General
The analysis of price changes is central to the analysis of macroeconomic conditions. Generally, consumer price indices (CPI) are seen as one of the key indicators of price changes and are often used as the measure of inflation in each country. CPI are also used for other purposes, such as for wage setting or in legal documents, which may mean that a range of different national CPI exist, each to suit a different purpose. However, in general, only one official measure of the CPI exists per country. In recent years, countries have started to place more emphasis on presenting a variety of price measures that are available and explaining how they can be used for different purposes. Examples of this change can be seen in (i) the presentation of a range of "headline" CPI by national statistical offices (for example the Retail Price Index (RPI) and the Retail Price Index excluding Mortgage Interest Rates (RPIX) produced by the United Kingdom), (ii) the different measures of "underlying" or "core" inflation that are used by many central banks, (iii) the use of the national accounts GDP deflator as a measure of price change in macroeconomic analysis and, most recently, (iv) the production and publication of the European Harmonised Indices of Consumer Prices (HICP).
The Main Economic Indicators publication (MEI) contains a range of indicators of price change for the OECD Member countries and for the OECD country groupings or zones. GDP price deflators are shown in the national accounts subject pages in Part I and in many country pages in Part II. Measures of national CPI and Producer Price Indices (PPI) are shown at the All items level and for certain components (for example price indices for food) in country pages. One measure of underlying inflation, All items less food less energy, is presented for four OECD zones on the CPI subject page. The latest addition to this range of price indicators is the presentation of the HICP for 17 European countries in the July 1999 MEI publication. This series is presented at the All items level on the individual country pages.
Which measure of price change to choose?
The first distinction that should be made is between the GDP deflator and the CPI. The CPI only covers changes in the prices of expenditures by households which represent around 60% of total economic activity as defined by GDP. In this sense the GDP deflator can be seen as a broader measure of price change. However, its different method of compilation means that care should be taken in comparing it directly with the national CPI.
There is no single definition of underlying inflation or core inflation. The general idea is to identify a measure of price change covering those items which are not affected by large and volatile price changes. Examples of such price changes are those caused by government action (e.g. changing taxes on petrol or alcohol) or those caused by seasonal factors (e.g. fruit and vegetable prices. A common technique for estimating underlying inflation is simply to remove the more volatile components from the All items CPI. This is the approach used by the OECD with the measure of underlying inflation being calculated by deducting both food and energy from the All items index. Further work on considering other definitions of core inflation and other techniques of a more econometric nature may be possible in the future.
When attempting to compare price change across countries it should also be recognised that the use of the term "All items" in the national CPI of each country is not a sign of perfect comparability. Each country will compile its CPI using similar approaches but differences in the range of goods and services included in the index, the treatment of certain difficult items such as housing costs, different aggregation formula and differences in the sources of data for weights will lead to different CPIs which may reduce comparability. Since the choices made by each country will depend on national circumstance it is a matter of recognising that such differences exist if comparisons across countries are to be made. The MEI publication "Consumer Price Indices: Sources and Methods" (OECD, 1994) helps explain many of the issues involved.
Harmonised Consumer Price Indices - HICP
The development of the HICP has occurred under the general direction of the Statistical Office of the European Communities, Eurostat. Comparable measures of inflation are required under the Treaty on European Monetary Union, signed at Maastricht. HICP are now compiled on a monthly basis by all members of the European Union, plus Norway and Iceland. A number of other countries including Switzerland, Poland, Hungary and the Czech Republic are in the process of developing estimates of price change according to the rules set out for the construction of HICP. The aim of producing comparable measures of price change has largely been achieved with agreement reached on the range of items to be included in the index, the formula to be used at each stage of calculation and the frequency of updating weights for the index. While work is still underway to refine the HICP framework to make it more comparable and inclusive, the HICP represent the most comparable measures of price change across countries. More information on the methods of construction of HICP can be obtained from Eurostat.
Importantly, the decisions taken regarding the construction of the HICP have been aimed at measuring monetary inflation rather than measuring the broader concept of the cost-of-living which has a more welfare-oriented philosophy. (The boundary between the measurement of inflation and the cost-of-living is far from clear and is the subject of continuing debate.) An example of the effect of this choice is that changes in interest rates which may be considered relevant in a measure of price change for indexing pensions are not included in the HICP. Overall, care must be taken when considering which measure of price change best suits its intended use. Indeed, the differences in scope which are possible depending on the desired use of the CPI has meant that all European countries except Luxembourg have continued to publish of their national CPIs as well as producing the monthly HICP. MEI will continue to publish national CPIs in its subject and country pages and will clearly label HICP series where they are used.
Energy price measures
It was noted earlier that the OECD compiles a measure of underlying inflation which excludes from the All items index the prices of energy and food items. The series for Underlying inflation, Food and Energy are presented for various groupings of countries in the CPI subject page. The series Energy and Food are also shown for some countries in the country pages. However, it has become increasingly difficult to collect the detailed information required to estimate both the energy series and the underlying inflation series. In part, the collection difficulties stem from the broad definition of energy which covers expenditure on both fuel and electricity for the home and gasoline for personal transport. Price indices for these items are rarely grouped together by Member countries and as more countries move towards a standard COICOP (Classification Of Individual COnsumption by Purpose) presentation of data, these individual indices are harder to access on a regular basis. While indicators for energy and underlying inflation will continue to be compiled, care should be taken when using the data because of the measurement difficulties which exist for a significant number of countries.
Estimates of CPI for OECD main country groupings
In addition to information on national measures of price change the OECD compiles estimates of price changes for a number of OECD main country groupings (area totals), namely the G7, the EU15, OECD-Europe (comprising European members of the OECD) and OECD-Total (comprising all members of the OECD) for: CPI All items; Food (excluding restaurants); All items less food and energry and; Energy. As well, two area totals are compiled to exclude the effect of Turkey which, because of its very high inflation relative to other member countries, has a substantial impact on the zone estimates for which it is included. These area totals are called "OECD-Europe excluding high inflation countries" and "OECD-Total excluding high inflation countries". OECD area totals estimates are compiled by aggregating the national CPI indices in each period using estimates of Households Private Final Consumption Expenditure (PFCE) as weights. The PFCE for each country is converted into a common currency (US dollars) using Purchasing Power Parities (PPP) which are rates of currency conversion that eliminate the differences in price levels between countries. The PPP used in the zone estimates relate specifically to PFCE and are not the same as the PPP for GDP which are more commonly available.
The weights used to compile the area total estimates are updated each year. The main aim of the moving weights approach as opposed to aggregating with weights from a particular year is to allow for the changing importance of a country within an area total over time. More specifically the area total indices estimated by MEI are chain-linked Laspeyres indices. This type of index is calculated in a two stage process where each observation during one particular year of the index, say 1998, is aggregated using the weights from the previous year, i.e. 1997 in this example. This forms a single link of length one year. Next, each link is joined together to create a smooth time series and then rebased to a common year, currently 2000=100. Since weights are usually available with some lag (around one year) estimates of the area total for the latest periods continue to use the most recently available weights until new data are available. MEI updates these weights for the December edition each year. Due to this process of updating weights and through revisions to the weights because of changes in the underlying national accounts data, the area total estimates are subject to revision even though national CPIs are rarely revised themselves.
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