4.2. SOCIAL SPHERE
4.2.3.1 Recommendations
on calculating the consumer price
index
[previous] [CONTENTS]
[next]
1. The notion of the consumer price index
The consumer price index (CPI) is a relative
index
characterising the average change in retail prices for a
fixed number of consumer goods and services over a certain
period of time. It is calculated both for the whole
population and for individual territories, socio-demographic
groups and family categories.
The CPI, estimated according to the fixed
basket, does not
take into account changes in population incomes, the quality
and structure of consumption.
The CPI's development presupposes several
stages, namely
-- the formation of a consumer basket;
-- the choice of a system of weights and
calculation
formula;
-- the compilation of a set of specifications;
-- the registration of prices and aggregation
of individual
indexes.
2. Problems solved with the help of the
CPI
Regular CPI computations should measure
the inflation
component of the growing consumer costs of different
population groups with due account of all sources of goods
and service sales.
State measures geared to social protection
and support of
public monetary incomes in the face of inflationary consumer
price rises also represent a sphere of practical use.
Differences in the consumption structure of various socio-
demographic groups place natural limits on the index.
Consequently, a network of CPIs must be developed, which
reflects the influence of consumer price dynamics on the
expenditure of a specific population group uniting families
with insignificant differences in the consumption structure.
3. Consumer Price Index System
The CPI should be differentiated along
three lines, namely
the coverage of consumer expenditure, socio-demographic
population groups and territories.
Depending on the fullness of the consumer basket, the CPI
system includes
1) the general index of consumer prices,
reflecting changing
costs in all consumer goods and services included in the
average consumer basket;
2) individual CPI characterising the changing
cost of a
fixed range of staple consumer goods and services excluding
luxury items, fashion commodities and other inessential
goods and services;
3) the subsistence minimum index, reflecting
the changing
cost of the minimum consumer budget.
The choice of a specific CPI depends on
the sphere of its
application. The general CPI is used as an indicator of
the
general inflationary rise in consumer prices. The individual
index and subsistence minimum index are used to support
the
real value of the public monetary incomes and the
subsistence minimum.
The aforementioned CPIs are developed for
specific
territories and socio-demographic groups, explained by
natural, climatic, social and economic differences of
various regions. The degree of specification largely depends
on the economic situation in the country, but a unified
CPI
is undesirable even in an economic crisis, disintegrating
consumer market and, hence, a fairly homogeneous, by modern
standards, consumption structure of the majority of the
population. We need a differentiated estimate of the
changing costs of consumer expenditures among different
groups of the able-bodied and disabled population and
different family categories, with special attention given
to
groups with the lowest incomes.
The CPI system should be built on common
methodological and
methodical principles.
4. Information Base
When calculating the CPI, both main statistics
sources are
used, namely the state statistics reports in trade and
prices, and selective family budget surveys, as well as
goal-oriented selective surveys.
The indexes of prices and tariffs for consumer
goods and
services are estimated, with due account of all sources
of
receipt (purchase). If the set of representative goods
coincides with the list of the most typical goods bought
by
all population groups, the CPI can be based on the price
registration system developed for the compilation of an
aggregate price index and tariffs for representative goods
and services. Otherwise, we either have to organise a
special selective inspection of shops for periodical
registration of prices for goods included in the CPI
consumer basket, or modify the existing inspection
programme.
The special inspection results are complemented
by data
developed by trade statistics (for instance, as far as the
volumes of actual sales of individual items are concerned)
and, if need be, by the population statistics figures pertaining
to the total population and territorial
population structures.
Cash expenditures and their structure for
different population groups are determined by selective
family budget surveys and are used to measure average group
price indexes. Natural profits and food products grown by
individuals and consumed by them and their families are
not taken into account.
[up]
5. Calculation formula
Statistically, the CPI represents the average
figure which
is a product of individual retail price indexes for consumer
goods and tariffs for paid services according to the fixed
consumer basket. It presupposes several aggregation stages,
namely
-- individual;
-- commodity group;
-- commodity class;
-- aggregate
The CPI is calculated in accordance with
the Las Peires
formula. It is recommended to use an average form identical
to the aggregate, which is the most widespread in world
practice.
p1q0 i.p0q0
CPI = p0q0 = p0q0 ,
p1
i = p0, where
stands for the amount;
"p1" and "p0" stand for a commodity
price in the period
under survey and the base period,
"q1" and "q0" stand
for the quantity of goods sold over the
period under survey and the base period;
"i" stands for the individual
price index.
The calculation of the average figure of
individual (group)
indexes largely facilitates the compilation of dynamic
indices, the introduction of new and replacement of old
components, and the taking into account of quality
corrections.
The Las Peires formula was chosen here
as it is based on a
fixed rather than a current set of consumer goods (cf. the
Paache formula) and therefore enables us to trace the price
dynamics proper, irrespective of changes in the consumption
structure.
6. The Formation of the Consumer Basket
The CPI is calculated on the basis of a
specific selection
which enables us to limit the list of goods and services
used in the index and distinguish the most typical consumer
goods of all population groups. In this way they become
comparable in terms of time and territory.
The index should reflect the actual structure
of consumer
expenditure formed in the region or in a specific socio-
demographic group. When the general CPI index is devised,
the consumer basket comprises the whole set of goods and
services actually bought by the population. When the
individual CPI is calculated, inessential goods and services
are excluded from the consumer basket. The same list should
be used in all territories, otherwise the compatibility
of
indexes and interregional comparisons will be impossible.
When the subsistence minimum CPI is calculated, the
composition and structure of the minimum consumer budget
are
used.
The formation of consumer baskets has specific
features both
on a territorial plane and for different population groups.
However, these specific features mostly boil down to
differences in the level and structure of consumer
expenditure, and also in the quality of consumed products,
while leaving the set of goods and services (commodity groups)
constituting the CPI basket practically intact. A
consumer basket standard must be identified to compare
different CPIs.
The selection of consumer goods and services
is divided into
three groups:
-- the food basket;
-- the nonfoods basket;
-- paid services.
The list of food products is made up of
items singled out in
the "Household Food Turnover" table when family
budgets are
worked out in greater detail. The selection of nonfoods
and
paid services is determined, respectively, on the basis
of
the "Nonfoods Purchase" and "Monetary Expenditure"
tables.
At the next stage of calculations, each commodity group
is
determined by one or several specifications uniting products
of the same quality, which are homogeneous in their consumer
purpose. The choice of specific goods should be based on
the
mass consumption principle. When such a commodity is hard
to
distinguish, the commodity item is specified with a few
most
typical consumption products, which differ insignificantly
in actual sales volumes.
The number of goods and services fixed
in the basket will
depend above all on the region's economic situation. The
consumer basket should reflect actual requirements and
correspond to the degree of accessibility of these benefits.
The general CPI's consumer basket should not contain more
than 250-300 items.
Unlike the unified list of commodity groups,
the
specifications differ from one territory or social group
to
another and are independently developed by the local
authorities.
7. The Choice of Weights System
To calculate the CPI at different aggregation
stages,
different weights systems are used. To count all channels
of
sales of a specific commodity in the average CPI, actual
sales volumes are used as weights. Beginning with the
commodity group level to the final calculation
of the CPI,
the average actual structure of family expenditure is used,
based on each item's share in the aggregate consumer
expenditure. (It is unnecessary to go over to per-capita
indices, because the choice of analysis unit does not
influence the expenditure structure.)
The construction of the individual CPI presupposes
a
preliminary adjustment of the actual expenditure structure.
All commodity items not included in the reduced consumer
basket are excluded from actual expenditure. The aggregate
cost of the remaining expenditure articles is used to
calculate the adjusted structure.
The minimal consumer budget structure stripped
to the main
items of consumer expenditure (without taxes, savings, etc.)
is used to calculate the subsistence minimum.
Since the composition and structure of consumer expenditure
varies in different social and income groups and in
different regions, the drafting of independent CPIs in each
case presupposes the use of individual weights systems.
The whole system of weights is fixed on a base level to
free
the index of the influence of qualitative changes which
inevitably appear in actual family expenditure. The change
of the market situation and the dynamics of consumers'
wealth, tastes and preferences require a periodic revision
of weights. The frequency of such revisions depends on the
stability of the consumer market and the authorities'
financial potential. An annual revision of the weights
system would be ideal. In any case, the period between the
two global selective family surveys should not be longer
than three years.
Partial changes in the weights structure
are admissible. For example, the weights of individual goods
are revalued without changing the total weight of the group
as part of a class of goods or even a commodity group. When
revising the CPI index, the old and new indices should be
linked with special translation coefficients used for this
purpose.
[up]
8. The Sequence of Price Index Aggregation
Information on prices and the quantity
of goods sold in each
specification should take into account different sources
of
goods sales. The number of state and private shops,
cooperative shops, collective farm markets and other sales
channels under analysis should be commensurate to the share
of goods sold in each source in the total volume of its
sales in kind.
If the periodic registration of the volumes
of sales is
impossible or inconvenient, sales structure can be
calculated indirectly. The structure of sales over the past
six months is counted in advance for each commodity group.
Local statistics bodies in each populated area carry out
calculations independently. Shops are selected in accordance
with the obtained data, i.e. the sales structure and the
structure of selected shops should concur (by types of
trade). This approach envisages certain restrictions on
the
total volume of shop selection. Whereas more than five
prices (per each commodity item) are recommended by the
IMF,
here at least ten should be registered. One should also
carefully watch the adequacy of any replacement, when key
trade enterprises are replaced.
The observation of the dynamics of retail
prices and tariffs
is entrusted to special price registrars.
Schematically, the sequence of the CPI
calculation can be
presented as follows:
1) After each article of the consumer basket
has been
determined by a set of specifications and populated areas
have been selected for the systematic registration of retail
prices for goods and paid service tariffs, a number of shops
are selected in each article to cover all possible sales
channels. The quantity of goods sold or the total cost of
sales are also registered (if possible) every month in
addition to shop prices.
2) Individual price indices in each specification
are
counted on the basis of information on prices in the
baseline and current periods (for example, whole milk with
a
specific fat content). Initially, the aggregation is carried
out on each source of goods sales individually. Let us
suppose that milk prices were registered in one populated
area in five state shops, two cooperative shops and three
collective-farm markets. At first ten individual price
indices are calculated. Then they are merged into three
average price indices (per each type of trade) measured
in
actual sales. Then the price index is calculated for the
commodity article as a whole.
If the sales volumes are unknown, all registered
prices are
summed up separately for the baseline and period under
review in accordance with the strict shop selection
structure. The correlation of the sums received in this
way
will be provided by the price index for the commodity item
as a whole.
Consequently, the price indices for specific
goods are
originally aggregated for commodity items included in the
consumer basket. The first variant of the calculation
provides an opportunity to analyse price dynamics, including
on different types of trade.
3) In its turn, the average price index
is calculated for
each commodity group in the whole selection of the region's
populated areas. The index is measured by the base retail
trade volume in each commodity group in the analysed
populated areas. When there is no such information, it can
be replaced by population figures.
4) At the final stage all price indices
for commodity groups
registered in the consumer basket are aggregated into
subindices for enlarged commodity groups and classes and
then into the total CPI. The average actual structure of
family expenditure is used as a measuring unit.
9. Methodological Characteristics of
Price Registration
The CPI calculation leads to a number of
methodological problems related to the calculation of consumer
prices.
[up]
Firstly, any commodity can undergo qualitative
changes with
time, which will affect its price. In these cases the
inflationary price index should be "purified"
of the
qualitative component;
a) if a qualitative improvement has been
caused by use of
better raw materials, i.e. factors where the influence on
prices can be determined, the factor analysis is used;
b) if a qualitative improvement cannot
be accurately
defined, we turn to an expert analysis of the changed
quality by industrial and trade specialists to obtain the
quality coefficient (the improvement of the article's
quality in percentage terms) and adjust the price index
accordingly. It should be borne in mind that the change
of
the goods' quality presupposes its improvement and its
deterioration without a simultaneous or disproportionate
price reduction. Price reductions at seasonal sales should
not affect the index.
Secondly, the emergence of new goods in
the market should be
regarded as a limited case of changing quality. New goods
may appear
a) as rival varieties of existing goods,
i.e. "old" and
"new" goods co-exist. In this case the linkage
method is
used, when the price difference is determined exclusively
by
an improvement in quality;
b) as replacements for old goods. If there
is no difference
between goods in terms of their utility or the consumer
has
no choice because the cheaper commodity has disappeared,
the
price difference should be counted in the index (direct
comparison);
c) as new in principle, without any past
counterparts. When
such commodities become consumer goods and achieve a certain
degree of stability in terms of prices and consumption,
the
CPI structure has to be revised.
Thirdly, the CPI has to be freed of the
influence of
seasonal fluctuations. The introduction of seasonal
adjustments to the CPI should be based on the scale of
seasonal fluctuations. As the consumer market develops and
is saturated, seasonal fluctuations tend to diminish. In
the
event of considerable monthly deviations from the index,
the
elimination of seasonal fluctuations should be as frequent
as the use of the CPI. In these cases it is preferable to
eliminate the seasonal changes directly
from the CPI with
the help of adjustment coefficients calculated in advance
for each commodity group.
A seasonal disappearance of certain commodities
can be
regarded as a specific case of seasonal fluctuations. In
this case the last price of the commodity is either retained
as such (i.e. 100%) throughout the period of its absence
or
the weight of such commodity is counted in a different
commodity group, proceeding from an assumed change in
demand.
10. Calculation of Durables in the CPI
Calculation of durables constitutes a difficult
conceptual
issue in CPI formation. Existing statistical practice does
not distinguish between the inclusion of non-durables and
durables in the commodity index, but this approach may lead
to a serious distortion of the CPI figure. This issue need
to be resolved.
11. Regularity of CPI Calculation
Regular CPI calculation depends on the
inflation rate and
the country's economic situation. Today monthly calculations
seem to be preferable. More frequent calculations can be
established independently by territorial authorities. The
index can be counted in relation to the same period last
year, the previous period of this year and in relation to
the beginning of the year.
12. CPI Calculations
The collection of pricing information and
calculation of the
CPI should be conducted by regional statistics bodies
systematically according to one method and in close
cooperation with trade specialists. As well as current index
calculation, the counting methods should be improved and
the
objectivity and promptness of price information supplied
should be increased. This work should be done along the
following lines:
-- a transition to the territorial principle
of organisation
and holding of selective surveys of family budgets; the
inclusion of new social groups in the budget network;
-- specification of the shop selection to improve its
comparability with the results of family budget surveys;
-- calculation of the influence of unofficial market prices
on the population's consumer expenditure;
[up]
[previous] [CONTENTS]
[next]
|