UNITED NATIONS New York and Geneva, 2OO9

UNITED NATIONS New York and Geneva, 2OO9

NOTE The desgnatons employed n ths publcaton, whch are n conformty wth the practce of the publshng organzatons, and the presentaton of materal theren do not mply the expresson of any opnon whatsoever on the part of the publshng organzatons concernng the legal status of any country, area or terrtory or of ts authortes, or concernng the delmtaton of ts fronters or boundares. Copyrght Unted Natons, 2009 Unted Natons Economc Commsson for Europe (UNECE) and Internatonal Labour Offce (ILO) Internatonal Monetary Fund (IMF) Organsaton for Economc Co-operaton and Development (OECD) Statstcal Offce of the European Communtes (Eurostat) The World Bank Offce for Natonal Statstcs (ONS), Unted Kngdom All rghts reserved Prnted at Unted Natons, Geneva, Swtzerland ECE/CES/STAT/NONE/2009/2

Foreword Ths Handbook s targeted at developng countres focusng on practcal solutons to the problems facng complers of the consumer prce ndex (CPI) n the developng world. It provdes practcal gudance on all aspects of complng a CPI, and offers advce on a range of operatonal ssues n data collecton, data processng and publcaton. Although targeted at CPI complers n developng countres t wll also be of nterest to complers more generally. The Handbook follows and supplements the nternatonal Consumer Prce Index Manual. Theory and Practce, publshed n 2004. It s accompaned by a CD ROM wth tranng ads and references, ncludng nteractve examples of the methods and calculatons gven n the Handbook, where users can nput ther own data. The publcaton of the Handbook s the result of a collaboratve effort nvolvng experts from a number of countres and organsatons, and t has benefted from the nput from CPI complers n developng countres. By referrng to the CPI Manual and drawng on experence of experts from both developed and developng countres the Handbook provdes nternatonally agreed gudance and suggests good practces wth the objectve to help natonal statstcal offces to further mprove ther CPI statstcs.

Preface Introducton The producton of ths Handbook has been funded by the UK Department for Internatonal Development under the drecton of the UK Offce for Natonal Statstcs and developed wth support from the Inter Secretarat Workng Group on Prce Statstcs. It s desgned to gve practcal gudance on the complaton of consumer prce ndces (CPIs), focusng on practcal solutons to ssues facng the complers of CPIs n the developng world. It offers advce on a whole range of operatonal ssues confronted by ndex complers from the samplng and collecton of prces through to ndex constructon and fnal publcaton. Although targeted at complers of CPIs n developng countres t wll also be of practcal use to complers of CPIs n other countres. Ths Handbook supplements the ILO Manual on Consumer Prce Indces. The latter provdes a comprehensve revew of the economc and statstcal theory whch underles CPIs, as well as an n depth gude to complaton, and has been wrtten for the beneft of users as well as producers. In contrast, the Handbook takes the underlyng theory as gven. Cross references to the ILO Manual are provded for those who wsh to nvestgate the more theoretcal aspects. Users of ths Handbook are encouraged to take advantage of ths as t s mportant to understandng the conceptual and theoretcal context underlyng the practcal advce beng gven. The Handbook s also accompaned by a set of PowerPont sldes for local tranng purposes and a CD ROM wth nteractve examples of the llustratve calculatons gven n the Handbook, where users can nput ther own data. Background In 2004 a comprehensve Consumer Prce Index Manual: Theory and practce was publshed by the Internatonal Labour Offce (ILO), wth the support and co operaton of a number of other nternatonal organsatons. It s an expanded revson of the earler ILO publcaton Consumer prce ndces: an ILO manual, publshed n 1989. The new Manual s wdely regarded as the man nternatonal reference source for CPIs. It covers vrtually every aspect of a consumer prce ndex. Yet some CPI practtoners, especally n developng countres, have found that ts comprehensveness has made t less sutable as a day to day source of gudance, partcularly on detaled practcal ssues. Ths Handbook, whch s a companon volume to the Manual, focuses prmarly on practcal matters, and deals less wth theory than does the Manual. It should be seen not as a replacement for the Manual but as a supplement. In December 2003 the Internatonal Conference of Labour Statstcans, convened by the ILO, adopted a Resoluton concernng consumer prce ndces. Ths Resoluton replaced the prevous Resoluton on CPIs adopted n 1987. The ILO Resoluton and the CPI Manual are compatble documents, and ndeed the preparaton of the draft Resoluton was done n parallel wth the preparaton of the Manual. The text of the ILO Resoluton s ncluded as Appendx 3 to the CPI Manual tself. In plannng the present Handbook, t was decded that although desgned for use by CPI practtoners n every country, specal attenton should be pad to the needs of developng and transton countres. The authors of each chapter were made aware of ths polcy from the start. The ILO, n collaboraton wth UNECE, carred out a user survey of the CPI Manual n order to elct useful deas for ncluson n the Handbook, and to dscover more about the perceved lmtatons of the Manual. The survey was addressed to all natonal statstcal nsttutes and also to other users such as mnstres of labour and workers and employers organsatons. Over 100 responses from a smlar number of countres were receved. More than half of respondents felt that more space should be devoted to practce related ssues and the most useful chapter n the Manual was thought to be Chapter 9 on the practcal aspects of CPI calculaton. v

PRACTICAL GUIDE TO PRODUCING CONSUMER PRICE INDICES Gven the specal focus on developng countres, t was decded that a panel of revewers from such countres should be nvolved n the preparaton of the Handbook. More than ten CPI experts from a representatve group of countres were accordngly asked to comment on specfc chapters. Ther vews were regarded as extremely valuable and the content of the Handbook has benefted as a result. For example, there are frequent references to the problems met n collectng prces n markets, whch to the reader n a developed country may seem dsproportonate, but to CPI practtoners n developng countres are crucal. To assst readers of the Handbook, the chapter headngs have been made as compatble as possble wth that of the Manual. In terms of general orderng ths has been acheved, though exact numercal compatblty s lmted to just a few of the 18 chapters. Wth ts emphass on practcal matters, the Handbook has been wrtten wth a vew to use by CPI statstcans workng n natonal statstcal offces. The varous topc specfc chapters should be useful for practtoners faced wth specfc problems n certan areas of CPI complaton (e.g. how to deal wth seasonal products or how to aggregate prces at the lowest level where there are no weghts avalable). It s also hoped that the Handbook can be used for tranng purposes. The language used, as well as the style, has been delberately amed at a level whch should be easly understood not only by CPI experts but also by new professonal staff jonng a CPI department n a natonal statstcal nsttute. As wth the Manual tself, an electronc verson of the Handbook s avalable on the nternet at http://www.lo.org/cp manuals and s regarded as a lvng document that wll be amended and updated as necessary over the comng years. As mentoned n the Introducton, there s an accompanyng CD ROM whch ncludes not only worked examples whch can be adapted usng natonal datasets, but also the text of the CPI Manual, and some other useful background papers. A gude to readers The Handbook broadly follows the same sequence of chapters as n the Manual so that t covers n logcal sequence the successve steps n ndex complaton. But t s not desgned necessarly to be read from cover to cover. It s expected that complers wll be able to dp nto t as requred. Each chapter s self contaned, gvng a bref summary of the correspondng chapter n the man ILO Manual before provdng practcal gudance. Illustratve examples of calculatons and model documents are also presented to assst the user. The Handbook uses the same termnology as the Manual. Further detals on the contents of the Handbook are gven n Chapter 1. The Handbook s not prescrptve where t cannot or does not need to be, and n these cases makes recommendatons or gves examples of what mght be consdered best practce. The reader should bear two thngs n mnd. Frstly, t s not always possble to gve defntve practcal gudance as ths would wrongly assume that the solutons to conceptual problems are, themselves, always clear cut and that there are no choces to be made about precsely how a practcal soluton s mplemented. Secondly, what s applcable locally and what can be acheved on the ground wll depend on the resources avalable to the ndvdual Natonal Statstcal Insttute. Acknowledgements The producton of ths Handbook was a collaboratve effort nvolvng many people. Authors of the ndvdual chapters and ther co authors were drawn from CPI experts around the world and contrbutons were sought from experts wth extensve experence n workng on CPI ssues n developng countres. The Handbook also drew on documentaton from the UK Offce for Natonal Statstcs and from work undertaken by the Statstcal Offce of the European Communtes (Eurostat) n connecton wth the development of the European Unon s Harmonsed Index of Consumer Prces. The latter acted as a focal pont for mprovng the complaton of CPIs n the European Unon and sgnfcantly ncreased levels of understandng and expertse n CPI methodology. Davd Fenwck was the Edtor n Chef of the handbook and accompanyng CD ROM. John Astn the co edtor of the Handbook and Terry Offner the co edtor of the CD ROM. The authors and, n brackets, co authors of the ndvdual chapters are as follows: v

PREFACE 1. Introducton Davd Fenwck and John Astn 2. The Scope of the CPI John Astn (Paul Armknecht) 3. Product Classfcaton Marc Prud Homme (John Astn) 4. Expendture Weghts n the CPI Marc Prud Homme (Paul Armknecht) 5. Samplng Procedures Davd Fenwck and Matthew Powell (Terry Offner) 6. Prce Collecton Terry Offner (John Astn) 7. Substtuton and Qualty Change Paul Armknecht (Walter Lane) 8. New Products Paul Armknecht (Matthew Powell) 9.1. Specal Cases Housng Davd Fenwck (Yoel Fnkel, John Astn) 9.2. Specal Cases Own Account Producton Keth Blackburn (John Astn) 9.3. Specal Cases Servces Walter Lane (Marc Prud Homme ) 9.4. Specal Cases Tarffs Marc Prud Homme and Davd Fenwck (Walter Lane) 9.5. Specal Cases Seasonal Products Yoel Fnkel and Davd Fenwck (Marc Prud Homme) 9.6. Specal Cases Second Hand Goods Davd Fenwck (Paul Armknecht) 10. Index Calculaton John Astn and Marc Prud Homme (Davd Fenwck) 11. Specal Indces John Astn (Marc Prud Homme) 12. Data Valdaton Terry Offner (Matthew Powell) 13. Sources of Errors and Bas n a CPI Yoel Fnkel (Paul Armknecht) 14. Publcaton, Presentaton, Analyss and Interpretaton Davd Fenwck (John Astn) 15. Organsaton and Management Davd Fenwck and Yoel Fnkel 16. User Consultaton Davd Fenwck (Yoel Fnkel) 17. CPI/ICP Integraton and Harmonsaton John Astn (Keth Blackburn) 18. Qualty Reportng and mprovng the CPI: Frameworks, checklsts and work programmes. Davd Fenwck (George Beelen) 19. Glossary John Astn The qualty of the Handbook was also ncreased by the valuable contrbutons of colleagues, ncludng user nput from CPI complers n a number of natonal statstcal nsttutes partcularly n developng countres. Specal thanks are due to staff at the Afrcan Development Bank and the Asan Development Bank, who provded useful comments, to the UNECE, ILO, the IMF, COMESA, and CEPAL who facltated consultaton wth CPI complers on earler drafts, and to the followng ndvduals who provded some helpful comments whch were ncorporated n the fnal text: Nelson Taruvnga; Vncent Musoke Nsubuga; Patrck Kelly; Saad Bashr; Phllp Mt; Sanjev Bhonoo; Ncholas Nsowah Nsowah; Borbala Mnary; Maretta Morada and Zakayo Msokwa. I would lke to thank my co edtor of the handbook, John Astn, who also drafted or co authored a number of chapters. I am also grateful to Erwn Dewert, who took on the task of revewng the more techncal aspects of the handbook, ncludng the scrupulous checkng of formulae for errors and nconsstency n annotaton. The dea of a CD ROM evolved durng the early stages of draftng of the handbook and became a project n ts own rght. I am ndebted to Terry Offner for applyng hs techncal sklls n undertakng much of the detaled work and for actng as my co edtor on the CD ROM, and to Marc Prud Homme for draftng the PowerPont presentatons, whch are an ntegral and mportant part of the materals ncluded n the CD ROM. The producton of an nternatonal handbook, whch reles on contrbutons from around the world, requres a great deal of co ordnaton. Ben Whtestone (UK Offce for Natonal Statstcs) took on the role of project manager and hs efforts were a sgnfcant factor n the success of ths project. Fnally, thanks go to the UK Department for Internatonal Development who funded the draftng of ths Handbook, the UK Offce for Natonal Statstcs who provded a great deal of day to day support and the Unted Natons Economc Commsson for Europe (UNECE) for undertakng the prntng and dstrbuton. Davd Fenwck Edtor n Chef v

Contents Foreword... Preface... v Introducton... v Background... v A gude to readers... v Acknowledgements... v 1 Introducton... 1 Systems of Prce Indces and supportng frameworks... 1 Lower level Frameworks... 2 Choce of ndex number formula... 3 Index Formula at Lower (Elementary Aggregate) Level... 3 Acquston, use, or payment approach... 3 Contents of the Handbook... 4 Termnology n the Handbook... 6 2 The Scope of the CPI... 8 Introducton... 8 The dfferent uses of a CPI... 8 Geographcal coverage... 9 Reference populaton for the CPI... 10 Democratc versus plutocratc weghts... 11 Product exclusons... 11 Imputed transactons and mputed prces... 12 3 Product Classfcaton... 13 Introducton... 13 Classfcaton systems: the general case... 13 The CPI classfcaton system... 14 Specfc requrements of a CPI classfcaton... 14 The COICOP classfcaton... 15 Benefts of adoptng the COICOP classfcaton... 16 Natonal versons of COICOP at the sub class level... 16 Incorporatng new products n the CPI classfcaton... 17 Changng from a natonal classfcaton to COICOP... 17 4 Expendture Weghts n the CPI... 18 Introducton... 18 Background... 18 Conceptual bass of the weghts... 19 Weghtng structure... 23 Data sources... 25 Natonal Accounts... 28 Weghts reference perod... 29 5 Samplng Procedures... 38 Introducton... 38 Background... 38 x

PRACTICAL GUIDE TO PRODUCING CONSUMER PRICE INDICES Overvew... 39 Illustratve example of selectng a sample for prce collecton... 41 6 Prce Collecton... 48 Introducton... 48 Background... 48 The prncples of prce collecton... 49 Item specfcatons... 49 The prces to be collected... 51 Problems sometmes encountered... 56 Frequency and tmng of prce collecton... 56 Practcal collecton procedures: plannng and organsaton... 58 Practcal collecton procedures: collectng prces n the feld... 59 Tranng and work nstructons... 62 7 Substtuton and Qualty Change... 71 Introducton... 71 Background... 71 Substtuton procedures... 72 Temporarly (non seasonal) mssng products... 73 Permanently mssng products... 73 Qualty adjustng the prce for dfferences n qualty... 75 Drect comparson... 75 Drect or explct qualty adjustment methods... 75 Implct qualty adjustment... 77 Matched models... 81 Summary... 81 8 New Products... 88 Introducton... 88 Defnton of New Products... 88 Plannng for the ntroducton of new products... 89 Tmng of the ntroducton of new products... 90 Methods of ncorporatng new products nto the ndex... 91 Geographcal dmenson... 95 Servces Prevously Provded Free... 95 9.1 Specal Cases Housng...101 Introducton... 101 Owner occuper housng costs... 101 Rented accommodaton... 105 9.2 Specal Cases Own Account Producton...108 Introducton... 108 Background... 108 The own account producton dlemma... 109 Goods produced for own consumpton... 110 Constructon of a general consumpton ndex... 111 Constructon of a monetary ndex... 112 Constructon of a compensaton ndex... 112 Own account household servces (excludng owner occuper housng servces)... 112 9.3 Specal Cases Servces...114 x

CONTENTS Introducton... 114 Background... 114 Health, educaton and socal protecton servces... 115 Health servces (doctors and dentsts)... 117 Educaton... 120 Transport... 122 9.4 Specal Cases Tarffs...123 Introducton... 123 Background... 123 The man measurement ssues... 124 Treatment of tarffs and the nformaton requrement... 124 Prce measurement methods... 125 Illustratve examples... 127 Qualty adjustment... 128 New servce provders and new products... 131 Classfcatons... 131 9.5 Specal Cases Seasonal Products...132 Introducton... 132 Background... 132 Fxed weghts approach... 133 Varable weghts approach... 134 Fxed or varable weghts?... 135 Estmaton of weghts... 135 Monthly approach: maxmum overlap not an alternatve... 136 Rollng Year Index an alternatve method of presentaton... 136 Some common mplementaton problems... 137 Some common seasonal products and ther treatment... 138 Intractable problems and serous challenges?... 139 9.6 Specal Cases Second Hand Goods...140 Introducton... 140 Qualty adjustment... 143 Alternatve approaches... 143 10 Index Calculaton...147 Introducton... 147 Background... 147 The complaton of ndces for elementary aggregates... 148 Calculaton formulae for elementary aggregate ndces... 150 The complaton of upper level aggregate ndces... 156 Lnkng and Channg... 161 Splcng and chan lnkng... 163 Channg and splcng to change the weghts... 163 11 Specal Indces...165 Introducton... 165 Background... 165 Seasonally adjusted consumer prce ndces... 165 Seasonal adjustment methods... 166 Core nflaton and smoothed ndces... 167 x

PRACTICAL GUIDE TO PRODUCING CONSUMER PRICE INDICES Other specal ndces... 169 Illustratve examples... 170 12 Data Valdaton...176 Introducton... 176 Background... 176 Data valdaton and edtng procedures n the feld... 177 Data valdaton at Regonal or Natonal Headquarters... 178 Data edtng... 178 Non statstcal checkng... 178 Statstcal checkng... 179 Dealng wth outlers... 181 Mssng prces... 182 Credblty checkng... 182 Output edtng of ndces... 183 Analytcal tools... 183 Prortsaton... 184 13 Sources of Errors and Bas n a CPI...188 Introducton... 188 Background... 188 Summary of General Measurement Problems... 188 Bas n a CPI... 190 Samplng and Non samplng Errors... 193 14 Publcaton, Presentaton, Analyss and Interpretaton...196 Introducton... 196 Tmng of publcaton... 196 Pre release access... 197 Poltcal and polcy statements by mnsters and ther offcals... 198 Procedures on publcaton day... 199 Format and content of statstcal press notce... 199 Standard calculatons and specal presentatons and analyss... 201 Internal purchasng power of natonal currency... 204 Roundng... 205 15 Organsaton and Management...211 Introducton... 211 Overvew of Qualty Management System... 211 Documentaton... 212 Internal Audts... 214 Revew systems... 216 Busness contnuty... 219 16 User Consultaton...226 Introducton... 226 The general prncples of consultaton... 226 Specal arrangements for consultaton on the CPI... 227 Who to consult and on what... 227 Practcal optons for consultaton advsory commttees... 228 Advsory commttees operatonal arrangements and terms of reference... 229 Advsory commttees role of the NSI and the Natonal Statstcan... 229 x

CONTENTS Stakeholder engagement and management... 229 17 CPI/ICP Integraton and Harmonsaton...234 Introducton... 234 Spatal versus temporal prce ndces... 234 Basc data relatonshps between the ICP and CPIs... 235 Integraton of CPI and ICP datasets... 236 Integraton benefts from ICP partcpaton... 237 18 Qualty Reportng and Improvng the CPI...241 Introducton... 241 A model framework: qualty reports... 241 A model framework: checklsts... 242 Plannng: work programmes... 242 Project Management... 245 Glossary of Man Terms...254 x

CHAPTER 1 Introducton 1.1 Consumer prce ndces measure changes over tme n the general level of prces of goods and servces that households acqure, (use or pay for) for the purpose of consumpton. In many countres they were orgnally ntroduced to provde a measure of the changes n the lvng costs faced by workers, so that wage ncreases could be related to the changng levels of prces. However, over the years, CPIs have wdened ther scope, and nowadays are wdely used as a macroeconomc ndcator of nflaton, as a tool by governments and central banks for nflaton targetng and for montorng prce stablty, and as deflators n the natonal accounts. Wth the globalsaton of trade and producton and the lberalsaton of the markets, natonal governments, central banks and nternatonal organsatons place great mportance on the qualty and accuracy of natonal CPIs, and n ther nternatonal comparablty. 1.2 Dfferent conceptual frameworks can be used to address fundamental ssues relatng to nature of the ndex. For example, whether the CPI should measure the change n cost of a fxed weght basket of goods and servces or whether t should measure the change n the cost of lvng,.e. the cost of mantanng a gven standard of lvng, takng nto account the fact that when prces change consumers change ther expendture patterns. The use and conceptual bass of the ndex wll determne the method of constructon, ncludng the formulae used for the aggregaton of prces. 1.3 The method of constructon also allows (or should allow) CPIs to be adapted for a wde range of specfc uses. For example, they can be adapted to calculate specfc nflaton rates for socal groups such as pensoner or low ncome households. Ther product coverage can be adapted so as to show what the rate of nflaton s n partcular sectors such as energy or food, or excludng partcular sectors such as alcohol and tobacco. They can shed lght on the effect of tax changes or government regulated prce changes on the rate of nflaton. They can be compled on a regonal bass, showng dfferent nflaton rates wthn dfferent parts of a country or between urban and rural areas. 1.4 In short, consumer prce ndces are now consdered as one of the most mportant economc and socal ndcators produced by Natonal Statstcal Insttutes (NSIs) throughout the world. Aganst ths background, the challenge of natonal statstcs nsttutes s fourfold: to dentfy user needs; to conceptualse user needs n terms of economc theory; to translate the underlyng concept nto statstcal measurement terms followng the fundamental prncples of prce ndex measurement; to construct the ndces so defned and evaluate them aganst purpose. Systems of Prce Indces and supportng frameworks Hgher level frameworks 1.5 The System of Natonal Accounts 2008 provdes the basc gudelnes for buldng approprate frameworks for CPIs and other prce ndces n the famly of prce ndces, coverng all major economc actvty ncludng, most partcularly, producton and consumpton and ntermedate outputs. In theory the System of Natonal Accounts also provdes a methodology for developng and extendng the core system of prce ndces to meet specalsed needs whlst mantanng consstency of approach, both n concepts and practcal measurement, and coherence n terms of the defnton, classfcaton and measurement of flows and stocks of goods and servces. The use of such frameworks also facltates the examnaton of the relatonshps between dfferent prce nflaton measures and can help analysts n ther understandng and nterpretaton of nflatonary sgnals. Wth ther ablty to dentfy statstcal gaps, these frameworks can also facltate future developments n the feld of prce statstcs. One such framework s the Stage of Processng Framework (see Appendx 1.1). Stage of Processng Framework 1.6 A Stage of Processng framework has a useful role to play n nformng polcy formaton. It can also provde the bass for systematcally analysng the buld up of nflatonary pressures n 1

PRACTICAL GUIDE TO PRODUCING CONSUMER PRICE INDICES the economy and for trackng relatonshps between prce developments n partcular sectors. From a compler s pont of vew t also provdes a useful tool for dentfyng gaps n avalable prce ndex seres and a focal pont for nvestgatng coherence n ndex constructon. 1.7 The frst step n constructng such a framework s to dvde the entre economc process nto dstnct stages: Rest of the world Producton: splt nto broad categores such as agrculture and manufacturng (and further subdvded nto prmary, ntermedate and fnal producton). Fnal demand: separated nto prvate fnal consumpton, government consumpton, captal purchases and exports. 1.8 The man seres of prce ndces are then grouped accordng to coverage. For nstance, ths mght be as follows: Consumers expendture (Consumer Prces Index). Other elements of Fnal Demand (an Index of Government Prces [IGP] and an Index of Investment Prces [IIP]. Inputs nto and outputs from the manufacturng sector (the Producer Prces Index [PPI]). Trade prce ndces 1.9 In prncple, for all sgnfcant transfers of goods and servces from one part of the economy to another, there should be a representatve prce ndex (based on drectly measured prces) that reflects the changng level of prces for all such goods (or servces). 1.10 The Stage of Processng Framework s shown n Appendx 1.1. The source of the goods/servces s shown down the left sde of the table; the destnaton s shown along the top of the table. For nstance, the prces charged by the manufacturng sector for consumer goods sold to the retal/wholesale sector are reflected n the PPIs (Producer Prce Indces). The prces charged by the retal sector for consumer goods sold to prvate consumers are reflected n the CPI. Across the top of the table are the buyers, classfed nto two broad groups: ntermedate demand and fnal demand. Most sectors of producton are nvolved n both buyng nputs and sellng output so they appear n the table both as buyers and as sellers. In practce, n some cells transactons from seller to buyer wll be nsgnfcant and these are denoted by a dash. For nstance, there are unlkely to be any mported goods feedng nto the constructon sector as ntermedate demand. In the example n Appendx 1.1, whch for llustratve purposes has been populated on the bass of a typcal stuaton, the shaded cells represent sgnfcant transactons n the economy for whch there are no relevant prce ndces. Where publshed ndces do exst, the name (or acronym) of the ndex s gven. For nstance, the sale of fnshed goods by retalers to prvate fnal consumpton s measured by the CPI. 1.11 The practcal advantages of usng a Stage of Processng Framework can clearly be llustrated: The assocated table of nflaton rates can be used for analytcal purposes and help nform economc polcy. Aggregate prce ndces (and nflaton rates) for each row and for each column may be computed to produce nflaton rates for dfferent sectors. Possble enhancements to currently publshed ndces can be dentfed. Major gaps can be dentfed. Issues relatng to statstcal ntegraton and coherence and can be also dentfed. For example, ssues relatng to coherence n concepts and practcal measurement arse when combnng rows and columns. Lower level Frameworks 1.12 Hgher level frameworks can be supplemented by lower level frameworks such as the Stage of Producton Framework. The latter, whch can be used for n depth nvestgaton of the Producer Prce Index, s not expanded upon here. 1.13 The lower level theoretcal framework for CPIs s essentally based on economc theory relatng to consumer behavour. In ths context the Schultze Panel on Conceptual, Measurement, and Other Statstcal Issues n Developng Cost of Lvng Indexes makes a dstncton between the tradtonal CPI based on a fxed weght basket, as beng a cost ofgoods ndex (COGI), and a cost of lvng ndex, whch measures the change n expendtures a household would have to make n order to mantan a gven standard of lvng or utlty. Many references n the plentful lterature on consumer prce ndces argue that an advantage of a COLI over a COGI s that the former s supported by economc theory (.e. the behavour of the ndvdual n the market place), mplyng that the latter s not. But economc theory can be used to support both a COGI and a COLI, one 2

INTRODUCTION at a macro level and one at a mcro level, and both complement one another. Thus: A COGI measures the nflatonary pressures n the economy from prce developments n the retal sector. It represents one of many sectors, albet an mportant one, n the Stage of Processng Framework. A COLI measures the expendture requred by a household to mantan ther standard of lvng or utlty. Puttng asde the defnton of utlty and whether the COLI s unconstraned or constraned, t s an ndex constructed from the vewpont of the ndvdual consumer and has ts foundaton n mcro economcs and the theory of ndvdual consumer behavour. Unlke a COGI, t takes nto account the substtutons consumers make when faced by relatve changes n prces ether between dfferent goods and servces or between dfferent outlets and supplers. 1.14 The dfferent uses of a CPI set wthn these frameworks determne a number of measurement ssues ncludng the choce of ndex number formula. Choce of ndex number formula 1.15 Most countres state that they use a Laspeyres ndex or a Laspeyres type ndex for ther natonal CPI whch, n practce, s somewhere along the contnuum between a cost of goods ndex (COGI) and a cost of lvng ndex (COLI). 1.16 Experts generally agree that the deal type of ndex for a CPI would be a superlatve ndex such as the Fsher ndex. Superlatve ndces make equal use of the prces and quanttes n both of the perods beng compared (such as the base perod and the latest month). In realty, quanttes for recent perods are almost never known, so that n practce nearly all NSIs produce CPIs whch rely on quanttes relatng to a base perod some tme earler. 1.17 Some countres am to produce a cost of lvng ndex (COLI). But such an ndex s n fact a type of superlatve ndex and suffers from the same practcal defect as mentoned above. 1.18 It s mportant, nevertheless, for natonal statstcal offces to be able to state publcly what type of ndex s beng calculated n ther CPI. A true Laspeyres ndex uses quantty data whch relate to exactly the same perod as the prce reference perod. Ths s rarely the case. Most statstcal offces have a prce reference perod whch s later than the perod to whch the quantty data (.e. the weghts) relate and wll span, say, a year rather than a pont n tme. Ths s because the man source of weghts data s a Household Budget Survey (HBS) whch typcally produces usable results a year or more after the end of a survey perod whch s not a pont n tme. In these crcumstances, ether the HBS perod weghts are used wthout adjustment, or they are prce updated to the prce reference perod. Ether of these methods results n a Lowe ndex, but s often referred to as a Laspeyres type ndex. The CPI Manual (Chapter 1) goes nto consderable detal on these and other ndex number types. 1.19 The Handbook n general s based on the assumpton that the ndex beng compled s a Lowe (or Laspeyres type) ndex. Index Formula at Lower (Elementary Aggregate) Level 1.20 The frst stage n the calculaton of CPIs s the calculaton of elementary prce ndces, whch are then aggregated to obtan hgher level prce ndces. Expendture weghts are not usually avalable below the elementary aggregate level. The three most wdely known elementary ndex formulae are the Carl, the Dutot and the Jevons and each s assocated wth a number of assumptons whch wll mpact on measured nflaton. The Carl (a smple arthmetc average of prce relatves) and Dutot (the rato of smple arthmetc averages of prces) formulae have a number of problems assocated wth ther use partcularly the Carl, whch s postvely dscouraged as t s partcularly assocated wth some bad characterstcs. Because of ths the Jevons formula (the rato of smple geometrc averages) s ncreasngly used. It should be noted that an arthmetc average s always greater than or equal to a geometrc average and that the dfference wll be greater the greater the varance n the prce relatves. The choce of formula becomes more mportant the greater the dversty of prce movements whch s one argument for ensurng that elementary aggregates are as homogeneous as possble. Acquston, use, or payment approach 1.21 A CPI s based on the measurement of the change n prces of the goods and servces ncluded n the basket. The vast majorty of goods (but not necessarly of total values) are prced n the retal outlets sellng them. It should be noted that n normal crcumstances the prces recorded are the labelled prces, whch are assumed to be the prces 3

PRACTICAL GUIDE TO PRODUCING CONSUMER PRICE INDICES actually pad by consumers. It s also generally assumed that payment for the goods s made at the tme of purchase ndeed the consumer would regard the two events as dentcal. However, payment can be n cash or on credt, ncludng credt cards for whch the due date of payment may be several weeks after the actual purchase. 1.22 The tme factor s mportant n other ways too. A shopper may decde to buy a larger than normal quantty of a partcular good f there s a specal prce reducton. The product may then be stored at home and consumed (.e. used) over a relatvely long perod. Cans of food, for example, offered cheaply for a lmted perod, may be stored at home wthout deteroraton for months and consumed at the usual frequency. 1.23 Another ssue concerns the defnton of usage. A bottle of mlk wll typcally be consumed wthn a few days of purchase. Consumpton s lkely to take place n the month for whch the CPI s calculated. But a sem durable such as a shrt wll be worn many tmes over a perod of probably several years. A durable such as a televson set may be used for a decade or more and a house over an even longer perod of tme. The queston arses as to whch CPI month (or months) should the purchase be allocated. 1.24 Wth servces these questons can be even more complex. Take, for example, the purchase of a season tcket for a bus servce. Ths may be a sngle payment for a pass whch gves free bus transport for a year. It can be seen that although ths example s clearly a servce (the use of bus transport over a perod of tme) t has much n common wth the purchase of a durable such as a televson or shrt whch provdes a type of servce over a long perod. A servce such as a medcal operaton can also be regarded as durable, snce t s lkely to gve longterm health benefts to the patent. 1.25 CPI theory devotes much thought to these ssues, whch can have mportant mplcatons not only for how a CPI s compled but for the results themselves. Three dfferent approaches can be dentfed: The acqustons approach relates to when the good or servce s acqured, rrespectve of when t s actually used or consumed. The tme of acquston of a good s the moment at whch the legal ownershp of the good passes to the consumer. Ths s usually the pont at whch the purchaser ncurs a lablty to pay. On the other hand, wth a servce there s no change n ownershp; t s acqured at the tme the producer provdes t (e.g. the bus journey). A CPI based on ths approach measures the change n the cost of acqurng a product. The tmng of the recorded prces should be consstent wth the way n whch the value would be recorded n the expendture data used for the CPI weghts. The use approach relates to the perod over whch the product s consumed or used; a CPI based on ths approach measures the change n the cost of usng the product over tme; n other words the cost of the good s dstrbuted over ts useful lfe. Expendtures on durable goods and servces are lable to fluctuate. The payments approach relates to the perod of tme when the actual perod to perod payments for the product are made. Ths can dffer from the perod when t s acqured and when t s used. When payments are not made n cash, there may be a long perod before the purchase s pad for, whether by cheque, credt card or other method. The tme at whch these debts are made s rrelevant for the recordng of the prce. The prce to be recorded s the prce payable at the tme of acquston (though sometmes the method of payment may tself affect the prce). 1.26 Statstcal offces need to have a clear polcy on whch of these approaches s used n ts CPI. In practce, the choce between the three approaches s an ssue relatng to durable goods and ts mpact s lkely to be lmted to the weght gven to owneroccuper housng costs. The latter s dscussed n Secton 9.1 of the Handbook. In countres where food expendtures and other expendtures on nondurables, sem durables and even servces account for a sgnfcant share of the CPI basket and where credt fnancng s rarely used, the acquston, use and payment approaches wll gve very smlar results and hence the CPI can satsfy many uses equally well. Ths s the prncpal reason why most countres use, ether mplctly or explctly, the acqustons approach to defne what consttutes consumpton expendture. Contents of the Handbook 1.27 The complaton of CPIs s hghly complex. Readers wll note that t occupes eghteen chapters of the Handbook. Although each chapter deals wth a partcular topc, t s nevtable n such a complex process that there are many nter dependences between the topcs. It s not possble to make decsons on sources of weghts data wthout frst decdng on such factors as geographcal and populaton coverage, for example. So there are many cross references wthn each chapter. 4

INTRODUCTION 1.28 The followng summary of the contents of each chapter draws attenton to some of the more crucal lnks between chapters. Chapter 2 on the scope of the CPI, covers such ssues as: the dfferent uses of CPIs; geographcal coverage (ncludng regonal coverage); the reference populaton; the choce between democratc and plutocratc weghts; the exclusons of certan products such as narcotcs; and the treatment of mputed transactons and mputed prces. Chapter 3 deals wth the subject of product classfcaton, and focuses almost entrely on the standard nternatonal classfcaton COICOP. Chapter 4 s devoted to the mportant ssue of expendture weghts. There are lnks to ssues dealt wth n other chapters, ncludng: plutocratc and democratc weghts; the acquston, use or payments approach to the recordng of prces; the treatment of taxes and subsdes; the populaton and geographc coverage; the treatment of own account producton; the treatment of n knd remuneraton; and the coverage of second hand goods. All of these topcs are dealt wth n greater detal n other chapters. Chapter 4 covers n depth the sources of weghts data, ncludng Household Budget Surveys and adjustments whch may be needed; the weghts reference perod and prce updatng; and the use of weghts n calculatng the overall ndex. Chapter 5 deals wth the complex ssue of samplng. CPIs necessarly rely on the use of samples coverng tme, locaton, outlet type, product type, and detaled product specfcatons. All of these aspects of samplng are dealt wth n Chapter 5. Chapter 6 on prce collecton, follows logcally from Chapter 5. It deals wth most of the practcal aspects of prce collecton, ncludng: frequency and tmng of collecton; perod or pont n tme prcng; outlet types; seasonal avalablty (also dealt wth n Chapter 9); prce volatlty; the management of prce collecton ncludng qualty control and documentaton; staff management and tranng; methods of recordng prces; treatment of specal offers and dscounts; barganed prces; central collecton. Chapter 7 deals wth the problems whch occur when products or outlets become unavalable, ether temporarly or permanently. The chapter covers the mportant questons of substtuton (replacement) and qualty adjustment. Chapter 8 covers the treatment of newly avalable products. It deals wth plannng for the ntroducton of new products; the tmng of ther ntroducton n the CPI; sample rotaton; how to add a new elementary aggregate; and the consequental effects on the calculaton of the overall ndex. Chapter 9 deals wth a varety of specfc goods and servces whch need specal treatment. They are: o Owner occuped housng the varous methods of attrbutng values to the shelter costs of owner occupers. o Own account producton, wth partcular emphass on home produced food. o Certan servces, n partcular health and educatonal servces, where there are usually ssues concerned wth free or hghly subsdsed provson. o Tarffs such as those used n utltes lke publc transport, gas, electrcty and water supply, etc. o Seasonal products methods of dealng wth products (especally fresh food products) whch are avalable n certan months but not n others. o Second hand goods, such as clothng and motor cars. The chapter covers stuatons where second hand tems are traded va dealers or drectly between households, and dstngushes between mported and domestc products. Chapter 10 s devoted to the detaled methods of calculaton of CPIs, focussng n turn on the complaton of elementary aggregate ndces and then the staged aggregaton to the overall CPI. It covers such ssues as the stratfcaton of elementary aggregates; the use of mplct weghts wthn elementary aggregates; the pros and cons of varous elementary aggregate formulae; the choce of formula for calculatng the aggregate ndces; and the chan lnkng and splcng of ndces. Chapter 11 deals wth the calculaton of varants of the standard CPI, ncludng: ndces relatng to partcular soco economc groups; regonal CPIs; ndces excludng certan product groups such as alcohol and tobacco; constant tax ndces; and seasonal adjustment of the overall CPI. Chapter 12 deals wth data valdaton at all stages of complaton of a CPI. Ths ncludes checkng at the ntal nput stage; credblty 5

PRACTICAL GUIDE TO PRODUCING CONSUMER PRICE INDICES checkng; the audtng of complaton processes; output edtng of results; the treatment of outlers; data edtng, ncludng the use of algorthms such as the Tukey algorthm. Chapter 13 deals wth the sources of errors and bas, ncludng advce on how to mnmse them. It deals specfcally wth questons of bas n elementary aggregates and upper level substtuton bas; qualty change and new products bas; new outlet bas; and dfferent sources of samplng and non samplng error. Chapter 14 deals wth ssues concernng the publcaton of CPIs, ncludng analyss and presentaton. Specfc ponts covered are: tmng of publcaton; pre release announcements and access; assocated poltcal statements; examples of detaled procedural arrangements; press releases; revsons; specal presentatons and analyses. Chapter 15 addresses a wde range of ssues to do wth the organsaton and management of the whole CPI producton process. It descrbes typcal qualty management processes; nternal audtng; revew systems; and rsk assessment and dsaster plannng. Chapter 16 s concerned wth CPI user consultaton, focussng n partcular on the use of CPI advsory commttees. Chapter 17 addresses the subject of ntegraton of the CPI producton process wth the ICP (Internatonal Comparson Program for Purchasng Power Partes). It examnes the dfferences and smlartes between the two programs one spatal, the other temporal, and suggests ways of achevng maxmum overlap and hence effcency benefts. It also dscusses ways n whch both processes can acheve mutual statstcal mprovements n ther results. Chapter 18 provdes gudance on reportng mechansms for provdng users wth the metadata that they are enttled to on the characterstcs, qualty, access and ntegrty of the CPI and, correspondngly, the nformaton that a natonal statstcal nsttute needs to montor n order to know whether t s meetng user needs and to put n place a programme of mprovements. In partcular, the chapter looks at the use of qualty frameworks and checklsts. Termnology n the Handbook 1.29 The feld of consumer prce ndces uses very lttle termnology specfc to the subject. It uses many terms n general use n statstcs and economcs, such as sample, ndex and weght. It also uses many words and expressons whch are used n common language: examples nclude product, tem and basket. These words can have very specfc meanngs n a CPI context. In recent years there has been a marked ncrease n the degree of nternatonal dscusson and co operaton amongst CPI experts, and ths has had the fortunate result of brngng about greater harmonsaton of termnology. It has also drawn attenton to the problems of translaton, especally amongst the second group of commonly used words mentoned above. 1.30 The CPI Manual ncludes a lengthy glossary whch t s to be hoped wll assst n the gradual harmonsaton of termnology. Ths Handbook has wherever possble used the same terms as are found n the Manual s glossary. There s, however, a separate glossary so that readers do not need to consult the glossary n the Manual. Most of the defntons are dentcal, but n some cases the wordng has been changed to mprove clarty. Some new words and phrases have been added, whle some not referred to n the Handbook have been omtted. 1.31 Care has been taken to use throughout the Handbook the same words and phrases where these refer to the same object. Ths has been done for the sake of consstency, snce t could be msleadng to the reader to use dfferent terms for the same object. An example s the use of Household Budget Survey for the type of household survey whch requres households to state ther expendtures on varous products or groups of products. Countres often use a dfferent name for ther equvalent survey, but reference to the glossary wll explan what s ntended. Consstency has also called for a unform ttle to be gven to such bodes as Natonal Statstcal Insttutes (NSIs), regardless of ther actual names, whch vary consderably. 6

INTRODUCTION Appendx 1.1 Stage of Processng Framework /a from wholesalers/dealers/mport agents /b captal eqpt purchased through wholesalers/agents are not covered by the IIP whch reflects changng levels of output prces (e manufacturers lst or order prces) /c there may be drect purchases, but such transactons are not reflected n any publshed ndces /d The only export prces collected by PPS are from the producers (EPI1s). The EPI2s publshed by Trade Stats cover all exported goods; but only the EPIs determned by PPS are based on drect prce collecton /e ths block s equvalent to the sale of labour by prvate households to the productve sectors of the economy /f most captal goods wll, by defnton, feed nto ntermedate demand but captal goods purchased for re sale by dealers (eg cars) wll be classfed as ntermedate demand /g not yet based on drectly collected prces but an estmate of mported captal goods prces s made for the FEPI (and for the PINCCA) /h expendture on servces ncurred as an ntegral part of the acquston of captal goods s classfed as part of nvestment expendture / output from the constructon sector feeds nto Govt fnal consumpton (why?) /j from wholesale to retal /k eg domestc help /l captal goods that feed nto Govt Fnal consumpton (eg PCs costng < 1000) 7

CHAPTER 2 The Scope of the CPI Introducton 2.1 Chapter 1 of the CPI Manual provdes a summary of the background to CPI methodology. Paragraphs 1.8 to 1.12 provde some background on the orgns and use of CPIs, ncludng ther evoluton from compensaton ndces to macro economc ndces used by government to set nflaton targets, and paragraphs 1.13 to 1.146 dscuss the characterstcs of the dfferent ndex formulatons avalable and ther dfferent propertes, ncludng the tests that can be appled n decdng whch formulaton to adopt n dfferent crcumstances. Much of the remanng parts of Chapter 1 cover ssues relatng to concepts, the scope and defnton of a CPI and a wde range of other subjects confrontng the ndex compler ncludng the acquston, payments and user cost approaches, cost of lvng ndces, the constructon of expendture weghts and the collecton of prces data. Chapter 2 of the CPI Manual dscusses n greater detal the dfferent uses of a CPI and the practcal consequences for the prce statstcan. 2.2 The ILO Resoluton on CPIs specfcally addresses the scope of the CPI n paragraphs 8 to 14 and makes the pont that the scope of the ndex depends on the man use for whch t s ntended and should be defned n terms of the types of households, geographcal areas, and the types of consumer goods and servces acqured, used or pad for by the reference populaton. 2.3 A CPI can be used for a varety of purposes, the more common ones beng: the ndexaton of wages, rents, contracts and socal securty payments; the deflaton of household consumpton n the natonal accounts; as a general macroeconomc ndcator, especally for nflaton targetng and for settng nterest rates. Elements of a CPI are also often used n the calculaton of purchasng power partes (PPPs) requred n the Internatonal Comparson Program (ICP) 1. 2.4 Gven the many uses of CPIs, t s unlkely that one ndex can perform equally satsfactorly n all applcatons. Some countres therefore construct 1 See Chapter 17. several CPI varants for specfc purposes. Each ndex should be properly defned and named to avod confuson and a headlne CPI measure should be explctly dentfed. Where only one CPI s publshed, t s the man use that should determne ts type and scope. If there are several major uses, compromses may have to be made wth regard to how t s constructed. The purpose of a CPI should nfluence all aspects of ts constructon. CPI producers need to know how ther ndex s beng used f they are to ensure that t s ft for purpose. In ths connecton user consultaton s mportant. Chapter 16 provdes detaled advce on consultaton procedures. 2.5 Ths chapter revews the ssues confronted by the ndex compler relatng to the scope of the ndex and the practcal measurement and complaton decsons whch have to be made. But before dong so t revews the varous uses of a CPI to put the dscusson n context. The dfferent uses of a CPI 2.6 CPIs have three man uses: Indexaton A CPI used for wage or contract ndexaton of any specfc group, whether of populaton or of products, should represent the coverage of the group concerned. For nstance, t can be argued that the weghts of a CPI used for ndexaton of pensons should cover only the expendture of the pensoner populaton. The product and outlet lst could also be more approprately targeted, f the data exst. Ths means, for example, that a CPI used for ndexng pensons may use weghts relatng to pensoner households and may exclude products whch may be thought largely rrelevant to, say, poorer households, such as luxury tems or brands. Smlarly, for domestc ndexaton, the CPI should cover only the expendture of the resdent populaton (see secton below on Geographcal coverage ). More generally, t has to be decded whether the CPI should be, n prncple, a cost of lvng ndex or a pure prce ndex these two very dfferent concepts are dscussed n Chapter 1. 8