Reviewing the business architecture of consumer price statistics « (15/16 October 2009) « Be careful! CPI is an inflation indicator.

Every month more than one hundred thousand prices of consumption goods and services are collected in Portugal (and probably some millions across Europe). Such a huge amount of information, implying the mobilization of a significant part of our scarce statistical system resources, is devoted to the computation of CPI and HICP. These indicators are devised to express inflation behaviour. « « Be careful! CPI is an inflation indicator

Although inflation is one of the major macroeconomic variables it may seem reasonable to use the large number of observed prices for other additional purposes. One of these purposes could simply be the publication of average prices of the products included in the CPI reference basket. This information could be useful for consumers micro choices: what to buy? at what price? and, comparing prices across regions and countries, where? « « Be careful! CPI is an inflation indicator

However, this additional purpose raises doubts on the ability of CPI microdata to deliver accurate indications. The doubts are related with the way products are identified in the CPI collecting system. Each product is sufficiently identified to avoid any confusion with other product but... …the identification may not have enough detail to precisely identify a special type/brand of the product. « « Be careful! CPI is an inflation indicator

Thus, some degree of freedom has often to be conceded to the price collectors in choosing the concrete type/brand of a product. However, once the price collector has picked a specific variety of the product in a store, as long it remains possible and representative, that variety price should continue to be observed. Consequently, it may happen that different collectors follow different types/brands of the same product. So it could turn to be somewhat misleading to assign an average price to a product that combines several types/brands. « « Be careful! CPI is an inflation indicator

Moreover the imprecision grows if the intention is to compare average prices across countries with different practices and different types of products and varieties, in spite of the high degree of harmonization already attained in HICP compilation. To produce fair comparisons of prices the degree of detail and the characterization of the product has to increase. « « Be careful! CPI is an inflation indicator

That is why the PPPs project puts a lot of effort in detailing and characterizing the products chosen for price collection (although the collections are not so frequent and so extensive as in CPI framework). Indeed, the PPPs are intended to provide cross countries fair comparisons. Four examples were picked from Portuguese data just to illustrate this idea: apples, men’s jeans, men’s hair scissors cut and dog food. As it is shown each CPI product is related with more than one PPPs product (in each case the number of observations and price dispersion measures are presented in the tables). « « Be careful! CPI is an inflation indicator

Example 1: Apples!

Example 2: Men’s Jeans!

Example 3: Men’s Scissors Cut!

Example 4: Dog Food!

Why do not impose a higher level of detail in CPI products and take away from the price collectors their limited range of decision? (After all, quality changes are one of the most important problems that CPI compilers have to deal with). « « Be careful! CPI is an inflation indicator

If the PPPs detail was suddenly adopted by the CPI/HICP framework, in order to have more meaningful and comparable average prices, it would be very difficult to collect every month the large amount of prices used to compute the CPI/HICP. It could probably happen that for some products only a small number of (or even no) prices could be collected. In that context, specific variations of some products prices could have an inexplicable impact in overall CPI/HICP behaviour and hence affect its credibility as an inflation indicator. « « Be careful! CPI is an inflation indicator

CPI compilation framework has to live with this trade-off in order to have a broad base to represent prices variation: flexibility and precision. This does not mean the trade-off is immutable. Improvements in data collection, for instance gathering online information from major megastores, may induce simultaneously more precision and flexibility [as a matter of fact, Statistics Portugal is exploring this avenue]. But this takes time to be done properly. This time can only be evaluated by NSIs. « « Be careful! CPI is an inflation indicator

Even if the CPI compilation framework is not tailored to convey average prices for comparison purposes, given the huge dimension of the information collected, is it not possible to have an interface with the PPPs project? Yes, it might be possible to explore some areas, namely in food and beverages products, where the level of detail in product definition is almost the same. Even so this has to be done carefully. As it can be seen in the next picture prices collected for almost the same items at the same period of 2009 are very different in some cases. « « Be careful! CPI is an inflation indicator

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In summary: 1) Any articulation between CPI/HICP and PPPs price collection systems will have to take the necessary time to be done properly; 2) This articulation should be implemented if, after a careful evaluation, it can be concluded: a) that does not undermine the quality of the CPI as an inflation Indicator; b) and that does not endanger the ability of PPPs to acknowledge countries relative price levels. « Quality of the CPI as an inflation indicator

« Thank you for your attention!

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