods and services typically consumed in households located in all of the country s regional capitals and their urban zones. 4 The definition has been set according to the concept of household expenditure within the territory of Chile, which is consistent with the objective of calculating the price variations that consumers may encounter. The CPI (and its variation) is calculated and published on a monthly basis. This index is principally used for two purposes: a) To monitor the development of consumer prices over time (inflation), given that their behaviour has an impact on: the monetary policy as defined by the appropriate authority 5, the development of the Unidad de Fomento or UF (an inflation-indexed unit of account used in Chile) 6, the Monthly Tax Unit (Unidad Tributaria Mensual or UTM) 7, fluctuations in utility services tariffs 8, and deflation in household expenditure within National Accounts, among other uses. b) Variation as a proxy of the cost of living 9, enabling contracts to be indexedlinked Definition supported by ILO et al. (2006), page 559. In Chile, the Central Bank is the body that governs economic policy and its main goal is to keep inflation at low, steady and sustainable levels. In order to fulfil this mission, the Central Bank sets a target for inflation each year, keeping it under control by modifying the monetary policy rate on a monthly basis. For further information visit: This unit of account is adjusted according to the monthly variation of the CPI. More information available at: Chilean unit of account equivalent to a given amount of money, in Chilean pesos, and determined by law (Decree Law 830 published in Chile's Official Gazette -Diario Oficial in Spanish- on 31 December 1974); this unit is constantly updated according to the Consumer Price Index (CPI) and is used to calculate taxes, fines and custom duties. Definition translated into English from the following source: In Chile, several utility services readjust their tariffs according to the CPI or include the CPI in their polynomial calculation. Such services include electricity and sanitation services. See, as an example, electricity supply pricing: udo_abr08.pdf Even though the CPI is an indirect indicator of the cost of living, it is frequently used for this purpose. When the CPI is defined as a cost-of-living index, changes in household expenditure needed to maintain their standard of living are measured. See ILO et al. (2006), pages 50-51, chapter 17. Indexation is a process by which monetary values are adjusted according to price changes. Consequently, the indexation of contracts aims to maintain purchase power at a constant level. Examples of contracts include those for employment, accommodation rental and sales on credit. 5

6 To construct the index, the prices of goods and services of a set basket representing the average expenditure of urban households 11 within the country s borders are monitored on a monthly basis. Excluded from this calculation are communal dwellings (such as children s and old people s homes, barracks, hospitals and boarding schools) as well as expenditures made by Chilean citizens living abroad. Only monetary prices are included, thus any type of social transfer 12 and non-cash expenses 13 are excluded. The CPI base 2009=100 has an acquisitions approach 14. This means that the total value of goods and services purchased within the country in a given period of time is registered, regardless of them being wholly or partially consumed in that period and irrespective of the method of payment (cash, cheque or credit card) or if a financial liability is incurred when payments are made Index time frame Index reference period The reference period or base of the index corresponds to the time period of the base, which may be a month, a year or any other period, during which the value 100 is fixed, and all indices that are calculated are compared to this period. In the case of the CPI the base is the year 2009= In the following sections, more details are provided regarding how the basket is formed, although it can be stated that its structure is based on the Sixth Household Budget Survey See: Transfers are generally provided by the State and refer to the action of providing goods, services or financial assets where the beneficiary does not need to provide another good, service or financial asset in return, thus affecting the beneficiary s income and not the level of prices. All those transfers that affect the prices paid by households fall within the CPI. There are three different categories: barter transactions (households exchange consumer goods and services among themselves), in-kind payments (households pay for the goods and services they receive with work) and the production of goods and services for self-consumption. The acquisitions approach is usually adopted when the CPI is used as a macro-economic indicator. The other two alternatives are the use approach and the payments approach. The use approach deals with goods and services actually consumed by households to satisfy their needs and desires. The payments approach focuses, for CPI purposes, on households' actual spending in order to acquire consumer goods and services, and is often used when the main purpose of the index is to monitor adjustments to earnings or income. When a good or service is acquired that is financed by credit, two economic transactions take place: (i) a good or service is acquired or sold, and (ii) a financial obligation is established, in which interests need to be paid. 6

7 Price reference period This refers to the period in which prices are compared to those of other periods, or rather, the period used to calculate the elementary indices. In the CPI, the price reference period is 2009= Reference period of weights. Each product included in the CPI basket has a weight that enables the aggregation of higher-level indices until reaching the CPI. The weight is the expense ratio (relative weight) of a product within total household expenditure. The expenditure weighting structure in the CPI base 2009=100 is derived from the Household Budget Survey 16 (HBS), carried out between November 2006 and October These values are based on April and correspond to a sample of 10,390 households representing an urban population of 9.8 million people Geographical coverage of the index The CPI base 2009=100 is built on price and expenditure information from regional capitals and their urban zones in the country s fifteen regions. A comparison of CPI base 2009=100 with the CPI base December 2008=100 can be found in appendices 1, 2 and The methodology and results derived from this survey are available on the INE website: For regions 14 and 15, the survey was carried out between September 2007 and August 2008, as these regions were created following the start of the survey in The total expenditure for each month is expressed in the value of Chilean pesos in April 2007, in order to make values comparable with those reported each month by the Household Budget Survey. 7

8 3. Expenditure considered in the index weighting Expenditure included/excluded in the CPI basket The conceptual framework used to include or exclude costs from the CPI basket can be found in the System of National Accounts 1993 manual, 19 however, the definition and purpose of the CPI base 2009=100 resulted in the exclusion from costs of services related to owner-occupied housing, barter transactions, goods and services produced via own-account, and in-kind payments for goods and services, as these are not considered to be financial costs. Other exceptions are the inclusion of the purchase of second-hand cars and the exclusion of interest paid on financial intermediation services. The following monetary payments within the country are included as costs: - Household purchases of goods and services for final consumption. The cost of delivery will also be included in the event that the size and volume of a product prevents or discourages the consumer from taking it with them personally after purchase - Purchases of second hand cars by households - Transactions in which the final price includes indirect taxes such as VAT, tax on tobacco, specific tax on fuel, stamp duties and the tax on alcoholic beverages, among others. - Administrative rights for services rendered, such as payments to obtain a driver s licence, operator s licence for amateur radio, or fees for the issuing of certificates. - Financial costs (commissions) associated with: mortgages, consumer loans, borrowing facilities, credit cards issued by banks, credit cards provided by department store chains, the opening and maintenance of current accounts. - Rents effectively paid by households. - Registration fees to join a club or society, given that they provide the right to use the corresponding facilities. The following non-consumption costs, that is, those in which there is no flow of goods or services in return, are excluded from the CPI basket, as well as all costs incurred outside of the country's borders: 19 System of National Accounts (1993), see Chapter IX, B. Expenditures, acquisitions and uses. Available at: 8

9 - Investment: purchase of homes 20, properties, valuables 21 or financial assets (bonds, shares or securities acquired by households) and major housing repairs that increase the value of the property. - Interests on financial transactions where a loan is agreed (for example, loans issued by department stores, personal loans and mortgages) or life insurance premiums Interest and administrative fees on payments in arrears for purchases made on credit. - Acquisition of assets: contributions to private pension funds (AFP in their Spanish acronym) or to the State pension fund (INP). - Collective services provided by the State, including: public administration, defence, justice and the legal system. - Prices that are considered virtual transactions, such as the imputed rent of owneroccupied housing, which is valued in pesos, but where there is no actual transaction. - Transfers (received and paid) 23 : gifts, grants, direct taxes (such as income and real-estate taxes) and licenses 24 (including licenses to own or use vehicles, such as the municipal road tax, 25 and for boats and aircraft, and hunting and fishing permits). - Tips or gratuities, which are not mandatory in Chile (are not considered consumption expenditure but rather a transfer) Housing units fall outside the CPI basket as they are considered fixed assets (investments) and not as durable consumer goods. These are expensive durable goods that will not depreciate over time and are excluded from the CPI because they are not used for consumption and are purchased primarily as a store of value (for example: works of art, and precious stones and metals, together with the jewellery made from these last). This is a compound transaction, as a financial right is purchased (which falls outside the scope of the CPI) and there is a service fee (which is part of the CPI). For example, in the case of life insurance policies these usually include a long-term investment service that provides a financial reward if the insured survives the policy term; the policy also includes a fee service for managing such an instrument. Minimum welfare pensions granted by the State are examples of such transfers. When the payment is completely disproportionate to the cost of the service provided, the rights are therefore classified as taxes for the use of a good or as a permit to use goods or undertake activities, an example being the municipal road tax or payment for burial rights in a cemetery. Many countries include taxes for the use of private vehicles because, for the purpose of the CPI, they are viewed as consumption taxes, the decision to include or exclude them from the CPI depending on the respective statistical office. In the case of Chile, the decision was taken to exclude them as they were seen as a tax on the property value of the vehicle. Gratuities would fall inside the scope of the CPI if they were compulsory and formed an integral part of payment for a service. However, this is not the case in Chile. 9

10 Treatment of taxes and subsidies The treatment of taxes 27 and subsidies 28 in the construction of the CPI follows the conventions adopted in the System of National Accounts (SNA) , particularly when defining whether it is a direct tax or an administrative fee (this category includes property taxes and different licences including municipal road tax). The general principles and criteria pertinent to the Chilean CPI can be summarised as follows: a) Taxes and subsidies are compulsory transfers to (or from) the State, where one unit provides a good, service or asset to another without receiving any good, service or asset in return, that is, transactions where there is no direct requited payment. These are therefore excluded from the CPI. b) Consumption taxes or special purpose taxes are included in the CPI because they are part of the final price paid by households, an example being VAT. In contrast, taxes on income or property, along with duties charged for using a good or asset, are excluded from the CPI, as these levy a charge for the generation and use of an asset and not its consumption. Property taxes, registration fees in order to use a vehicle, boat or aircraft, municipal road tax, and hunting or fishing permits, 30 also fall into this category. c) Administrative fees (or payments) are viewed as the acquisition of a service, and their prices are included in the CPI calculation, provided that the government agency delivers in return to the person making the payment some kind of service, such as issuing a driver's licence. d) Subsidies are considered in the price collection if they are not discriminatory (that is, any consumer or person can access the subsidy without restriction, whether due to their economic situation or other reason). Consequently, all discriminatory subsidies fall outside the scope of the CPI Referring to a payment made by households and/or businesses to the government, which are used to finance public spending. Subsidies may be treated as negative taxes that help consumers to pay a lower final price. From a methodological point of view, subsidies are included in the general treatment provided that they are not discriminatory. See System of National Accounts (1993), paragraphs 8.54 and The approach adopted by the System of National Accounts is to consider such expenses as current taxes. 10

11 Exceptional situations regarding prices The guiding principle for the collection of prices in the CPI, is to register prices (unitary or in the unit of measurement specified in the definition of each variety) 31 paid by a buyer to purchase a good or service. However, it is possible that when the researcher gathers information from an outlet, it is discovered that the price has changed as a result of: a discount, promotion or simply because at the time the product is not available under the specifications set for that variety. In the exceptional circumstances of price discounts, the following general principles must be followed: a) Discounts must be attributable to the individual purchase of a good or service, b) They must be available to all potential consumers, with no special conditions attached (non-discriminatory), c) The buyer must be aware of the discount at the time of purchase, and d) The discounts must be clearly identified (advertised) in a visible place or places, so that the price researcher doesn t need additional information to understand when the offer is available. A total of twenty special situations have been considered for the treatment of prices, eleven of which are exclusively for calculating the final price of the discounted item; the remaining seven relate to special treatment in the event of missing prices or the addition of new items or features. More details are available in Appendix Definition of the consumption basket 4.1. The COICOP classification system The system of Classification of Individual Consumption According to Purpose (COICOP) is a functional categorization of SNA 1993 that imposes a strict separation between goods and services and facilitates international comparability. Goods and services are arranged in 12 divisions (higher level of aggregation), which are formed by the aggregation of groups. The groups consist of classes and these in turn are composed of subclasses. The subclasses are the result of aggregation of products, which are formed from the aggregation of varieties (elementary aggregate). The higher levels of aggregation allow international comparison, while the elementary aggregates such as product, variety and variety-establishment are subject to the 31 For a definition of variety see page

12 definition in each country according to their corresponding characteristics 32. The structure is as follows: Figure 1 Example of the classification system, CPI base 2009=100 División-Grupo-Clase-Subclase-Producto- Variedad Promedio aritmético ponderado Media geométrica Division-Group-Class-Subclass-Product- Variety Weighted arithmetic mean Geometric mean IPC CPI 32 Three examples are included in Appendix 4 of this document. 12

13 Alimentos y bebidas no alcoholicas Bebidas alcohólicas y tobaco alimentos bebidas no alcoholicas Pan y cereales carne Arroz todos los tipos harina de cereales pan y otros productos panaderia pan galletas pan correinte sin envasar pan especial sin envasar pan envasado Variación establecimiento Food and non-alcoholic beverages Alcoholic beverages and tobacco Food Non-alcoholic beverages Pan and cereals meat Rice, all types Cereal flours Bread and other bakery products bread biscuits Unwrapped normal bread Unwrapped special bread Wrapped bread Establishment variety clasificación CCIF clasificación propia COICOP Classification INE Classification The following table summarizes the composition of each level. 13

14 Table 1 Components of the CPI base 2009=100 (in numbers) Division Group Class Subclass Product 1. Food and non-alcoholic beverages Alcoholic beverages, tobacco and narcotics Clothing and footwear Housing, water, electricity, gas and other fuels Furnishings, household equipment and routine household maintenance 6. Health Transport Communications Recreation and culture Education Restaurants and hotels Miscellaneous goods and services TOTAL Basic concepts Price The price is the nominal transaction value (in monetary units) of a good or service. The price may or may not include home delivery, but must include all indirect or direct taxes currently in force and take into account any existing non-discriminatory discounts and any discounts not subject to a specific means of payment. Thus, it should be the universal access price, that is, the price that any resident must pay to receive the good or service. Product A product is a generic term to refer to a good or service that has a weight in household expenditure and is formed with a set of homogeneous varieties. Goods Goods are physical objects for which a demand exists, over which ownership rights can be established and whose ownership can be transferred from one institutional unit to another by engaging in transactions on markets SNA (1993), paragraph

15 Goods are in demand because they may be used to satisfy the needs or wants of households. The production and exchange of goods are quite separate activities and this is an economically significant characteristic that sets them apart from services. Goods are classified as durable and non-durable. Durable goods are physical objects that produce the necessary services to meet the desires and needs of consumers 34 and that can be consumed over various time periods. Examples include furniture, household appliances, motor vehicles and clothing. A non-durable good is one which is used up entirely once consumed, such as food and beverages that are used to satisfy hunger and thirst 35. In the case of food, there is a class of non-durable goods that disappear even if they have not been consumed: perishable goods. Perishable goods are non-durable goods that decay rapidly and need special treatment to increase their shelf life (expiry date within one month); fresh foods (fruit, vegetables and chilled meats) generally fall into this category. In contrast, non-perishable goods are non-durable consumer goods that have been processed on an industrial or small-scale level. These do not need refrigeration and have a long shelf life; examples include canned, pickled and dried foods. Services Services 36 are products that cannot be traded separately from their production. Services are produced to order and typically consist of changes in the conditions of the consuming units realized by the activities of producers at the demand of the consumers. By the time their production is completed they must have been provided to the consumers. The changes that consumers of services engage the producers to bring about may be temporary or permanent and can take a variety of different forms - in particular: a) Changes in the condition of the consumer s goods: the producer works directly on goods owned by the consumer by transporting, cleaning, repairing or otherwise transforming them; This term refers to a form of economic unit, usually a person or household. ILO et al. (2006), paragraph 3.3, page 47. See ILO et al. (2006), paragraph 3.22, page 49. Eurostat et al. (1993), paragraphs

16 b) Changes in the physical conditions of persons: the producer transports the persons, provides them with accommodation, provides them with medical or surgical treatments, improves their appearance, provides education, recreational services, financial intermediation, etc.; From a methodological and operative standpoint, services are divided into minor and special categories. Minor services are those whose classification does not represent a high degree of complexity at product and variety level. Characteristics include: (a) their prices do not require special treatment to be entered into the CPI calculation and (b) prices of different varieties are collected directly from establishments, which is similar to the way goods are treated. Some examples of minor services are: hairdressing, shoe repair and furniture restoration. Special services (or special calculations) are all those measurements (or methodologies) that aim to retrieve a price that can not be obtained from a direct observation at a point of sale. Examples of such services include: standard bills for electricity, drinking water and telecommunications services. ******************************************************************* 16

17 Variety The term variety refers to a good or service defined by a set of standard attributes or specifications 37 such as: - Brand: corresponds to the fantasy name or that linked to the manufacturer or product lines - Description: set of attributes of a variety, such as its smell, flavour, segment or type, colour, measurement and presentation units. - Packaging: final packaging containing the product, which may be formed by different types of materials or a mixture of materials, such as: glass, tin, aluminium, cardboard, polyethylene, polypropylene, tetra, and so on. - Weight or volume: number of units or net weight in the presentation of each product. - Unit of measure: the units of weight, volume, length, etc. corresponding to each product, expressed in grams, cubic centimetres, number of units, etc. - Origin: the origin of a product, which defines whether it has been produced locally or abroad (imported). - Barcode (Global Trade Item Number or GTIN): a unique and descriptive record of each product as a variety. This identifier has been adopted as a global standard to encode consumer goods. Varieties correspond to a product, are not subject to weighting, and are the object to which prices are assigned within an establishment Criteria used for selecting groups, products and varieties that make up the basket The benchmarks used to select groups and products from the Household Budget Survey (HBS) that are included in the basket of the CPI base 2009=100 must meet the following criteria: At "Group" level, the minimum benchmark weight for total expenditure is: - 0.1% in Division 1, "Food and non-alcoholic beverages - 0.2% in all other divisions Once the groups of each division have been selected, "products" are considered according to the following criteria: a) A minimum benchmark for the weight of the product of 0.020% in total household expenditure 37 Standard denotes the set of attributes applied to most of the goods in the basket. Two examples are included in Appendix 5. 17

18 b) The existence of product expenditure in four of the five quintiles according to per capita income. Finally, products are excluded if their price collection is operationally unfeasible. Like the December 2008=100 basket, the base 2009=100 basket includes products from the December 1998=100 basket, which are maintained, given their weighting registered in the Household Budget Survey, in four different ways: a) products that have been maintained, b) products that have merged with another and changed their name, 38 c) products that have merged with another and established a new product d) products that have transformed into a variety. Also, there is a group of products that no longer form part of the basket because of the following reasons: a) they are obsolete 39, b) they do not meet the selection criteria 40 and c) they are not considered consumption expenditure 41. The information used to select the varieties was derived from: market studies, structural surveys and large chains of department stores. Quantitative information on sales from 2007 identified the varieties that are part of the CPI basket with base December 2008=100. The relevance of the different varieties are reviewed on a yearly basis, using for that purpose their share of the market share, so that the varieties are the most representative within household consumption. To select a variety, the following general criteria were used: a) Representation. The basket is made up of those varieties that have the highest relative impact on sales. b) Permanence. The variety must be present in the market for a reasonable period of time of at least two periods. c) Degree of difficulty in terms of measurement. Priority is given to those varieties with a low level of difficulty in terms of measurement and monitoring over time, according to field observations and the lessons learned from the registration of outlets. From an operational point of view, varieties with high degrees of difficulty were only selected when it was absolutely necessary. d) Consumption habits. There are certain goods that belong to a given class, although the way they are bought or used at local level leads them to being classified in another, avocados and lemons being one example: both are fruits, thus according to the COICOP classification they belong to the fruit category Examples of merged products that have transferred from the December 1998=100 basket to that of December 2008=100 are as follows: Chard now known as chard and spinach ; air fresheners now referred to as household air fresheners and disinfectants ; engine oil referred to in the new CPI asx lubricants and oils for motor vehicles. Photographic film, calculators, cassette tapes, computer diskettes, video players and walkmans are examples of items that were withdrawn from the CPI basket. For example, landline telephones, Martini and candleholders. This group includes: mortgage payments, real-state contributions, vehicle licence and car registration fees. 18

19 However, domestic consumers treat these as vegetables, so they have subsequently been classified in the Vegetables and tubers class Definition of weights The weights in the CPI base December 2008=100 are based on the Household Budget Survey (HBS) However, costs related to barter, production for personal use, and investments and transfers that do not represent consumption expenditure were excluded. Weights remain fixed and constant from product level and up to the higher level, given that this is a Laspeyres-type index. At the lower levels (varieties) there are no weights Updating of weights according to the base period The expenditure weights necessary to calculate the indices are valued in Chilean pesos for April 2007, the main month in which the Household Budget Survey took place. However, the base period for the Greater Santiago CPI is December 2008=100, and care is taken not to implement any updating without base information provided by a household budget survey Weights of the divisions The application of the inclusion and exclusion criteria mentioned in section 4.3, results in the following structure of weights by divisions. Table No. 2 Weights of the different divisions that form the CPI Weight in the Division CPI basket (%) 1. Food and non-alcoholic beverages Alcoholic beverages, tobacco and narcotics Clothing and footwear Housing, water, electricity, gas and other fuels Furnishings, household equipment and routine household maintenance Health Transport Communications Recreation and culture Education There are three alternatives to provide up-to-date expenditure weights: (i) using information from the most recent household budget survey, (ii) using external data to adjust some of the weights, and (iii) using the price changes experienced by the goods and services that make up the basket (See INE Chile (1999) pages and ILO et al. (2006) pages ). However, this procedure creates a distortion by modifying the expenditure structure without taking into account the effects of substitution, income, and quantities consumed, or the changes in consumer preferences. 19

20 11. Restaurants and hotels Miscellaneous goods and services Price collection The CPI for Greater Santiago includes prices in Chilean pesos, which is the legal currency; however, some goods and services are traded in other units of account. The criterion used to convert such units into pesos are as follows:: a) Goods and services denominated in UF or UTM: These are converted into Chilean pesos according to their value on the fifteenth day of each month. Services priced in UF include monthly tuition fees, bank commissions and commissions charged by department stores; prices charged in UTM include rubbish collection. b) Goods and services priced in US dollars: These prices are converted into Chilean pesos at the exchange rate reported by the outlet when the price collection 43 is taking place. Examples: international airline tickets and hotel accommodation. 5. Monthly publication of the index The CPI and its variations are published within the first eight days of each month, according to a timetable agreed at the beginning of every year and that is available on the INE website: The Index appears at 8 am on its day of publication. The general index; monthly and inter-annual variation; and disaggregations by division, group, class, subclass and product, along with the impacts, 44 are freely available to the public in both printed and electronic format. 6. Calculation of the index The CPI is constructed in two stages: First stage: Elementary aggregates are calculated with the price information available for each variety-outlet An elementary aggregate is a micro-index corresponding to a (relative) ratio of prices. The variations of each micro-index are averaged by geometric mean, as there is a high degree of substitution between the varieties. Second stage: Elementary indices are joined together to form the higher level indices. A weighted arithmetic mean is used from the product level up to the CPI level The procedure is applicable to any good or service where the price is fixed in a foreign currency. In this case, the variation of prices includes the exchange rate variation of the peso to the foreign currency. An impact measures the weight or contribution of a given index in explaining the variation reported by the CPI over a given period of time, such as the impact of food prices on the annual variation reported by the CPI. The mathematical calculation can be found in Appendix 9. 20

21 The general algorithm used to calculate the CPI base December 2008=100, and the calculation of the index, its variations and impacts are presented in Appendices 6 to 9. Finally, the successive addition of higher-level indices allows calculation of the CPI for t a given period, constructed with a Laspeyres formula. A Laspeyres price index ( P ) maintains quantities fixed in a base period (period 0), and is calculated for each period as follows: P t N i= 1 = N i= 1 p p t i 0 i q q 0 i 0 i p t i = n j= 1 t vj t 1 v j 1/ n Where: t p i : Prices of goods and services i in period t 0 p i : Prices of goods and services i in base period (t=0) 0 q i : Quantity of goods and services i in base period (t=0) N : Total number of goods in the basket t v j : Price of variety j in period t t 1 v j n : Price of variety j in period t 1 : Number of varieties. The annual variation of the CPI is the product of the monthly variations. This index can be expressed as the weighted arithmetic mean of price relatives using as weights the shares in expenditure during the base period. The CPI is calculated as follows: N t N t p i t IPC( t) = I = w *100= *100 0 i Ii wi i= 1 pi i= 1. 21

22 Where: w i : denotes the cost weight of product i t I i : price relatives for product i in period t The table below summarizes the aggregation methods. Table No. 3 Aggregation methods Level of aggregation Aggregation method From divisions to CPI Arithmetic mean From group to division Arithmetic mean From class to group Arithmetic mean Weighted From subclass to class Arithmetic mean From product to subclass Arithmetic mean From variety to product Geometric mean Equally From type of outlet to variety Geometric mean represented 7. Data collection The collection of information involves: defining the varieties, availability of their relevant specifications and the existence of price collection procedures. A price is the market value of a good or service at the time the buyer incurs in liability to the seller. The price may or may not include home delivery, but it must include all indirect or specific taxes, non-discriminatory discounts, and discounts not depending on specific methods of payment. So, prices recorded are those universally observed regardless of the method of payment or type of customer. Prices required for calculating the CPI are secured in two ways: directly from the selected points of sale, or secondly, from company head offices. The latter is known as a centralized collection procedure. Prices are centrally collected when the price level in the various outlets of the same company are identical and outlined by the head office, and when they correspond to companies that provide regulated services. In both cases the information is collected directly from the head office Price collection procedure A frequency of collection is established according to price variability. For example, goods and services with more volatile prices are recorded more frequently during a measuring period. 22

23 Evidence from quantitative exercises support the decision to collect prices during the first three weeks of the month, except for fuels, intercity bus fares, fruits and vegetables, and sports stadium tickets, which are all collected four times a month. Specifically, price collection through the month is as follows: Table No. 4 Frequency of data collection Products Perishables, except fruits and vegetables(*) Non-perishable Food prepared away from the home Services Fuels Interurban bus fare (**) Sports stadium tickets Monthly price collection (number of times a month) X X X X X X X Notes: (*) plus a price collection on Saturday (**) prices are recorded every Friday Regarding operational procedure, the price survey is carried out from the first working day of the month up to the 22nd, from Monday to Friday and on two Saturdays. Prices belonging to the food division are collected in the morning (between 9:00 and 12:00), with the emphasis placed on street markets and restaurants. Prices of all other divisions are collected during the afternoon. In the case of financial expenses, insurance, fixed and mobile telephone services, among others, the deadline for surveying such services is the 15th of each month, while that set for data reception is the 25th of each month. The prices of education services are collected in December and March, while those for university exam preparatory institutes ( preuniversitarios ) are also collected in July, August and September. 23

24 7.2. Collection and treatment of prices One observation a month The price collected is entered unchanged into the CPI calculation system; examples include personal care products, maintenance and cleaning of the household, medicaments and clothing More than one observation a month For products whose prices are surveyed more than once a month, an average ( PM t ( e ) ) price is calculated from the equally-weighted average of observations of an outlet during the month the CPI is being calculated, explained as follows: PM t ( e) = n i= 1 p i N Significance: e : Outlet t : Month N : Number of collected prices p i : Collected prices Special cases: household price survey Data collection is carried out through direct surveys of households, using the CPI with base December 2008=100 to measure the prices of products for households, such as rent and domestic service. The way this procedure is calculated is presented in the following sections Housing rental To be consistent with the conceptual framework of the CPI base December 2008=100, owner-occupied houses have been excluded, thus avoiding estimates of the socalled "imputed rent. The monthly amount paid for housing rental purposes (houses and apartments) is calculated as a self-weighted geometric mean applied to changes in rents reported by the sample of households. Additionally, prices from real-estate websites and in the press are also taken into account. The sample of rented dwellings was secured through stratified random sampling and appropriate distribution by income quintiles Domestic service The domestic service measured in the CPI base December 2008=100 is defined as multiple tasks such as cleaning, washing, ironing, childcare and cooking services provided by live-in or live-out maids, working either full or part time. 24

25 The monthly monitoring is carried out by surveying households that spend on domestic services, complemented with a component of the Earnings Index calculated by INE. To determine the monthly variation in domestic service expenditure, the geometric mean of the variations of the two mentioned varieties is calculated. The sample design for domestic service is similar to the sample for rented housing. The objective is to secure a representative sample of households that incur in such expenditure for live-in or live-out domestic staff, full or part-time Special cases: prices collected from companies For some services, the only price that can be used is the total of the final invoice or bill; however, this has items that are not constant, meaning it cannot be used to calculate the CPI. Consequently, a "standard bill" by company is used, which involves undertaking a special calculation. A standard bill is the valuation of a set of "n" compulsory and supplementary items or components that make up the final value that a household has to pay for the service provided. In the case of utility services, like water and electricity, the amount payable has a fixed component (which does not depend on consumption) and another variable (which depends on monthly consumption). For communications services, a basket including minutes spent on local, long-distance and mobile phone calls Housing, water, electricity, gas and other fuels The division includes: home security along with water, electricity and gas supplies. a) Home security: Measured by means of the packages offered by Chile s main home security alarm companies. For each of these companies, which have the largest market share in terms of sales (weighted by installed units), a standard bill including the cost of installation, equipment leasing and the amount charged for the alarm and home surveillance service is established. Data related to the different components of the standard bill is collected on a monthly basis, and this information enters the CPI calculation as the weighted geometric mean 45 of the price variations reported in each standard bill. b) Water supply and sewerage: The price of this service is derived from a standard bill composed of fixed and variable costs, which also makes a distinction between peak and non-peak periods, valued according to the rate in effect on the fifteenth of each month. 46 The evolution of the standard bill defined for each of the companies operating in the Greater Santiago area is monitored on a monthly basis. For the purpose of CPI calculation, a weighted geometric mean according to the market share of companies providing water utilities is used The weight is derived from the market share of companies operating in this industry. These items are associated with a structure of consumption expressed in cubic metres per month 25

26 The standard bill can be broken down as follows: 47 - Fixed charge: A fixed, recurring charge that all customers pay whether or not they consume any water. This charge relates to administrative fees and costs that are not related to the company s service operation. - Variable charge at peak periods ($/m 3 ): Payment linked to increased water demand. In most cases, these charges are collected between 1 December and 31 March of each year. - Variable non-peak charge ($/m 3 ): Rates applicable from 1 April to 30 November each year. - Variable charge for over-consumption ($/m 3 ): This is the level of consumption above which over-consumption rates apply. This level is calculated in the period running from 1 July to 30 November each year. - Variable charge for sewage service: Amount charged for collecting wastewater from properties. This charge is proportional to water consumption. - Wastewater treatment variable charge: Amount charged for the wastewater treatment service, the aim of which is to ensure that the collected wastewater complies with current legislation and that sewage discharges into water bodies do not threaten environmental sustainability. This charge may appear as an additional charge to the variable charge for sewerage. c) Electricity supply: As with other basic services, the price used for CPI calculation is defined using a standard bill for each company, 48 which includes a given number of consumption averages (usually referred to as class brands) which are valued according to the respective rate segment. The weighted geometric mean of the variations reported in the standard bill of companies providing electric power in the Greater Santiago area is the value entered in the CPI calculation. The weighting value is the market share of each company. d) Gas supply: The gas supply is divided into network gas and liquid gas. The variation in the price of Mains Gas (town gas and natural gas) is obtained by assigning a value to the average consumption of a representative household using a standard bill for each gas distributor. Such a standard bill is composed of variable charges according to consumption and additional services. The most common tariff rate (that which has the highest percentage of use among customers) is used to establish the value of the standard bill. The weighted geometric mean of variations for the standard bill of each company is entered into the CPI calculation each month. Liquefied Petroleum Gas (LPG) is distributed in bulk and cylinder form Definitions were taken from The standard bill includes the fixed charge, meter rental (adjusted according to customer participation) and the variable costs directly linked with monthly consumption (charge for electricity consumed and electricity lines charges). 26