Price index: Difference between revisions
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==Methodology== | ==Methodology== | ||
The | The construction of consumer price indexes poses methodological issues that are typical of those affecting a variety of price indexes. Different countries have adopted different ways of calculation consumer price indexes <ref>[http://www.bls.gov/opub/hom/pdf/homch17.pdf ''The Consumer Price Index'' Bureau of Labor Statistics Handbook of Methods Ch 17 2007]</ref> <ref>[http://www.statistics.gov.uk/CCI/nugget.asp?ID=1709&Pos=6&ColRank=2&Rank=1000 ''Consumer Price Indices Methodology'' UK Office of National Statistics]</ref> <ref>[http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-BE-04-001/EN/KS-BE-04-001-EN.PDF ''Harmonised Indices of Consumer Prices'' Official Publications of the European Community 2004]</ref> | ||
but they have important features in common. The subject matter of a price index is normally a mixture of different quantities of each of a range of items. For the CPI, it is the mix of purchased items that is bought by a typical consumer. The price index is calculated as the weighted average of the current prices of those items expressed as a percentage of the weighted average of their base-year prices. In calculating those averages, the weight applied to each item is an estimate of the share of that item in the total of consumers’ expenditure. The weights adopted can be derived from national accounts or from surveys set up for the purpose. However, since the composition of consumer expenditure is constantly changing, a choice has to be made whether to use weights corresponding to the current mix, or to the base-year mix, or to some intermediate mix. | |||
==Weighting methods== | ==Weighting methods== | ||
Revision as of 17:35, 11 December 2007
A price index is the price of a group of products expressed as a percentage of the price of a comparable group of products at an earlier date. The Consumer Price Index (CPI), which is the most widely-used price index, is the price of the "basket" of products that is purchased by the typical consumer, expressed as a percentage of the price charged for a comparable basket at a stated base date. The CPI is often used as an inflation target by central banks and other monetary authorities. More generally, it provides an indication of changes in the cost of living and is used as as a factor to "index" past payments in order to maintain their purchasing power. It is also used as a divisor, or "deflator", that is applied to a percentage increase of a quantity measured in monetary units, such as dollars, in order to estimate its percentage had it been measured in physical units, such as gallons. Price indexes are also available for a variety of other prices including those of factory inputs and outputs, commodities and housing.
Methodology
The construction of consumer price indexes poses methodological issues that are typical of those affecting a variety of price indexes. Different countries have adopted different ways of calculation consumer price indexes [1] [2] [3] but they have important features in common. The subject matter of a price index is normally a mixture of different quantities of each of a range of items. For the CPI, it is the mix of purchased items that is bought by a typical consumer. The price index is calculated as the weighted average of the current prices of those items expressed as a percentage of the weighted average of their base-year prices. In calculating those averages, the weight applied to each item is an estimate of the share of that item in the total of consumers’ expenditure. The weights adopted can be derived from national accounts or from surveys set up for the purpose. However, since the composition of consumer expenditure is constantly changing, a choice has to be made whether to use weights corresponding to the current mix, or to the base-year mix, or to some intermediate mix.