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6461.0 - Consumer Price Index: Concepts, Sources and Methods, 2011  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 19/12/2011   
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APPENDIX 4 ILO RESOLUTION CONCERNING CONSUMER PRICE INDICES


INTRODUCTION

This appendix has been extracted from the website of the International Labour Organization (ILO). It reproduces the resolution concerning consumer price indices adopted by the Seventeenth International Conference of Labour Statisticians, 2003. The resolution can be found at

http://www.ilo.org/public/english/bureau/stat/download/res/cpi2.pdf.

It is also reproduced at annex 3 of the international Consumer Price Index Manual published by the ILO.


RESOLUTION II

Resolution concerning consumer price indices

Preamble

The Seventeenth International Conference of Labour Statisticians,

Having been convened at Geneva by the Governing Body of the ILO and having met from 24 November to 3 December 2003,

Recalling the resolution adopted by the Fourteenth International Conference of Labour Statisticians concerning consumer price indices and recognizing the continuing validity of the basic principles recommended therein and, in particular, the fact that the consumer price index (CPI) is designed primarily to measure the changes over time in the general level of prices of goods and services that a reference population acquires, uses or pays for,

Recognizing the need to modify and broaden the existing standards in the light of recent methodological and computational developments to enhance the usefulness of the international standards in the provision of technical guidelines to all countries,

Recognizing the usefulness of such standards in enhancing the international comparability of the statistics,

Recognizing that the CPI is used for a wide variety of purposes and that governments should be encouraged to identify the (priority) purposes a CPI is to serve, to provide adequate resources for its compilation, and to guarantee the professional independence of its compilers,

Recognizing that the (priority) objectives and uses of CPI differ among countries and that, therefore, a single standard could not be applied universally,

Recognizing that the CPI needs to be credible to observers and users, both national and international, and that better understanding of the principles and procedures used to compile the index will enhance the users' confidence in the index,

Agrees that the principles and methods used in constructing a CPI should be based on the guidelines and methods that are generally accepted as constituting good statistical practices;

Adopts, this third day of December 2003, the following resolution which replaces the previous one adopted in 1987:


The nature and meaning of a consumer price index

1 The CPI is a current social and economic indicator that is constructed to measure changes over time in the general level of prices of consumer goods and services that households acquire, use or pay for consumption.

2 The index aims to measure the change in consumer prices over time. This may be done by measuring the cost of purchasing a fixed basket of consumer goods and services of constant quality and similar characteristics, with the products in the basket being selected to be representative of households' expenditure during a year or other specified period. Such an index is called a fixed-basket price index.

3 The index may also aim to measure the effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare). This concept is called a cost-of-living index (COLI). A fixed basket price index, or another appropriate design, may be employed as an approximation to a COLI.


The uses of a consumer price index

4 The CPI is used for a wide variety of purposes, the two most common ones being: (i) to adjust wages as well as social security and other benefits to compensate, partly or completely, for changes in the cost of living or in consumer prices; and (ii) to provide an average measure of price inflation for the household sector as a whole, for use as a macro- economic indicator. CPI subindices are also used to deflate components of household final consumption expenditure in the national accounts and the value of retail sales to obtain estimates of changes in their volume.

5 CPIs are also used for other purposes, such as monitoring the overall rate of price inflation for all sectors of the economy, the adjustment of government fees and charges, the adjustment of payments in commercial contracts, and for formulating and assessing fiscal and monetary policies and trade and exchange rate policies. In these types of cases, the CPI is used as more appropriate measures do not exist at present, or because other characteristics of the CPI (e.g. high profile, wide acceptance, predictable publication schedule, etc.) are seen to outweigh any conceptual or technical deficiencies.

6 Given that the CPI may be used for many purposes, it is unlikely that one index can perform equally satisfactorily in all applications. It may therefore be appropriate to construct a number of alternative price indices for specific purposes, if the requirements of the users justify the extra expense. Each index should be properly defined and named to avoid confusion and a "headline" CPI measure should be explicitly identified.

7 Where only one index is compiled, it is the main use that should determine the type of index compiled, the range of goods and services covered, its geographic coverage, the households it relates to, as well as to the concept of price and the formula used. If there are several major uses, it is likely that compromises may have to be made with regard to how the CPI is constructed. Users should be informed of the compromises made and of the limitations of such an index.


Scope of the index

8 The scope of the index depends on the main use for which it is intended, and should be defined in terms of the type of households, geographic areas, and the categories of consumer goods and services acquired, used or paid for by the reference population.

9 If the primary use of the CPI is for adjusting money incomes, a relevant group of households, such as wage and salary earners, may be the appropriate target population. For this use, all consumption expenditures by these households, at home and abroad, may be covered. If the primary use of the CPI is to measure inflation in the domestic economy, it may be appropriate to cover consumption expenditures made within the country, rather than the expenditures of households resident within the country.

10 In general, the reference population for a national index should be defined very widely. If any income groups, types of households or particular geographic areas are excluded, for example, for cost or practical considerations, then this should be explicitly stated.

11 The geographic scope refers to the geographic coverage of price collection and of consumption expenditures of the reference population and both should be defined as widely as possible, and preferably consistently. If price collection is restricted to particular areas due to resource constraints, then this should be specified. The geographic coverage of the consumption expenditure may be defined either as covering consumption expenditure of the resident population (resident consumption) or consumption expenditure within the country (domestic consumption).

12 Significant differences in the expenditure patterns and/or price movements between specific population groups or regions may exist, and care should be taken to ensure that they are represented in the index. Separate indices for these population groups or regions may be computed if there is sufficient demand to justify the additional cost.

13 In accordance with its main purpose, the CPI should conceptually cover all types of consumer goods and services of significance to the reference population, without any omission of those that may not be legally available or may be considered socially undesirable. Where appropriate, special aggregates may be constructed to assist those users who may wish to exclude certain categories of goods or services for particular applications or for analysis. Whenever certain goods or services have been excluded from the index, this should be clearly documented.

14 Goods and services purchased for business purposes, expenditures on assets such as works of art, financial investment (as distinct from financial services), and payments of income taxes, social security contributions and fines are not considered to be consumer goods or services and should be excluded from the coverage of the index. Some countries regard expenditures on the purchase of houses entirely as a capital investment and, as such, exclude them from the index.


Acquisition, use or payment

15 In determining the scope of the index, the time of recording and valuation of consumption, it is important to consider whether the purposes for which the index is used are best satisfied by defining consumption in terms of "acquisition", "use", or "payment". (footnote 1) The "acquisition" approach is often used when the primary purpose of the index is to serve as a macroeconomic indicator. The "payment" approach is often used when the primary purpose of the index is for the adjustment of compensation or income. Where the aim of the index is to measure changes in the cost of living, the "use" approach may be most suitable. The decision regarding the approach to follow for a particular group of products should in principle be based on the purpose of the index, as well as on the costs and the acceptability of the decision to the users who should be informed of the approach followed for different products. Because of the practical difficulties in uniformly defining consumption and estimating the flow of services provided by other durable goods in terms of "use", it may be necessary to adopt a mixed approach, e.g. "use" for owner-occupied housing and "acquisition" or "payments" basis for other consumer durables.

16 The differences between the three approaches are most pronounced in dealing with products for which the times of acquisition, use and payment do not coincide, such as owner-occupied housing, durable goods and products acquired on credit.

17 The most complex and important of the products mentioned above is owner-occupied housing. In most countries, a significant proportion of households are owner-occupiers of their housing, with the housing being characterized by a long useful life and a high purchase outlay (price). Under the "acquisition" approach, the value of the new dwellings acquired in the weights reference period may be used for deriving the weight (and the full price of the dwelling is included in the CPI at the time of acquisition, regardless of when the consumption is taking place). Under the "payment" approach, the weights reflect the amounts actually paid out for housing (and the prices enter the CPI in the period(s) when the prices are paid). Under the "use" approach the weights are based on the value of the flow of housing services consumed during the weights reference period estimated using an implicit or notional cost (and prices or estimated opportunity costs enter the CPI when the consumption is taking place).

18 Own-account consumption, remuneration in kind and/or goods and services provided without charge or subsidized by governments and non-profit institutions serving households may be important in some countries where the purpose of the index is best satisfied by defining consumption in terms of "use" or "acquisition" (under the payment approach these are out of scope). The inclusion of these products will require special valuation and pricing techniques.


Basket and weights

19 Decisions on the composition of the basket and the weights follow directly from the scope, as well as from the choice between the "acquisition", "use" or "payment" approaches.

20 Once defined, the expenditures that fall within the scope of the index should be grouped into similar categories in a hierarchical classification system, e.g. divisions/groups/classes, for compilation as well as analytical purposes. There should be consistency between the classification used for index compilation and the one used for household expenditure statistics. The CPI classification should meet the needs of users for special subindices. For the purposes of international comparisons, the classification should also be reconcilable with the most recent version of the UN Classification of Individual Consumption According to Purpose (COICOP), at least at its division level.(footnote 2)

21 In order to facilitate the analysis and interpretation of the results of the index, it may be desirable to classify goods and services according to various supplementary classifications, e.g. source of origin, durability and seasonality. Calculation of the CPI by using various classifications should generate the same overall results as the original index.

22 The classification should also provide a framework for the allocation of expenditure weights. Expenditures at the lowest level of the classification system, expressed as a proportion of the total expenditure, determine the weights to be used at this level. When the weights are to remain fixed for several years, the objective should be to adopt weights that are representative of the contemporary household behaviour.

23 The two main sources for deriving the weights are the results from household expenditure surveys (HESs) and national accounts estimates on household consumption expenditure. The results from an HES are appropriate for an index defined to cover the consumption expenditures of reference population groups resident within the country, while national account estimates are suitable for an index defined to cover consumption expenditures within the country. The decision about what source or sources to use and how they should be used depends on the main purpose of the index and on the availability and quality of appropriate data.

24 The information from the main source (HESs or national accounts) should be supplemented with all other available information on the expenditure pattern. Sources of such information that can be used for disaggregating the expenditures are surveys of sales in retail outlets, point-of-purchase surveys, surveys of production, export and import data and administrative sources. Based on these data the weights for certain products may be further disaggregated by region and type of outlet. Where the data obtained from different sources relate to different periods, it is important to ensure, before weights are allocated, that expenditures are adjusted so that they have the same reference period.

25 Where the weight reference period differs significantly from the price reference period, the weights should be price updated to take account of price changes between the weights reference period and price reference period. Where it is likely that price updated weights are less representative of the consumption pattern in the price reference period this procedure may be omitted.

26 Weights should be reviewed and if appropriate revised as often as accurate and reliable data are available for this to be done, but at least once every five years. Revisions are important to reduce the impact on the index of product substitutions and to ensure the basket of goods and services and their weights remain representative.(footnote 3) For some categories, it may be necessary to update the weights more frequently as such weights are likely to become out of date more quickly than higher-level weights. In periods of high inflation, the weights should be updated frequently.

27 When a new basket (structure or weights) replaces the old, a continuous CPI series should be created by linking (footnote 4) together the index numbers based on the new basket of goods and services to those based on the earlier basket. The particular procedure used to link index number series will depend on the particular index compilation technique used. The objective is to ensure that the technique used to introduce a new basket does not, of itself, alter the level of the index.

28 Completely new types of goods and services (i.e. goods and services that cannot be classified to any of the existing elementary aggregates) should normally be considered for inclusion only during one of the periodic review and reweighting exercises. A new model or variety of an existing product that can be fitted within an existing elementary aggregate should be included at the time it is assessed as having a significant and sustainable market share. If a quality change is detected an appropriate quality adjustment should be made.(footnote 5)

29 Some products such as seasonal products, insurance, second-hand goods, expenditure abroad, interest, own production, expenditures on purchase and construction of dwellings, etc., may need special treatment when constructing their weights. The way these products are dealt with should be determined by the main purpose of the index, national circumstances and the practicalities of compilation.

30 Seasonal products should be included in the basket. It is possible to use: (i) a fixed weight approach which uses the same weight for the seasonal product in all months using an imputed price in the out-of-season months; or (ii) a variable weights approach where a changing weight is attached to the product in various months. The decision on the approach should be based on national circumstances.

31 The expenditure weights for second-hand goods should be based either on the net expenditure of the reference population on such goods, or the gross expenditure, depending on the purpose of the index.

32 When consumption from own production is within the scope of the index, the weights should be based on the value of quantities consumed from own production. Valuation of consumption from own production should be made on the basis of prices prevailing on the market, unless there is some reason to conclude that market prices are not relevant or cannot be reliably observed, or there is no interest in using hypothetically imputed prices. In this case the expenditures and prices for the inputs into the production of these goods and services could be used instead. The third option is to valuate it by using quality adjusted market prices.


Sampling for price collection

33 A CPI is an estimate based on a sample of households to estimate weights, and a sample of zones within regions, a sample of outlets, a sample of goods and services and a sample of time periods for price observation.

34 The sample size and sample selection methods for both outlets and the goods and services for which price movements over time are to be observed should ensure that the prices collected are representative and sufficient to meet the requirements for the accuracy of the index, but also that the collection process is cost-effective. The sample of prices should reflect the importance, in terms of relative expenditures, of the goods and services available for purchase by consumers in the reference period, the number, types and geographic spread of outlets that are relevant for each good and service, and the dispersion of prices and price changes across outlets.

35 Probability sampling techniques are the preferred methods, in principle, as they permit sound statistical inference and control over the representativity of the sample. In addition, they permit estimation of sampling variation (errors). However, they may be costly to implement and can result in the selection of products that are very difficult to price to constant quality.

36 In cases where appropriate sampling frames are lacking and it is too costly to obtain them, samples of outlets and products have to be obtained by non-probability methods. Statisticians should use available information and apply their best judgement to ensure that representative samples are selected. The possibility of applying cut-off or detailed quota sampling(footnote 6) strategy may be considered, especially where the sample size is small. A mixture of probability and non-probability sampling techniques may be used.

37 Efficient and representative sampling, whether random or purposive, requires comprehensive and up-to-date sampling frames for outlets and products. Sample selection can be done either by head office from centrally held sampling frames, or in the field by price collectors, or by a mixture of the two. In the first case, price collectors should be given precise instructions on which outlets to visit and which products to price. In the second case, price collectors should be given detailed and unambiguous guidelines on the local sampling procedures to be adopted. Statistical business registers, business telephone directories, results from the point-of-purchase surveys or from surveys of sales in different types of outlets, and lists of Internet sellers may be used as sampling frames for the central selection of outlets. Catalogues or other product lists drawn up by major manufacturers, wholesalers or trade associations, or lists of products that are specific to individual outlets such as large supermarkets might be used as the sampling frame for selection of products. Data scanned by bar-code readers at the cashier's desk (electronic databases) can be particularly helpful in the selection of goods and services.

38 The sample of outlets and of goods and services should be reviewed periodically and updated where necessary to maintain its representativeness.


Index calculation

39 The compilation of a CPI consists of collecting and processing price and expenditure data according to specified concepts, definitions, methods and practices. The detailed procedures that are applied will depend on particular circumstances.

40 CPIs are calculated in steps. In the first step, the elementary aggregate indices are calculated. In the subsequent steps, higher level indices are calculated by aggregating the elementary aggregate indices.


Elementary aggregate indices

41 The elementary aggregate is the smallest and relatively homogeneous set of goods or services for which expenditure data are defined (used) for CPI purposes. It is the only aggregate for which an index number is constructed without any explicit expenditure weights, although other kinds of weights might be explicitly or implicitly introduced into the calculation. The set of goods or services covered by an elementary aggregate should be similar in their end-uses and are expected to have similar price movements. They may be defined not only in terms of their characteristics but also in terms of the type of location and outlet in which they are sold. The degree of homogeneity achieved in practice will depend on the availability of corresponding expenditure data.

42 An elementary index is a price index for an elementary aggregate. As expenditure weights usually cannot be attached to the prices or price relatives for the sampled products within the elementary aggregate, an elementary index is usually calculated as an unweighted average of the prices or price relatives. When some information on weights is available, this should be taken into account when compiling the elementary indices.

43 There are several ways in which the prices, or the price relatives, might be averaged. The three most commonly used formulae are the ratio of arithmetic mean prices (RAP), the geometric mean (GM) and the arithmetic mean of price relatives (APR). The choice of formula depends on the purpose of the index, the sample design and the mathematical properties of the formula. It is possible to use different formulae for different elementary aggregates within the same CPI. It is recommended that the GM formula be used, particularly where there is a need to reflect substitution within the elementary aggregate or where the dispersion in prices or price changes within the elementary aggregate is large. The GM has many advantages because of its mathematical properties. The RAP may be used for elementary aggregates that are homogeneous and where consumers have only limited opportunity to substitute or where substitution is not to be reflected in the index. The APR formula should be avoided in its chained form, as it is known to result in biased estimates of the elementary indices.

44 The elementary index may be computed by using either a chained or direct form of the formula chosen. The use of a chained form may make the estimation of missing prices and the introduction of replacement products easier.


Upper level indices

45 These price indices are constructed as weighted averages of elementary aggregate indices. Several types of formulae can be used to average the elementary aggregate indices. In order to compile a timely index, the practical option is to use a formula that relies on the weights relating to some past period. One such formula is the Laspeyres-type index, the formula used by most national statistical agencies.

46 For some purposes it may be appropriate to calculate the index retrospectively by using an index number formula that employs both base-period weights and current-period weights, such as the Fisher, Törnqvist or Walsh index. Comparing the difference between the index of this type and the Laspeyres-type index can give some indication of the combined impact of income changes, preference changes and substitution effects over the period in question, providing important information for producers and users of the CPI.

47 Where the change in an upper level index between two consecutive periods such as t-1 and t is calculated as the weighted average of the individual indices between t-1 and t, care should be taken to ensure that the weights are updated to take account of the price changes between the price reference period 0 and the preceding period t-1. Failure to do so may result in a biased index.


Price observations

48 The number and quality of the prices collected are critical determinants of the reliability of the index, along with the specifications of the products priced. Standard methods for collecting and processing price information should be developed and procedures put in place for collecting them systematically and accurately at regular intervals. Price collectors should be well trained and well supervised, and should be provided with a comprehensive manual explaining the procedures they have to follow.


Collection

49 An important consideration is whether the index or parts of the index should relate to monthly (or quarterly) average prices or to prices for a specific period of time (e.g. a single day or week in a month). This decision is related to a number of issues, which include the use of an index, the practicalities of carrying out price collection and the pattern of price movements. When point-in-time pricing is adopted, prices should be collected over a very small number of days each month (or quarter). The interval between price observations should be uniform for each product. Since the length of the month (or quarter) varies, this uniformity needs to be defined carefully. When the aim is monthly (or quarterly) average prices, the prices collected should be representative of the period to which they refer.

50 Attention should also be paid to the time of day selected for price observation. For example, in the case of perishable goods, price observations may need to be collected at the same time on the same day of the week and not just before closing time, when stocks may be low, or sold cheaply to minimize wastage.

51 Price collection should be carried out in such a way as to be representative of all geographical areas within the scope of the index. Special care should be taken where significant differences in price movements between areas may be expected.

52 Prices should be collected in all types of outlets that are important, including Internet sellers, open-air markets and informal markets, and in free markets as well as price-controlled markets. Where more than one type of outlet is important for a particular type of product, this should be reflected in the initial sample design and an appropriately weighted average should be used in the calculation of the index.

53 Specifications should be provided detailing the variety and size of the products for which price information is to be collected. These should be precise enough to identify all the price-determining characteristics that are necessary to ensure that, as far as possible, the same goods and services are priced in successive periods in the same outlet. The specifications should include, for example, make, model, size, terms of payment, conditions of delivery, type of guarantees and type of outlet. This information could be used in the procedures used for replacement and for quality adjustment.

54 Prices to be collected are actual transaction prices, including indirect taxes and non-conditional discounts, that would be paid, agreed or costed (accepted) by the reference population. Where prices are not displayed or have to be negotiated, where quantity units are poorly defined or where actual purchase prices may deviate from listed or fixed prices, it may be necessary for the price collectors to purchase products in order to determine the transaction prices. A budget may be provided for any such purchases. When this is not possible, consideration may be given to interviewing customers about the prices actually paid. Tips for services, where compulsory, should be treated as part of the price paid.

55 Exceptional prices charged for stale, shop-soiled, damaged or otherwise imperfect goods sold at clearance prices should be excluded, unless the sale of such products is a permanent and widespread phenomenon. Sale prices, discounts, cut prices and special offers should be included when applicable to all customers without there being significant limits to the quantities that can be purchased by each customer.

56 In periods of price control or rationing, where limited supplies are available at prices which are held at a low level by measures such as subsidies to the sellers, government procurement, price control, etc., such prices as well as those charged on any significant unrestricted markets should be collected. The different price observations should be combined in a way that uses the best information available with respect to the actual prices paid and the relative importance of the different types of sales.

57 For each type of product, different alternatives for collecting prices should be carefully investigated, to ensure that the price observations could be made reliably and effectively. Means of collection could include visits to outlets with paper forms or hand-held devices, interviews with customers, computer-assisted telephone interviews, mail-out questionnaires, brochures, price lists provided by large or monopoly suppliers of services, scanner data and prices posted on the Internet. For each alternative, the possible cost advantages need to be balanced against an assessment of the reliability and timeliness of each of the alternatives.

58 Where centrally regulated or centrally fixed prices are collected from the regulatory authorities, checks should be made to ascertain whether the goods and services in question are actually sold and whether these prices are in fact paid. For goods and services where the prices paid are determined by combinations of subscription fees and piece rates (e.g. for newspapers, journals, public transport, electricity and telecommunications) care must be taken to ensure that a representative range of price offers are observed. Care must also be taken to ensure that prices charged to different types of consumers are observed, e.g. those linked to the age of the purchaser or to memberships of particular associations.

59 The collected price information should be reviewed for comparability and consistency with previous observations, the presence of replacements, unusual or large price changes and to ensure that price conversions of goods priced in multiple units or varying quantities are properly calculated. Extremely large or unusual price changes should be examined to determine whether they are genuine price changes or are due to changes in quality. Procedures should be put in place for checking the reliability of all price observations. This could include a programme of direct pricing and/or selective re-pricing of some products shortly after the initial observation was made.

60 Consistent procedures should be established for dealing with missing price observations because of, e.g. inability to contact the seller, non-response, observation rejected as unreliable or products temporarily unavailable. Prices of non-seasonal products that are temporarily unavailable should be estimated until they reappear or are replaced, by using appropriate estimation procedures, e.g. imputation on the basis of price changes of similar non-missing products. Carrying forward the last observed price should be avoided, especially in periods of high inflation.


Replacements

61 Replacement of a product will be necessary when it disappears permanently. Replacement should be made within the first three months (quarter) of the product becoming unavailable. It may also be necessary when the product is no longer available or sold in significant quantities or under normal sale conditions. Clear and precise rules should be developed for selecting the replacement product. Depending on the frequency of sampling and the potential for accurate quality adjustment, the most commonly used alternatives are to select: (i) the most similar to the replaced variety; (ii) the most popular variety among those that belong to the same elementary aggregate; and (iii) the variety most likely to be available in the future. Precise procedures should be laid down for price adjustments with respect to the difference in characteristics when replacements are necessary, so that the impact of changes in quality is excluded from the observed price.

62 Replacement of an outlet may be motivated if prices cannot be obtained e.g. because it has closed permanently, because of a decline in representativeness or because the outlet no longer cooperates. Clear rules should be established on when to discontinue price observations from a selected outlet, on the criteria for selecting a replacement, as well as on the adjustments that may be required to price observations or weights. Such rules should be consistent with the objectives of the index and with the way in which the outlet sample has been determined.

63 Deletion of an entire elementary aggregate will be necessary if all products in that elementary aggregate disappear from most or all outlets and it is not possible to locate a sufficient number of price observations to continue to compile a reliable index for this elementary aggregate. In such situations, it is necessary to redistribute the weight assigned to the elementary aggregate among the other elementary aggregates included in the next level of aggregation.


Quality changes

64 The same product should be priced in each period as long as it is representative. However, in practice, products that can be observed at different time periods may differ with respect to package sizes, weights, volumes, features and terms of sale, as well as other characteristics. Thus it is necessary to monitor the characteristics of the products being priced to ensure that the impact of any differences in price-relevant or utility-relevant characteristics can be excluded from the estimated price change.

65 Identifying changes in quality or utility is relatively more difficult for complex durable goods and services. It is necessary, therefore, to collect a considerable amount of information on the relevant characteristics of the products for which prices are collected. The most important information can be obtained in the course of collecting prices. Other sources of information on price-relevant or utility-relevant characteristics can be producers, importers or wholesalers of the goods included and the study of articles and advertisements in trade publications.

66 When a quality change is detected, an adjustment must be made to the price, so that the index reflects as nearly as possible the pure price change. If this is not done, the index will either record a price change that has not taken place or fail to record a price change that did happen. The choice of method for such adjustments will depend on the particular goods and services involved. Great care needs to be exercised because the accuracy of the resulting index depends on the quality of this process. To assume automatically that all price change is a reflection of the change in quality should be avoided, as should the automatic assumption that products with different qualities are essentially equivalent.

67 The methods for estimating quality-adjusted prices(footnote 7) may be:

(a) Explicit (or direct) quality adjustment methods that directly estimate the value of the quality difference between the old and new product and adjust one of the prices accordingly. Pure price change is then implicitly estimated as the difference in the adjusted prices.

(b) Implicit (or indirect) quality adjustment methods which estimate the pure price change component of the price difference between the old and new products based on the price changes observed for similar products. The difference between the estimate of pure price change and the observed price change is considered as change due to quality difference. Some of these methods are complex, costly and difficult to apply. The methods used should as far as possible be based on objective criteria.


Accuracy

68 As with all statistics, CPI estimates are subject to errors that may arise from a variety of sources.(footnote 8) Compilers of CPIs need to be aware of the possible sources of error, and to take steps during the design of the index, its construction and compilation processes to minimize their impact, for which adequate resources should be allocated.

69 The following are some well-known sources of potential error, either in pricing or in index construction, that over time can lead to errors in the overall CPI: incorrect selection of products and incorrect observation and recording of their prices; incorrect selection of outlets and timing of price collection; failure to observe and adjust correctly for quality changes; appearance of new goods and outlets; failure to adjust for product and outlet substitution or loss of representativity; the use of inappropriate formulae for computing elementary aggregate and upper level indices.

70 To reduce the index's potential for giving a misleading picture, it is in general essential to update weights and baskets regularly, to employ unbiased elementary aggregate formulae, to make appropriate adjustments for quality change, to allow adequately and correctly for new products, and to take proper account of substitution issues as well as quality control of the entire compilation process.


Dissemination

71 The CPI estimate should be computed and publicly released as quickly as possible after the end of the period to which it refers, and according to a pre-announced timetable. It should be made available to all users at the same time, in a convenient form, and should be accompanied by a short methodological explanation. Rules relating to its release should be made publicly available and strictly observed. In particular, they should include details of who has pre-release access to the results, why, under what conditions, and how long before the official release time.

72 The general CPI should be compiled and released monthly. Where there is no strong user demand for a monthly series or countries do not have the necessary resources, the CPI may be prepared and released quarterly. Depending on national circumstances, sub-indices may be released with a frequency that corresponds to users' needs.

73 When it is found that published index estimates have been seriously distorted because of errors or mistakes made in their compilation, corrections should be made and published. Such corrections should be made as soon as possible after detection according to publicly available policy for correction. Where the CPI is widely used for adjustment purposes for wages and contracts, retrospective revisions should be avoided to the extent possible.

74 The publication of the CPI results should show the index level from the index reference period. It is also useful to present derived indices, such as the one that shows changes in the major aggregates between: (i) the current month and the previous month; (ii) the current month and the same month of the previous year; and (iii) the average of the latest 12 months and the average of the previous 12 months. The indices should be presented in both seasonally adjusted and unadjusted terms, if seasonally adjusted data are available.

75 Comments and interpretation of the index should accompany its publication to assist users. An analysis of the contributions of various products or group of products to the overall change and an explanation of any unusual factors affecting the price changes of the major contributors to the overall change should be included.

76 Indices for the major expenditure groups should also be compiled and released. Consideration should be given to compiling indices for the divisions and groups of the COICOP.(footnote 9) Sub-indices for different regions or population groups, and alternative indices designed for analytical purposes, may be compiled and publicly released if there is a demand from users, they are judged to be reliable and their preparation is cost effective.

77 The index reference period may be chosen to coincide with the latest weights reference period or it could be established to coincide with the base period of other statistical series. It should be changed as frequently as necessary to ensure that the index numbers remain easy to present and understand.

78 Average prices and price ranges for important and reasonably homogeneous products may be estimated and published in order to support the research and analytical needs of users.

79 Countries should report national CPI results and methodological information to the International Labour Office as soon as possible after their national release.

80 Comparing national CPI movements across countries is difficult because of the different measurement approaches used by countries of certain products, particularly housing and financial services. The exclusion of housing (actual rents and either imputed rents or acquisition of new houses, and maintenance and repair of dwelling) and financial services from the all-items index will make the resulting estimates of price change for the remaining products more comparable across countries. Therefore, in addition to the all-items index, countries should, if possible, compile and provide for dissemination to the international community an index that excludes housing and financial services. It should be emphasized, though, that even for the remaining products in scope, there can still be difficulties when making international comparisons of changes in consumer prices.


Consultations and integrity

81 The compiling agency should have the professional independence, competence and resources necessary to support a high quality CPI programme. The UN Fundamental Principles of Official(footnote 10) Statistics and the ILO Guidelines concerning dissemination practices for labour statistics(footnote 11) should be respected.

82 The agency responsible for the index should consult representatives of users on issues of importance for the CPI, particularly during preparations for any changes to the methodology used in compiling the CPI. One way of organizing such consultations is through the establishment of advisory committee(s) on which social partners, as well as other users and independent experts, might be represented.

83 In order to ensure public confidence in the index, a full description of the data collection procedures and the index methodology should be prepared and made widely available. Reference to this description should be made when the CPI is published. The documentation should include an explanation of the main objectives of the index, details of the weights, the index number formulae used, and a discussion of the accuracy of the index estimates. The precise identities of the outlets and goods and services used for price collection should not be revealed.

84 Users should be informed in advance of any changes that are going to be made to the scope, weights or methodology used to estimate the CPI.

85 Technical guidance on the compilation of consumer price indices is provided in the Consumer price index manual: Theory and practice.(footnote 12) This manual should be updated periodically in order to reflect current best practice.


ANNEX 1

Terminology and definitions

(a) "Consumer goods" are goods or services that are used by households for the satisfaction of individual needs or wants.

(b) "Consumption expenditures" are expenditure on consumer goods and services and can be defined in terms of "acquisition", "use", or "payment".

  • "acquisition"(footnote 13) indicates that it is the total value of the goods and services acquired during a given period that should be taken into account, irrespective of whether they were wholly paid for or used during the period. This approach could be extended to include the estimated values of own-account production and social transfers in kind received from government or non-profit institutions. The prices enter the CPI in the period when consumers accept or agree prices, as distinct from the time payment is made;
  • "use" indicates that it is the total value of all goods and services actually consumed during a given period that should be taken into account; for durable goods this approach requires valuing the services provided by these goods during the period. The prices (opportunity costs) enter the CPI in the period of consumption;
  • "payment" indicates that it is the total payment made for goods and services during a given period that should be taken into account, without regard to whether they were delivered or used during the period. The prices enter the CPI in the period or periods when the payment is made.

(c) "Scope of the index" refers to the population groups, geographic areas, products and outlets for which the index is constructed.

(d) "Coverage" of the index is the set of goods and services represented in the index. For practical reasons, coverage may have to be less than what corresponds to the defined scope of the index.

(e) "Reference population" refers to that specific population group for which the index has been constructed.

(f) "Weights" are the aggregate consumption expenditures on any set of goods and services expressed as a proportion of the total consumption expenditures on all goods and services within the scope of the index in the weight reference period. They are a set of numbers summing-up to unity.

(g) "Price updating of weights" is a procedure that is used to bring the expenditure weights in line with the Index or price reference period. The price updated weights are calculated by multiplying the weights from the weight reference period by elementary indices measuring the price changes between weight reference and price reference period and rescaling to sum to unity.

(h) "Index reference period" is the period for which the value of the index is set at 100.0.

(i) "Price reference period" is the period whose prices are compared with the prices in the current period. The period whose prices appear in the denominators of the price relatives.

(j) The "weight reference period" is the period, usually a year, whose estimates of the volume of consumption and its components are used to calculate the weights.

(k) "Probability sampling" is the selection of a sample of units, such as outlets or products, in such a way that each unit in the universe has a known non-zero probability of selection.

(l) "Cut-off sampling" is a sampling procedure in which a predetermined threshold is established with all units in the relevant population at or above the threshold being eligible for inclusion in the sample and all units below the threshold being excluded. The threshold is usually specified in terms of the size of some relevant variable (such as some percentage of total sales), the largest sampling units being included and the rest excluded.

(m) "Quota sampling" is a non-probability method where the population is divided into certain strata. For each stratum, the number ("quota") of elements to be included in the sample is specified. The price collector simply "fills the quotas", which means, in the case of outlet sampling, that the selection of the outlets is based on the judgement of the price collectors and the specified criteria.

(n) "Imputed expenditures" are the expenditures assigned to a product that has not been purchased, such as a product that has been produced by the household for its own consumption (including housing services produced by owner-occupiers), a product received as payment in kind or as a free transfer from government or non-profit institutions.

(o) "Imputed price" refers to the estimated price of a product whose price during a particular period has not been observed and is therefore missing. It is also the price assigned to a product for which the expenditures have been imputed, see (n).

(p) "Outlet" indicates a shop, market stall, service establishment, internet seller or other place where goods and/or services are sold or provided to consumers for non-business use.

(q) "Linking" means joining together two consecutive sequences of price observations, or price indices, that overlap in one or more periods, by rescaling one of them so that the value in the overlap period is the same in both sequences, thus combining them into a single continuous series.

(r) "Price" is defined as the value of one unit of a product, for which the quantities are perfectly homogeneous not only in a physical sense but also in respect of a number of other characteristics.

(s) "Pure price change" is that change in the price of a good or service which is not due to any change in its quality. When the quality does change, the pure price change is the price change remaining after eliminating the estimated contribution of the change in quality to the observed price change.

(t) "Quality adjustment" refers to the process of adjusting the observed prices of a product to remove the effect of any changes in the quality of that product over time so that pure price change may be identified.

(u) "Consumer substitution" occurs when, faced with changes in relative price, consumers buy more of the good that has become relatively cheaper and less of the good that has become relatively more expensive. It may occur between varieties of the same product or between different expenditure categories.


ANNEX 2

Quality adjustment methods

Implicit quality adjustment methods

1 The "overlap" method assumes that the entire price difference at a common point in time between the disappearing product and its replacement is due to a difference in quality.

2 The "overall mean imputation" method first calculates the average price change for an aggregate without the disappearing product and its replacement, and then uses that rate of price change to impute a price change for the disappearing product. It assumes that the pure price difference between the disappearing product and its replacement is equal to the average price changes for continuing (non-missing) products.

3 The "class mean imputation" method is a variant of the overall mean imputation method. The only difference is in the source of the imputed rate of price change to period t+1 for the disappearing product. Rather than using the average index change for all the non-missing products in the aggregate, the imputed rate of price change is estimated using only those price changes of the products that were judged essentially equivalent or were directly quality-adjusted.

Explicit quality adjustment methods

4 The "expert's adjustment" method relies on the judgement of one or more industry experts, commodity specialists, price statisticians or price collectors on the value of any quality difference between the old and replacement product. None, some, or all of the price difference may be attributed to the improved quality.

5 The "differences in production costs" approach relies on the information provided by the manufacturers on the production costs of new features of the replacements (new models), to which retail mark-ups and associated indirect taxes are then added. This approach is most practicable in markets with a relatively small number of producers, with infrequent and predictable model updates. However, it should be used with caution as it is possible for new production techniques to reduce costs while simultaneously improving quality.

6 The "quantity adjustment" method is applicable to products for which the replacement product is of a different size to the previously available one. It should only be used if the differences in quantities do not have an impact on the quality of the good.

7 The "option cost" method adjusts the price of the replacements for the value of the new observable characteristics. An example of this is the addition of a feature that earlier has been a priced option as standard to a new automobile model.

8 A "hedonic" regression method estimates the price of a product as a function of the characteristics it possesses. The relationship between the prices and all relevant and observable price-determining characteristics is first estimated and then results are used in the estimation of the index.


ANNEX 3

Types of errors
  • "Quality change error" is the error that can occur as a result of the index's failure to make proper allowance for changes in the quality of goods and services.
  • "New goods error" is the failure to reflect either price changes in new products not yet sampled, or given a COLI objective, the welfare gain to consumers when those products appear.
  • "Outlet substitution error" can occur when consumers shift their purchases among outlets for the same product without proper reflection of this shift in the data collection for the index.
  • "New outlets error" is conceptually identical to new goods error. It arises because of the failure to reflect either price changes in new outlets not yet sampled, or the welfare gain to consumers when the new outlets appear.
  • "Upper level substitution error" arises when the index does not reflect consumer substitution among the basic categories of consumption owing to the use of an inappropriate method for aggregating elementary aggregates in the construction of the overall index value. Only relevant to a COLI, although an equivalent (representativity error) may be defined from the perspective of the pure price index.
  • "Elementary index error" arises from the use of an inappropriate method for aggregating price quotations at the very lowest level of aggregation. The elementary index error can take two forms: formula error and lower level substitution error. The index suffers from formula error if, as a result of the properties of the formula, the result produced is biased relative to what would have been the result if a pure price change could have been estimated. The index suffers from lower level substitution error if it does not reflect consumer substitution among the products contained in the elementary aggregate.
  • "Selection error" arises when the sample of price observations is not fully representative of the intended population of outlets or products. The first four types of errors listed above can be seen as special cases of this type of error.


ANNEX 4

Classification of Individual Consumption According to Purpose (COICOP) (breakdown of individual consumption expenditure of households by division and group)

01 Food and non-alcoholic beverages

01.1 Food

01.2 Non-alcoholic beverages

02 Alcoholic beverages, tobacco and narcotics

02.1 Alcoholic beverages

02.2 Tobacco

02.3 Narcotics

03 Clothing and footwear

03.1 Clothing

03.2 Footwear

04 Housing, water, electricity, gas and other fuels

04.1 Actual rentals for housing

04.2 Imputed rentals for housing

04.3 Maintenance and repair of the dwelling

04.4 Water supply and miscellaneous services related to the dwelling

04.5 Electricity, gas and other fuels

05 Furnishings, household equipment and routine household maintenance

05.1 Furniture and furnishings, carpets and other floor coverings

05.2 Household textiles

05.3 Household appliances

05.4 Glassware, tableware and household utensils

05.5 Tools and equipment for house and garden

05.6 Goods and services for routine household maintenance

06 Health

06.1 Medical products, appliances and equipment

06.2 Outpatient services

06.3 Hospital services

07 Transport

07.1 Purchase of vehicles

07.2 Operation of personal transport equipment

07.3 Transport services

08 Communication

08.1 Postal services

08.2 Telephone and telefax equipment

08.3 Telephone and telefax services

09 Recreation and culture

09.1 Audio-visual, photographic and information processing equipment

09.2 Other major durables for recreation and culture

09.3 Other recreational products and equipment, gardens and pets

09.4 Recreational and cultural services

09.5 Newspapers, books and stationery

09.6 Package holidays

10 Education

10.1 Pre-primary and primary education

10.2 Secondary education

10.3 Post-secondary non-tertiary education

10.4 Tertiary education

10.5 Education not definable by level

11 Restaurants and hotels

11.1 Catering services

11.2 Accommodation services

12 Miscellaneous goods and services

12.1 Personal care

12.2 Prostitution

12.3 Personal effects n.e.c.

12.4 Social protection

12.5 Insurance

12.6 Financial services n.e.c.

12.7 Other services n.e.c.

1 See Annex 1. <back
2 See Annex 4. <back
3 See Annex 1. <back
4 See Annex 2. <back
5 See Annex 2. <back
6 See Annex 1. <back
7 See Annex 2. <back
8 See Annex 3. <back
9 See Annex 4. <back
10 UN Economic and Social Council, 1994. <back
11 Sixteenth International Conference of Labour Statisticians, 1998. <back
12 Consumer price index manual: Theory and practice (International Labour Office, International Monetary Fund, Organisation for Economic Co–operation and Development, Statistical Office of the European Communities (EUROSTAT), United National Economic Commission for Europe and the World Bank, Geneva, 2004). <back
13 This definition differs from the one adopted by the 14th ICLS (1987). <back

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