How do we measure the evolution of consumer prices?

Transcription

1 ROMANIA Press Office 16 Libertatii Avenue, Sector 5, Bucharest Phone/Fax: ; Fax PRESS RELEASE No. 65 of December 15, 2006 How do we measure the evolution of consumer prices? - Clarifications for an adequate understanding - The issue of the calculation methodology for the Consumer Price Index (CPI), and implicitly for inflation, which is intended to measure the evolution of prices of products and tariffs of services that are consumed by the population, has been a main concern of expert statisticians, as well as of those who use and interpret these data. The quality of the message sent by the persons who disseminate statistical data and, implicitly, the degree to which the message is properly interpreted by the addressees depend on the adequate understanding of the various figures that measure the evolution of prices. In the last few days, this issue has been at the core of debates and commentaries concerning the calculation methodology, the interpretation and use of the results released by the National Institute of Statistics. It is well-known that the CPI is one of the most sensitive and important statistical macro-economic indicators, with a major impact on all the economic and social policy decisions. Thus, every country developed national methodologies meant to describe, as accurately as possible, the evolution of prices from one period to the next. These methodologies were the focus of exchanges of experience at international level aimed at harmonising the methods and techniques used, so as to ensure the quality of the entire process of production of consumer price indices. Moreover, considering that the data on the evolution of consumer prices need to be comparable at European level, steps were taken - under the co-ordination of Eurostat - towards creating a common methodological basis of Member States, steps which resulted in the adoption of Council Regulation (EC) No 2494/95 of 23 October 1995 concerning harmonised consumer price indices. Long before Romania s EU accession, the National Institute of Statistics joined the European programme for the calculation of the Harmonised Consumer Price Index (HCPI) and started to publish and send to Eurostat ever since 1997 both the data on consumer price evolution obtained by using the national method (CPI) and those calculated in accordance with the harmonised methodology (HCPI), as a commitment undertaken within the pre-accession process. The questions that were asked and which, to some extent, are still asked, can be summarised as follows: 1. Why does Romania separately calculate and publish two consumer price indices, the CPI and the HCPI? 2. Are there conceptual and methodological differences between the two indices? 3. Why are the data calculated for the two indices different? Which is the correct figure? 4. Is the HCPI a more accurate index than the CPI?

2 The point of view of the National Institute of Statistics with regard to these questions is presented hereinafter. Why does Romania separately calculate and publish two consumer price indices, the CPI and the HCPI? Romania, like all the other EU Member States, calculates two consumer price indices due to the fact that each of them serves different purposes: a. The CPI is used for the substantiation at national level of monetary policies (hence the target established for inflation by the National Bank of Romania), social policies (minimum salary, indexation, income support, pensions etc.) and economic, budgetary and tax policies; b. The HCPI is exclusively used for the international comparison of the level of inflation between Member States and for establishing the monetary policy at EU level. The possibility of calculating and using only one index, even in the context of having to comply with European regulations, was never considered by any of the Member States. Moreover, the Council Regulation mentioned above acknowledges the existence and the need to continue to use the two indices. Are there methodological differences between the two indices? The answer is NO. Here are the arguments: 1. The methodology of the two indices complies with the Council Regulation (EC) concerning harmonised consumer price indices. 2. For both indices, the INS performs the unique collection of prices and tariffs, and the elementary aggregation of prices is also unique. The type of index for a higher level of aggregation is the same (Laspeyres), ensuring that indices with a common basis are developed, an essential condition for measuring the evolution of prices. 3. The system used for aggregation is the same weighting system that reflects the specific nature and the structure of the population s consumption in Romania obtained from the statistical survey on family budgets. 4. The differences between the two indices are the following: a) the form of presentation of aggregation items In the national system, the calculation of the CPI is performed by using a nomenclature of goods and services structured on 54 items of food products, 112 items of non-food products and 50 items of services, which are representative for the consumption of the Romanian population. In the European system, a classification of expenditure by purpose (COICOP Classification of Individual Consumption by Purpose) is employed. Thus, the items comprised in the national system are regrouped according to this classification. For instance: in the transport group, the HCPI includes purchases of motor vehicles and new cars, transport services, fuels for motor vehicles and lubricants, repairs, while, in the CPI calculation, this group only includes transport services, the rest being comprised in the non-food goods group. 2

3 b) the reference populations the CPI covers the actual consumption expenditure of the Romanian population, namely the prices and tariffs paid by the Romanian residents for the purchase of products and services in Romania; the HCPI also takes into account the expenditure of foreign tourists on Romanian territory based on the estimates from the balance of payments separately for transport, accommodation, public catering, recreation. c) other differences with regard to insurances, in the case of the HCPI, the balance between bonuses and compensations is quantified, while the CPI includes the bonuses paid for compulsory insurances; with regard to medicines, the HCPI only takes into account the actual expenditure of households, while, for the CPI, besides the net expenditure, free medicines are also included. d) the reference period of indices in the case of the HCPI: the index is calculated and published as against the average of 2005 (2005=100). EU Member States comply with this rule for comparability reasons, irrespective of the reference basis of national indicators and the weighting system used. This means that complementary calculations are performed on the same data in order to obtain an index whose reference basis is the average of 2005; also for comparability reasons, the weights used by each country to calculate the HCPI are expressed in prices of December of the previous year. in the case of the CPI: calculated as against the previous month of the same year, the index shows the evolution of prices from one month to the next, which actually is of most interest; calculated as against the month of December of the previous year, the index reflects the evolution of prices since the beginning of the year; calculated as against the corresponding month of the previous year, the index points out the evolution of prices, eliminating the seasonal nature of this evolution. Therefore, both in the case of the HCPI and in that of the CPI, as indices calculated using a fixed basis, starting from the relations between indices, similar indices can be obtained employing any reference basis. Why are the data calculated for the two indices different? Which is the correct figure? From the very beginning, we should specify that any index, including that of the evolution of consumer prices, as well as its corresponding rate, must be interpreted in relation to the basis it refers to. If we didn t take into account this essential condition, we would compare completely different indices or rates, and the resulting conclusions would be inconsistent. 3

4 In the context of the recent increases in prices for natural gas, thermal and electric energy and due to people s impression that we are experiencing a general price rise, the index that drew the attention to the potential inconsistencies was the so-called harmonised index, whose published value for October 2006 was 7.02%. Erroneously, this level was confronted with the CPI values published for October 2006, which show how prices evolved in relation to different reference periods: September 2006 (100.21%), December 2005 (102.98%) and October 2005 (104.80%). The differences between these two levels come from the fact that each of the indices by means of which data are obtained have distinct reference bases: the HCPI is calculated as against the average of price evolution in 2005 (2005=100). This calculation basis, specified in the publication, is used by all EU Member States, including Romania, in order to allow the evaluation - under comparable conditions - of price evolution in the entire European area. Unlike the HCPI, the CPI is calculated and published in relation to two bases: previous month=100 and December 2005=100. If we recalculate the HCPI using the same bases as for the CPI, the results are the following: COMPARISONS BETWEEN CPI AND HCPI - January - October Basis: previous month=100 Basis: December 2005=100 MONTH CPI HCPI MONTH CPI HCPI January January February February March March April April May May June June July July August August September September October October If we recalculate the CPI employing the average of 2005 (2005=100) as a basis, in order to make it comparable with the data published for the Harmonised Consumer Price Index, the results are the following: Basis: average of 2005 (2005=100) MONTH CPI HCPI January February March April May June July August September October

5 As it can be seen, the differences between the two indices are insignificant. For example, if we analyse the figures from the right perspective, the price rise in October 2006 as against the average of the 2005 is virtually the same in both cases (of +7.02%, according to the CPI, and of +6.96%, according to the HCPI). Therefore, the 2.98% increase compared to December 2005 and the 4.80% rise as against October 2006 are accurate figures, as the data presented in the tables show. The results in the above tables were calculated based on the data comprised in the Statistical Price Bulletin No. 10/2006, published and disseminated by the National Institute of Statistics. Thus, all the data are accurate. The important thing is to analyse and interpret them while meeting the comparability criteria. Is the HCPI a more accurate index than the CPI? Doubting the accuracy of either of the two indices makes no sense, since the methodology is the same in both cases, the differences merely consisting in the form of presentation of the detailed data and in the coverage. In fact, according to the results presented above, the data, calculated under comparability conditions, show insignificant differences (at the level of the first decimal digit, the data even coincide), generated by the previously mentioned features. The weights used for calculating the two indices come from the same source, the Family Budget Survey (FBS). This yearly survey is based on a sample of more than households. It is a representative sample at national level, in terms of geographical distribution (including for the urban and rural areas), socio-professional categories and other criteria. The same source that has been used so far will be employed for determining the weights in the future, as it would be pointless to use, for instance, instead of national weights, the average weights at European level. If the other Member States used this latter source, the results wouldn t be representative of the national consumption structures and wouldn t allow an accurate comparison. For instance, in Romania, the weight of food expenditure in the total expenditure of an average household is approximately 41%, while in Europe it amounts to approximately 20%. Under such circumstances, if we used the European weight, a general 10% rise in the prices for food products would make a 2% contribution to the CPI increase, while the Romanian weight shows us a 4.1% rise. No one is interested in distorting the truth for the sake of European harmonisation. Instead of conclusions... In 2007 and in the years to come, the INS will continue to calculate and publish (as it has so far) both the consumer price index for internal needs and the harmonised consumer price index for comparability, like all the other EU Member States. The conclusion is that we cannot and we do not have two inflations, every index of consumer prices being intended to measure the evolution of prices and tariffs in Romania, depending on the purpose for which it was designed. 5