1.1 A price index is a measure of the proportionate, or percentage, changes in a set of prices over time. A consumer price index (CPI) measures changes in the prices of goods and services that households consume. Such changes affect the real purchasing power of consumers’ incomes and their welfare. As the prices of different goods and services do not all change at the same rate, a price index can only reflect their average movement. A price index is typically assigned a value of unity, or 100, in some reference period and the values of the index for other periods of time are intended to indicate the average proportionate, or percentage, change in prices from this price reference period. Price indices can also be used to measure differences in price levels between different cities, regions or countries at the same point in time.
10.1 This chapter focuses on a number of expenditure areas that pose particular problems for price index compilers, both in terms of identifying an agreed conceptual approach and also overcoming practical measurement difficulties. Six areas have been selected for discussion, mainly from the service sector. They are:
11.1 This chapter discusses the general types of potential error to which all price indices are subject. The literature on consumer price indices (CPIs) discusses these errors from two perspectives, and this chapter presents the two perspectives in turn. First, the chapter describes the sources of sampling and non-sampling error that arise in estimating a population CPI from a sample of observed prices. Second, the chapter reviews the arguments made in numerous recent studies that attribute bias to CPIs as a result of insufficiently accurate treatment of quality change, consumer substitution and other factors. It should be emphasized that many of the underlying issues discussed here are dealt with in much greater detail elsewhere in the manual.
12.1 Consumer price indices (CPI) are one of the most important and widely used of macroeconomic indicators. As well as informing economic policy, they are used for indexation of welfare benefits, pensions, gilts and securities, and also for escalation clauses in private contracts. Accuracy and reliability are paramount for a statistic as important as a CPI.
13.1 The consumer price index (CPI) is one of the most important statistical series. Where statistics are categorized according to their potential impact, the CPI and its variants are always in the first rank. It follows therefore that it must be published, and otherwise disseminated, according to the policies, codes of practice and standards set for such data.
14.1 This chapter focuses on the value aggregates for goods and services that relate the major price indices, including the consumer price index (CPI), to one another. The chapter provides a deeper context for the domain of the CPI covered in Chapter 3 and the index weights dealt with in Chapter 4. It also deepens the context for defining the sample unit and the set of products, discussed in Chapter 5.
The answer to the question what is the Mean of a given set of magnitudes cannot in general be found, unless there is given also the object for the sake of which a mean value is required. There are as many kinds of average as there are purposes; and we may almost say in the matter of prices as many purposes as writers. Hence much vain controversy between persons who are literally at cross purposes. (Edgeworth (1888, p. 347)).
16.1 As was seen in Chapter 15, it is useful to be able to evaluate various index number formulae that have been proposed in terms of their properties. If a formula turns out to have rather undesirable properties, this casts doubts on its suitability as an index that could be used by a statistical agency as a target index. Looking at the mathematical properties of index number formulae leads to the test or axiomatic approach to index number theory. In this approach, desirable properties for an index number formula are proposed, and it is then attempted to determine whether any formula is consistent with these properties or tests. An ideal outcome is the situation where the proposed tests are both desirable and completely determine the functional form for the formula.
17.1 This chapter and the next cover the economic approach to index number theory. This chapter considers the case of a single household, while the following chapter deals with the case of many households. A brief outline of the contents of the present chapter follows.
18.1 In the previous chapter on the economic approach to index numbers, it was implicitly assumed that the economy behaved as if there were a single representative consumer. In the present chapter, the economic approach is extended to an economy with many household groups or many regions. In the algebra below, an arbitrary number of households, H say, is considered. In principle, each household in the economy under consideration could have its own consumer price index. In practice, however, it will be necessary to group households into various classes. Within each class, it will be necessary to assume that the group of households in the class behaves as if it were a single household in order to apply the economic approach to index number theory. The partition of the economy into H household classes can also be given a regional interpretation: each household class could be interpreted as a group of households within a region of the country under consideration.