Consistency and Extrapolation of ICP Benchmarks: The Case of Asia Yuri Dikhanov 3rd Regional Coordinating Agencies meeting October 28-30, 2015 Washington, DC

Background Asian comparisons as a part of the International Comparison Program (ICP) Why extrapolation between benchmark is necessary? Inconsistencies between PPPs: ICP benchmarks, national accounts deflators and CPIs Available information for extrapolation and ICP-SNA (CPI) consistency studies

ICP-CPI inconsistencies Biggest difference: PPPs are spatial and CPIs are temporal indices Comparing CPIs to changes in PPPs over time involves many factors other than price movements. CPIs are mostly [but not always] estimated using Laspeyres indices at the aggregate level, based on different years. ICP uses the EKS (Fisher) index. Addressing inconsistencies: Bridge the two benchmarks (2005 and 2011) using the 12 COICOP category CPI components Predict PPPs by applying CPI components to the corresponding PPP categories

Linking 2005 and 2011 ICP: Asia Comparable in terms of: Structured product descriptions for individual items of HH Set of countries (22 out of 23) Sampling framework Classification systems used Methodology Consistent comparison across time and space is possible

Scope of ICP comparison 2005 comparison, 22 countries, 108 basic headings, EKS (Fisher) aggregation Implicit ICP inflation 2011 comparison, 22 countries, 108 basic headings, EKS (Fisher) aggregation Joint 2005-2011 comparison

Scope of extrapolation 2005 comparison, 8 countries, 12 COICOP categories EKS (Fisher or Tornqvist) aggregation CPI, 12 COICOP categories 8 countries GDP deflators, 12 COICOP categories 5 countries 2011 comparison, 8 countries, 12 COICOP categories EKS (Fisher or Tornqvist) aggregation

Elementary aggregation in ICP Country-Product Dummy method:

Aggregate index in ICP: EKS (Fisher)

Index number problem in extrapolation ICP uses multilateral index: EKS (Fisher) and CPD at the elementary level In Asia most CPI uses Laspeyres with varying base years (aggregate) At the elementary level: some uses geometric, harmonic or arithmetic average CPI uses national expenditure weights ICP uses national accounts weights (in the context of international comparison)

Table 1. Consistency of PPPs Estimated at Different Levels of Aggregation   BAN HKG IND MAL PHI SIN SRI THA SD PPPs: single-year estimation (HKG = 1) 2005 ICP, 22 countries 108 BHs, EKS (Fisher) 3.387 1.000 2.072 0.276 3.277 0.188 5.100 2.404 8 countries, COICOP12, EKS (Törnqvist) 3.481 2.143 0.278 3.298 5.236 2.427 COICOP12-8 vs. ICP108-22 (geomean=1) 0.986 1.014 0.980 1.007 0.987 1.004 1.25% 8 countries, COICOP12, EKS (Fisher) 3.500 2.141 0.279 3.312 5.304 2.439 0.985 1.018 1.015 0.979 1.40% 2011 4.281 2.586 0.270 3.188 0.191 7.099 2.181 4.339 2.649 0.272 3.220 7.278 2.203 0.998 1.012 1.002 1.001 0.88% 4.345 2.654 3.219 0.190 7.317 2.202 0.997 1.016 0.982 1.10%

ICP 2005 and 2011: Consistency of Joint vs. Single-year aggregation   BAN HKG IND MAL PHI SIN SRI THA SD ICP2005, EKS, 108 BH 3.387 1.000 2.072 0.276 3.277 0.188 5.100 2.404 ICP2005, EKS, 108 BH Joint 3.287 2.025 0.273 3.201 0.187 5.019 2.387 ICP2011, EKS, 108 BH 4.281 2.586 0.270 3.188 0.191 7.099 2.181 ICP2011, EKS, 108 BH Joint 4.405 2.637 3.255 0.192 7.217 2.207 2005, Joint vs. Individual 0.985 1.015 0.992 1.003 0.991 1.009 0.999 1.007 0.96% 2011, Joint vs. Individual 0.986 1.006 0.997 0.990 1.002 0.998 0.87%

CPI vs. Implicit ICP Deflators (Joint)   BAN HKG IND MAL PHI SIN SRI THA SD CPI, official 1.678 1.176 1.655 1.177 1.329 1.197 1.774 1.199 22 countries 108 BHs, EKS (Fisher) 1.681 1.255 1.634 1.253 1.276 1.288 1.804 1.160 8 countries, COICOP12, EKS (Törnqvist) 1.658 1.620 1.257 1.815 1.161 8 countries, COICOP12, EKS (Fisher) 1.648 1.626 1.272 1.807 1.158 difference from official CPI 1.002 1.067 0.987 1.065 0.960 1.076 1.017 0.968 4.33% 0.988 0.979 1.068 1.023 4.52% 0.982 0.983 0.957 1.019 0.966 4.40%

CPI vs. Implicit ICP Deflators

Table 4. ICP-CPI Consistency: Extrapolation vs. Actual Benchmark   extrapolation, 2011 to 2005, with CPI components BAN HKG IND MAL PHI SIN SRI THA SD ICP, 22 countries 108 BHs, EKS (Fisher) 3.387 1.000 2.072 0.276 3.277 0.188 5.100 2.404 8 countries, COICOP12, EKS (Törnqvist) 3.278 2.093 0.277 2.980 0.187 5.035 2.280 COICOP12-8 vs. ICP108-22 (geomean=1) 1.009 0.977 0.967 0.974 1.075 0.982 0.990 1.030 3.40% 8 countries, COICOP12, EKS (Fisher) 3.292 2.101 2.971 5.076 2.282 1.007 0.978 0.965 1.079 0.985 0.983 1.031 3.55% extrapolation, 2005 to 2011, with CPI components 4.281 2.586 0.270 3.188 0.191 7.099 2.181 4.606 2.739 0.274 3.574 7.537 2.348 0.976 1.051 0.992 1.034 0.937 1.050 3.78% 4.646 2.751 0.275 3.595 7.626 2.364 0.973 1.056 0.993 1.035 4.07% Detailed CPI extrapolation: Eliminate both differences in index numbers between ICP and CPIs and index number differences among CPIs. > Apply detailed CPI by 12 COICOP categories to both benchmarks > Compare the results to the actual benchmarks

Precision: CPI vs. GDP (HHCE) Deflator Components

Comparative Measures of Inflation: CPI, GDP (HHCE) deflators, ICP implicit inflation

Summary The current study shows that in extrapolating ICP benchmarks with CPIs and GDP deflators, we observe in Asia: Accuracy of extrapolation 3.4 to 4.1% (CPI components) 5.1% to 5.9% (with GDP (HHCE) component deflators) These discrepancies are irreducible further Two distinct clusters observed: Higher income showing price levels higher than predicted with the CPI; Lower income having price levels close to or lower than their predicted values.

ANNEX: Case of Africa Time period: 2005-11 18 countries COICOP 12 (most countries) No joint comparison (so no direct estimate of ICP inflation) No GDP details (HHCE) available

CPI-ICP inconsistencies, by component

Conclusions The largest inconsistencies observed are for Education (CV – 59.1%), Communication – 86%; Predicted vs. Benchmark ratio for Household Consumption ranged from 84.4% to 127.3%; No distinct pattern or clustering observed