-consuming and costly if it requires a new HBS to be carried out. However, the longer the period between weight updates, the less relevant and representative the CPI becomes. Many NSOs are moving toward annual or biannual weight updates.
1.16 In Chapters 2 – 4 of ConsumerPriceIndexTheory , the superlative indices Walsh, Fisher, and Törnqvist show up as being “best” in all the approaches to index number theory. These three indices give very similar results so that for any practical reason it will not make any difference which one is chosen as the preferred theoretical
-level substitution bias is perhaps the most widely accepted source of CPI bias, and the kind with which economists are most familiar from literature on price index theory and practice. Simply stated, it arises when CPIs employ the Laspeyres formula, which is well known to provide an upper bound on a COLI under certain assumptions about consumer behavior (see Chapter 4 of the publication ConsumerPriceIndexTheory ), or a similar method that uses a fixed-base or -basket index, like the Lowe and Young formulas. The assumption in the definition of the Laspeyres-type price index
measures of price change. Related or alternative measures, and subaggregate indices, are discussed in paragraphs 14.23–14.34.
Seasonal Adjustment and Smoothing of the Index
14.11 The treatment of seasonal products and the estimation of seasonal effects are discussed in Chapter 11 of this Manual and Chapter 4 of the publication ConsumerPriceIndexTheory . This chapter discusses the dissemination of adjusted or smoothed series.
14.12 Many series of economic statistics are disseminated seasonally adjusted, as well as unadjusted. CPIs, however, are not
Elementary Price Indices
8.15 Various methods and formulas may be used to calculate elementary price indices. This section provides a summary of the methods that have been most commonly used and the advantages and disadvantages that NSOs must evaluate when choosing a formula at the elementary level. Chapter 6 of ConsumerPriceIndexTheory provides a more detailed discussion.
8.16 The methods most commonly used are illustrated in a numerical example in Tables 8.1 – 8.3 . In these examples, an elementary aggregate consists of seven varieties of an item that could
. These methods are particularly useful for scanner data, where item turnover is often high and promotional sales occur frequently.
10.63 The most important multilateral price index number methods are described in the following text; for a comprehensive discussion, see Chapter 7 of ConsumerPriceIndexTheory . After defining the variety, a short overview of traditional bilateral price indices and chaining is provided.
Defining the Variety
10.64 Before applying any index calculation method, the individual variety to be priced must be defined. The basic
, Törnqvist, or Walsh price indices. Chapter 4 in ConsumerPriceIndexTheory demonstrates that these three indices produce essentially the same results in practice. The Laspeyres index formula, however, is not generally used in practice. This is because the weight reference period, the period to which the expenditure weights refer, is generally earlier than the price reference period of the CPI. To derive an index that commences from its price reference period but keeps quantity weights fixed based on the earlier weight reference period, many NSOs would price update
publication ConsumerPriceIndexTheory , the bias in a fixed-basket index is likely to increase with the age of the weights. At some point, it therefore becomes desirable to use the weights of a more recent period to ensure that the index is weighting appropriately the price changes currently faced by consumers.
3.78 If data sources such as the HBS are available only at irregular or infrequent intervals, the frequency of weight revision may necessarily be linked to the availability of results from the HBS. When the weights are to be fixed for several years, the
.85 The properties and behavior of COLIs are explained in some detail in Chapter 4 of the publication ConsumerPriceIndexTheory . A summary explanation has already been given in Chapter 1 . The maximum scope of a COLI would be the entire set of consumption goods and services consumed by the designated households from which they derive utility. It includes the goods and services received free as social transfers in kind from governments or NPISH. Because COLIs measure the change in the cost of maintaining a given standard of living or level of utility, they lend
the ones used in 2020 to May 2021 stage. In introducing such representative varieties there is an implicit weighting, and care has to be exercised to ensure it is meaningful. At the elementary level of aggregation, the Jevons index is the ratio of geometric means, which is equal to the geometric mean of price relatives (for more information see Chapter 6 of the publication ConsumerPriceIndexTheory ). Equal (implicit) weight is given by the Jevons index to each variety’s price relative. Explicit weights may also be used.
-adjustment procedure requires some concept of what is ideally required and how it is done in practice.
6.73 In Chapter 4 of ConsumerPriceIndexTheory , a cost of living index is defined as the ratio of the minimum expenditure in the base and current period required to achieve a given standard of living or utility. Quality adjustments to prices involve attempting to measure the price change for a product that has exhibited some change in its characteristics from an earlier period that provides a different level of utility to the consumer. Equating of the value of a quality