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Books by Grigory Yavlinsky
Economics and Politics in Russia
The Center for Economic and Political Research (EPIcenter)
Nizhni Novgorod-Moscow, 1992

4.2. SOCIAL SPHERE Recommendations on calculating the consumer price index

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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.


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.


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.


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;


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