The Identification of Seasonal Items in the Basket and the Corresponding Length of the Seasonal Cycle

11.42 The most important characteristics that can be associated with a strongly seasonal product are: it is not available for purchase during certain months (or the quantity available for purchase is negligible); there is a significant variation in demand during the year; and there are corresponding large fluctuations in price. The variations in supply and demand, mean that prices cannot be observed during the out-of-season months. Seasonal products are associated with variations both in availability of products and in demand and this can lead to pronounced variations in stocks in outlets, expenditure levels, and prices. Any period of nonavailability for pricing in outlets should have some typical annual cyclical pattern. If for some reason a product becomes unavailable in a month where it would normally be available and sold at a normal price, this does not make it a seasonal product. The out-of-season period of a product includes the months in that no prices are observed or used in the compilation for that product, because it is not available for pricing or only available in small quantities in very few outlets at abnormal prices. The inclusion of abnormally high “start-of-season” prices collected from relatively few outlets can potentially introduce a downward bias in the index for both the fixed-weight and seasonal-weight approaches. It may also cause difficulties for price collectors trying to find the products.

The Geographical Dimension

11.43 The seasonal availability of products may vary between regions within a large country. There may also be a difference in supply (and demand) between markets in rural and urban areas, or between market stalls and more upmarket outlets catering to higher incomes. For example, some prices may be collectable in the capital city even though the product is generally not available elsewhere. Where this is the case, different seasonal cycles may be applied, particularly if the differences are marked and regional or urban/ rural subindices are being computed. The decision should take account of the extent of the differences and the needs of users.

Lack of Well-Defined Seasons

11.44 In practice, seasonal products do not always appear and disappear in the same month every year. This presents a problem both for year-on-year monthly comparisons of monthly indices, and for year-on-year comparisons of quarterly indices, but is particularly pronounced for the former. The consequence of neglecting the importance of carefully predefined seasons can contribute to a method, failing to correctly reflect the price changes in the price index in the short term, particularly the seasonal-weight approach. Decisions made regarding the relevance of prices that could have been observed but were not (and have not been included in the index or the imputation of missing prices) can affect the stability of the price index. Thus, the fact that seasonal patterns change and the need to confront whether to accept this or force data into a predetermined seasonal pattern poses a dilemma to CPI compilers. It is particularly important that when data are published, the national statistical office (NSO) should provide background explanations for both the monthly changes and the 12-month rate of change, and whether this is influenced by a change in the timing of sales and in what direction and by what magnitude.

Domestic Products Being Replaced with Imported Products When Out of Season

11.45 When domestically produced, the product description is especially important. The CPI compiler will need to make a judgment on whether an imported apple is of the same quality as a domestic one and if so whether it can be treated as an equivalent or “comparable” fruit. This judgment should be based not just on the variety of apple, its general condition, and favor, but also on whether the market perceives it to be the same and treats it as the same.

11.46 To correctly define those months that the price index of the seasonal product will be calculated from observed prices, particularly in the situation where the methodology requires a fixed seasonal pattern, the NSO should examine in detail the historical data on prices and availability for each product and undertake a sensitivity analysis to identify working rules for determining the inclusion and exclusion of products in the index in specific months. These working rules include:

• The data on availability are needed to decide whether it is likely that in any specific month the product will keep returning to the market every year.

• The price data will show how the inclusion of the product in the index for the first month that the product returns to the market may contribute to the volatility of the index. For example, if the entry price is particularly high (for example, more than 250 percent higher than the product’s last actual price), then it would be reasonable to consider not including the product for that month, especially as it is improbable that the product was widely purchased at such a high price.

• Strongly seasonal products enter the market at high prices that decline toward the end of the season but can go up sharply before exiting the market. This will also have an impact that may vary depending on the calculation approach used.

Fruits and Vegetables

11.47 The prices of seasonal fruits and vegetables are strongly dependent on supply conditions, such as weather, and are thus liable to show extreme price movements and shifts in seasons, as well as seasonal unavailability. However, changes in specification or quality are not common and therefore do not cause the same challenges as are experienced when dealing with, for example, seasonal clothing (see paragraphs 11.49–11.51).

Clothing

11.48 The treatment of seasonal clothing can be challenging, especially because fashion is involved. In many countries, the price patterns of clothing are the result not just of seasonal availability (for example, winter coats or bathing suits) but, especially for fashion goods, of discounts in seasonal sales. In addition, the problem of extreme price movements is combined not only with seasonal unavailability, but by annual changes in the products because of the effect of fashion. New stocks of clothes that arrive in the outlets at the beginning of their season may have styles that are different from those that disappeared at the end of the previous season, so there is the question of whether the new styles are different in quality from the old styles. In addition, prices generally fall over the course of the season: prices at the end of a season are often discounted as outlets clear their stocks in readiness for the next season. For seasonal items, comparisons must be made between the new replacement products and the old products that disappeared at the end of the previous season, maybe six months earlier. Dealing with these issues can be challenging:

• Specification changes. Since it can be difficult to make like-to-like observations for many categories of clothing, the rules for judging whether a replacement is comparable to an original item may need to be less rigid or strict. For example, this season’s high-fashion coat can be viewed as comparable to last season’s model, unless there are obvious differences in important characteristics such as textile replacing leather. For high-fashion items, only changes in compositional and material characteristics, if significant, should be treated as quality changes (see Chapter 6). The primary characteristic of most high-fashion items is the product brand, which incorporates the fashion element. Keeping the same or an equivalent brand is often the key to measuring the fashion element.

• Discounted end-of-season prices. In the case of a product showing temporary discounts or promotions, where it seems likely that the price will return to its normal level after a short period, then the discounted price should be included, and no special method is needed to handle it. If, however, the discounting is seasonal in nature and intended to help the outlet clear stocks of old styles, then the issue is more problematic because, unless specific procedures are applied to ensure a return to normal prices, the index will be subject to a systematic downward bias. The exclusion of such situations is an important consideration in defining the in-season period. Products that have flaws or are irregular should not be included.

11.49 As a result of the complications discussed in the previous paragraphs, some NSOs employ the following procedures during the period covering the time when a seasonal clothing item is not available. This adopts the fixed-weight approach and imputes missing prices by applying price movements, using the overall mean or the targeted mean (see Chapter 6) to the last available normal price.

• In the first month that the item or variety is unavailable, record the price at its “normal” level; in other words, in the first month impute the last available normal price.

• Impute a price during the period of unavailability, for the second and subsequent months, by applying the monthly movements for clothing items for which prices are available to the last normal price.

• When the normal season resumes, select a replacement as similar as possible to the variety that was priced during the previous season and compare its price directly to the final imputed price of the old variety. It is important that the index reflects the full extent of the price difference between the last month that a price was imputed and the first month of the new season. If the replacement has a different level of quality, then the price should be adjusted using one of the quality-adjustment methods presented in Chapter 6.

• Continue price collection using this new variety for the new season.

Chapter 5 includes further guidance on the treatment of sale prices.

The National versus the Domestic Concept

11.65 The national concept means that the CPI should cover all expenditure (and prices) relating to the resident households of the country, regardless of where the expenditure takes place. The national concept aligns with the System of National Accounts (SNA).⁵ The weights for expenditure abroad can be computed from the HBS, at least in theory, but measuring prices paid abroad can pose significant practical and operational problems especially for purchases from physical outlets as opposed to purchases made online.

11.66 The domestic concept means that the CPI should cover all the expenditure made by households within the economic territory of the country, including the nonbusiness expenditure made by foreign visitors. It excludes the expenditure abroad of the resident households.

11.67 As discussed in Chapter 2, the treatment of purchases made online requires special consideration. In principle, the domestic and national concepts could provide guidance on how to treat the expenditure made on goods and services, including digital downloads, purchased online. In many cases, however, internet-based outlets may be based (registered) abroad and this expenditure would be considered cross-border shopping. For those countries following the national concept, the approach is clear. Strictly speaking, under the domestic concept, this expenditure would not be included because it would be defined as expenditure abroad; in practice, this requires a broader interpretation. The nature of internet purchases, therefore, requires a different way of thinking and special consideration, especially with regard to the domestic concept. Additionally, internet purchases continue to grow in importance.

11.68 Many countries have carefully considered how to include the expenditure (and prices) made on goods and services via the internet. For the purchase of goods, the expenditure and prices should be reflected in the country where the goods are delivered.

11.69 Services purchased on the internet can be more problematic for CPI compilation because there are both tangible and digital services. Tangible services would include traditional services such as transportation, hotels, entrance to cultural/sporting events, or education. Digital services would include telecommunications, broadcasting (for example, streaming or downloading music, movies, or television content), and other services (for example, software). If the service is consumed in the economic territory where the household is resident, it should be included in the CPI; however, if the service is consumed outside of the economic territory of the country, it would be excluded. For example, if a household reserves a hotel room that will be used and paid for in another country, it would be considered out of scope. For digital services, because the service is being consumed within the economic territory of a country, the expenditure and prices should be included in the country where the household resides.

11.70 The estimation of expenditure weights can be a more challenging measurement issue. When expenditure or alternative sources of data are not readily available, but internet purchases are known to be substantial, an NSO could investigate augmenting the CPI basket using an estimated weight until the precise weight can be established. By doing this, the relevance of the CPI basket is better maintained.

11.71 For item and variety selection, online retailers often identify their top-selling products on their websites. This can help with identifying those products to price; however, the bestseller or most popular item lists may be skewed by the web-based retailer to sell specific items. CPI staff should carefully review these lists to identify those items that represent the most popular or best seller.

Determining the Location of the Online Retailer and of the Transaction

11.72 The location of the purchaser, the location of the website, and the location of the transaction may be spread across different countries. Several alternative locations may be considered in determining whether an online transaction complies with the national or domestic concept:

• Purchaser’s domicile at the time of the order

• Address where the product is delivered to

• Purchaser’s address

• Billing address

• The location where the product is consumed

• Country where tax, most particularly value-added tax (VAT) or goods and services tax (GST), is paid

11.73 As noted previously, internet purchases force a broader interpretation of the domestic concept. In this case, a pragmatic approach needs to be adopted rather than establishing and adhering to rules and regulations designed to maintain strict consistency with national accounts. For this reason, alternative workable approaches are sometimes used. Fieldman and Sandberg (2012) suggest using the address where the product is delivered to as a practical solution. The country of delivery is where the consumer and the product come together. If the purchaser’s country is not listed as the standard location for the delivery of purchases from the website, then it may be assumed that the seller’s location is in another country. Following this approach, downloads of music, e-books, or software should be classified as domestic purchases as these are normally delivered instantaneously to the user. Although, conceptually this deviates from the concept of a foreign internet purchase, as it will most likely capture purchases from some foreign-based websites, practically it is considered by some as the next best alternative. However, it can lead to inconsistencies between a CPI and the coverage of both the national accounts and of the balance of payments. The approach adopted by Eurostat for the EU HICP uses administrative rules relating to taxation as the basis for determining how to treat internet purchases.⁶ Eurostat’s recommendations on the treatment in the EU of cross-border internet purchases borrow from the VAT rules as applied to all member states. The VAT rules consider the fact that an increasing number of products are electronic (for example, an e-book), rather than a physical good or service in the traditional sense. The rules make a distinction between goods, digital services, and other services. For goods ordered on the internet, the place of delivery determines the VAT rate, and usually, this will be the country of residence of the purchaser. For digital services, the VAT rate is determined by the country where the purchaser normally resides. For nondigital services, even if booked online, such as fights and package holidays, the VAT is determined by the country where the tangible service is provided. The recommendations also cover purchases ordered over the telephone or by mail order catalog that are treated in the same way as internet purchases because of the similarities between different forms of remote purchase.

11.74 In the EU, the scope of the HICP follows the domestic concept, as it covers all household final monetary consumption expenditure (as defined on the EU Regulations on HICP and described in Chapter 2) in the economic territory, regardless of the nationality or normal residence of the consumer.

11.75 According to Eurostat, applying the VAT rules to CPI compilation concerning internet purchases results in the following:

• The expenditure and the prices for goods purchased through the internet are recorded in the HICP of the country where the product is delivered.

• The expenditure and the prices for tangible services purchased through the internet are recorded in the HICP of the country where the service is provided.

• The expenditure and the prices for digital services (for example, communication, broadcasting, or electronic services) are recorded in the HICP of the country where the consumer usually resides.

• The price to be recorded should be the full price, including any compulsory additional costs, provided that these costs can be attributed solely to the purchase of the product concerned.

The Different Conceptual Approaches

The Payments Approach

11.103 The scope for a payment index is defined by reference to actual expenditure made by households to gain access to consumer goods and services. Thus, the payments approach covers the expenditure actually incurred in occupying a dwelling. The set of expenditure specific to owner-occupiers in the weight reference period includes:¹⁴

• Down payments or deposits on newly purchased dwellings

• Legal and real estate agency fees payable on property transfers

• Repayments of mortgage principal

• Mortgage interest payments

• Alterations and additions to the dwelling

• Insurance of the dwelling

• Repair and maintenance of the dwelling

• Property rates and taxes

11.104 While it is conceivable to include all these items in the index, it is generally agreed that at least some represent capital transactions that ought to be excluded from a CPI. For example, while down payments and repayments of the mortgage principal result in a running down of household cash reserves, they also result in the creation of a real asset (at least part of a dwelling) or in the reduction of a liability (the amount of mortgage debt outstanding). Similarly, any cash expenditure on alterations and additions result in a running down of cash reserves offset by increases in dwelling values. In other words, those transactions that result in no net change to household balance sheets should be excluded.

11.105 The remaining items can be regarded as current expenditure that does not result in any offsetting adjustments to household balance sheets. It is therefore considered appropriate that these items be included in a payments-based CPI. By defining a payments index in this way, the aggregate payments equal a household’s source of funds. A household’s total source of funds comprises income after tax (for example, wages, transfers, property income, and insurance claims) and net savings (as a balancing item). It is for this reason that a payments-based CPI is commonly considered to be the best construct for assessing changes in net money income over time.

11.106 It is sometimes argued that the payments approach is more consistent with the traditional approach to CPI compilation, this is a carryover from a time when the CPI was mostly used as a compensation tool. It is more easily understood by the public and measures costs directly, thereby avoiding imputation.

11.107 There are also disadvantages to using the payments approach. The items of direct expenditure by purchasers of property include mortgage interest payments,¹⁵ repayment of capital, and large repairs (associated with depreciation from wear and tear as properties get older). All of these expenditure items are generally considered out of the scope of a CPI because they represent capital formation. A CPI should only relate to final consumption expenditure and should exclude financial transactions and investment. The acquisition of a house will normally represent a substantial capital asset over a period of time, a point that emerges when comparing the position of owner-occupiers with tenants who rent. It can therefore be argued that the capital element of mortgage repayments should be regarded as an investment or saving rather than final consumption expenditure and should therefore be excluded from the index.

11.108 When using the payments approach, the question arises over whether the weight and price indicator should be net of any tax allowances for mortgage interest payments. It is recommended that, in accordance with the principle that a CPI should be based on the amounts actually paid, the weight and price indicator should both be based on payments after tax relief.

11.109 The adoption of the payments approach is that it requires a large volume of data that may not be available to the compiler. Mortgage interest payments will be affected by changes in both interest rates and house prices in different ways. Changes in interest rates will affect all of those buying a house apart from those on fixed-interest loans, while changes in house prices will affect only those buying a house in the current period. Thus, a price indicator consisting of the current interest applied to a standard-sized mortgage to a standard-sized house would not be appropriate. An appropriate indicator involves two components: the rate of interest and the average amount of mortgage debt outstanding. To calculate the average outstanding debt at any point in time can be problematic as it consists of a large number of individual debts, some from mortgages taken out recently and others from mortgages taken out some time ago at historic prices and with some of the debt paid back. It is unlikely that all countries will have the necessary data to apply this method.

11.110 It can be argued that the main disadvantage of the payments approach is that it includes a major (explicit) cost of owning a home, namely mortgage interest, but it does not include a major offsetting (implicit or imputed) benefit, namely possible price appreciation or capital gains on the home. The neglect of this benefit is particularly troublesome when there is moderate or high inflation in the economy: the observed mortgage interest cost can increase compared with other costs and give a very misleading picture of the homeowner’s true long-term costs of living in the home (because the offsetting benefit is neglected). But the counterargument is that the capital gains of owning a house that appreciates in value are of limited relevance when people must bear such costs from current income, and the value of the underlying asset can only be materialized if the home is sold and the proceeds are not used to purchase another property for own occupation. This is, perhaps, a case where the measurement approach that is adopted will vary depending on the use and purpose of the CPI.

11.111 Estimation of gross expenditure on the items listed in paragraph 11.104 in the weight reference period is readily achievable using HBS data, as the items are generally reportable by households. The construction of price indices for real estate agency fees and insurance is discussed in paragraphs 11.378–11.384 and 11.385–11.403, respectively. Indices for repair and maintenance, and property rates and taxes, are not considered particularly problematic and so are not discussed in this chapter. The remainder of this section addresses the construction of price measures for mortgage interest charges.

11.112 The construction of price indices for mortgage interest charges is complex. The degree of complexity will vary from country to country depending on the operation of domestic financial markets and the existence of any income tax provisions applying to mortgage interest payments. What follows therefore is a description of an overall objective for producing the required index in the most straightforward cases. The methodology will need to be modified to account for additional complexities that may be encountered in some countries.

11.113 The general approach to construct price indices for mortgage interest charges may be summarized, briefly, as follows. Under a fixed-basket approach, the objective of the index is to measure the change over time in the interest that would be payable on a set of mortgages equivalent to those existing in the weight reference period. This base stock of mortgages will vary widely in age, from those taken up in the weight reference period to those taken up many years previously. In compiling a fixed-base index, the distribution of mortgages by age must be held constant.

11.114 The amount of interest payable on a mortgage is determined by applying some rate of interest, expressed as a percentage, to the monetary value of debt. Therefore, changes in mortgage interest charges over time can, in principle, be measured by periodically collecting information on a representative selection of mortgage interest rates, using these to derive an average interest rate, and then applying this to an appropriate debt figure. At least for standard variable rate mortgages, interest due on the revalued stock of base period mortgages may be derived simply with reference to current mortgage interest rates.

11.115 The main challenge in constructing a price index for mortgage interest charges is determining the appropriate debt figure in each of the comparison periods. Since the real value of any monetary amount of debt varies over time according to changes in the purchasing power of money, it is not appropriate to use the actual base period monetary value of debt in calculations for subsequent periods. Rather, it is necessary first to update that monetary value in each comparison period so that it remains constant in real terms (that is, so that the quantities underpinning the base period amount are held constant).

11.116 To update the monetary value of debt, it is necessary to form at least a theoretical view of the quantities underpinning the amount of debt in the base period. The amount of mortgage debt outstanding for a single household in the base period depends on the original house purchase price and loan-to-value ratio, and on the rate of repayment of principal since the house was purchased. An equivalent value of debt can be calculated in subsequent comparison periods by holding constant the age of the debt, the original value of the debt (as some fixed proportion of the total value of the dwelling when the mortgage was initially entered into), and the rate of repayment of the principal (as some proportion of the original debt), and applying these factors to house prices for periods corresponding to the age of the debt.

11.117 To illustrate how the update of the monetary value of debt can be done in practice, suppose a household purchased a dwelling five years earlier than base period for $100,000 and financed 50 percent by mortgage. If, between the time of purchase and the base period, the household repaid 20 percent of this debt, then the outstanding debt on which base period interest charges were calculated would have been $40,000. Considering a subsequent comparison period and supposing that it is known that house prices doubled between the period when the household was originally purchased and the period five years prior to the comparison period, then the equivalent amount of outstanding debt in the comparison period would be calculated by first taking 50 percent of the revalued house price (of $200,000) to give $100,000, and then reducing this by the principal repayment rate (of 20 percent) to give $80,000.

11.118 Under the assumptions described in paragraph 11.117, the comparison period value of outstanding debt may be estimated directly from the base period value of outstanding debt based on house price movements between five years prior to the base period and five years prior to the comparison period. In other words, while preservation of original debt/equity ratios and rates of repayment of principal help in understanding the approach, estimates of these variables are not strictly required to calculate the required comparison period debt. All that is required is the value of the outstanding debt in the base period, the age of that debt and a suitable measure of changes in dwelling prices.

11.119 Supposing that all mortgages are of the variable rate type, and that average nominal interest rates rose from 5 percent in the base period to 7.5 percent in the comparison period, interest payments in the two periods can be calculated as $2,000 and $6,000, respectively, and so the mortgage interest payments index for the comparison period is 300.0. An identical result may be found directly from index number series for debt and nominal interest rates. The mortgage interest charges index equals the debt index multiplied by the nominal interest rate index divided by 100. In this example, the debt index equals 200.0 and the nominal interest rate index equals 150.0. Therefore, the mortgage interest rate index equals (200.0 × 150.0)/100 or 300.0.¹⁶

11.120 While the single-household example shown previously is useful in explaining the basic concepts, it is necessary to devise a methodology that can be employed to calculate a mortgage interest charges index for the overall reference population. The main complication when moving from the single-household to the many-household case is the fact that the age of the debt will vary across households. Given the importance of revaluing base period debt to maintain a constant age, this is no trivial matter. While it is conceivable that information on the age of mortgage debt could be collected in HBSs, the additional respondent burden and the generally small number of households reporting mortgages often serve to make estimates from this source unreliable. Another option is to approach a sample of providers of mortgages (for example, banks or building societies) for an age profile of their current mortgage portfolio. This type of data is normally available from financial institutions and is generally reliable.

11.121 To calculate mortgage interest charges, a nominal mortgage interest rate index series is applied to the aggregate level of outstanding debt. A nominal mortgage interest rate index series is obtained by calculating average quarterly interest rates on variable rate mortgages from a sample of lending institutions (starting in period Y0:Q1) and presenting them in index number form. The nominal interest rate series can then be combined with the debt series to calculate the final mortgage interest rate charges series, as illustrated in Table 11.3.

^{Table 11.3}

Calculation of a Mortgage Interest Charges Series

^{Table 11.3}

Calculation of a Mortgage Interest Charges Series

Year	Quarter	Debt Index	Nominal Interest Rates Index	Mortgage Interest Charges Index
		(a)	(b)	(c) = (a) × (b)/100
Y0	Q1	100.0	100.0	100.0
	Q2	100.7	98.5	99.2
	Q3	101.4	100.8	102.2
	Q4	101.9	101.5	103.4

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^{Table 11.3}

Calculation of a Mortgage Interest Charges Series

Year	Quarter	Debt Index	Nominal Interest Rates Index	Mortgage Interest Charges Index
		(a)	(b)	(c) = (a) × (b)/100
Y0	Q1	100.0	100.0	100.0
	Q2	100.7	98.5	99.2
	Q3	101.4	100.8	102.2
	Q4	101.9	101.5	103.4

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11.122 The construction of equivalent indices for fixed-interest mortgages is more complicated since an interest charges index needs to be calculated separately for each age cohort of debt to reflect the fact that interest payable today, for example, on a loan four years old, depends on the interest rate prevailing four years ago. This requires the compilation of a nominal fixed-interest rate index extending back as far as the dwelling price series. To the extent that the interest rates charged on fixed-interest loans also depend on the duration of the loan, calculation of the nominal fixed-interest rate series is also more complex. The additional complexity of these indices may make the construction of a mortgage interest charges index impractical for countries where fixed-interest rate mortgages predominate.

11.123 The construction of the index for mortgage interest payments is based on the assumption that the purpose of the mortgage is to finance the purchase of the dwelling (hence revaluation of debt by changes in dwelling prices). However, it is increasingly common, particularly in developed economies, for households to draw down on the equity they have in their home. That is, households may take new or additional mortgages, or withdraw part of the principal already paid to finance other activities, for example, to purchase a large consumer durable such as a car or a boat, to go on holiday, or to purchase stocks and bonds. If these alternative uses of the funds made available by way of mortgages are significant, it may be appropriate to regard at least some proportion of mortgage interest charges as the cost of a general financial service rather than a housing cost. For that proportion of the debt deemed to be used for other purposes, it would be more appropriate to use a general index of price inflation for debt revaluation purposes.

11.124 Despite being a relatively simple method of representing owner-occupied housing services costs, the payments approach is open to conceptual challenge. As discussed in the user cost approach, including mortgage interest payments could be problematic for monetary policy purposes. However, another issue is that if both house prices and mortgage interest rates remain unchanged for a period, the mortgage interest charges index does not usually remain unchanged for the same period. This is because the mortgage debt index will continue to change, as changing house prices prior to the stable period continue to work their way through the various debt age cohorts. Conceptually, this may prove unsatisfactory to many users, who generally expect CPIs to reflect current interest rate movements only.

The Acquisitions Approach

11.125 The scope for an acquisition index is defined as all consumer goods and services acquired by households for own consumption. Those countries that compile their CPIs on an acquisitions basis have generally concluded that the principal purpose of their CPI is to provide a measure of price inflation for the whole household sector. Based on the view that price inflation is a phenomenon peculiar to the operation of markets, the domain is also normally restricted to those consumer goods and services acquired in monetary transactions. Consumer goods and services provided at no cost to households by governments and nonprofit institutions serving households (NPISHs) are excluded (as discussed in Chapter 2).

11.126 The expenditure of owner-occupiers of housing that could be included in an acquisitions index are the following:¹⁷

• Net purchases of dwellings (that is, purchases less sales by the reference population)

• Direct construction of new dwellings

• Alterations and additions to existing dwellings

• Legal and real estate agency fees payable on property transfers

• Repair and maintenance of dwellings

• Insurance of dwellings

• Property rates and taxes

11.127 The construction of price indices for real estate agency fees and insurance is discussed in paragraphs 11.378–11.384 and 11.385–11.403, respectively. Indices for repair and maintenance, and property rates and taxes are not considered particularly problematic and are not discussed in this chapter. Paragraphs 11.141–11.145 address the issues involved in constructing measures for dwelling purchase, construction, and alterations and additions. The advantages of the acquisitions approach compared to the user cost and payments approaches are discussed in paragraphs 11.88 and 11.103

11.128 As CPIs are constructed to measure price change for a group of households in aggregate (that is, the reference or target population), like for other second-hand goods a net expenditure should be used for those transactions that take place between those households. In the case of an index covering all private households, the weight should only reflect net additions to the household sector owner-occupied housing stock. In practice, net additions will mainly comprise those dwellings purchased from businesses (that is, newly constructed dwellings, company houses, or rental dwellings) and those purchased from or transferred from the government sector plus any purchases, for owner-occupation, of rental dwellings from reference population households. If the CPI is constructed for some subgroup of the population (for example, wage and salary earners), the weight should also include purchases from other household types.

11.129 The acquisition approach can be represented in Figure 11.1. The circle on the left represents the existing owner-occupied dwelling stock. The circle on the right represents all other existing dwelling stock (that is, rented dwellings and vacant dwellings). The rectangle on top represents newly constructed dwellings. The rectangle on the bottom represents self-builds. The flows of properties from one sector to another are represented by arrows. There are also internal flows within the existing owner-occupied dwelling stock (as one owner-occupier buys an existing dwelling from another) and within the other existing dwelling stock.

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The Acquisitions Approach for Owner-Occupied Housing

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11.130 In CPI compilation, a normal procedure is to account expenditure that is used in weighting in “net” terms. For most products, the reference population makes purchases, not sales; however, for some product groups, sales are significant. This happens with the purchase of dwellings, where it would be necessary to net out the sales from the purchases. These same principles apply to all second-hand goods.

11.131 According to the net acquisition approach, sales of dwellings between households have a negative weight and purchases have a positive weight. Any sale or purchase between households has no impact unless an intermediary, such as a real estate agent is involved. Thus, it is the net acquisition cost approach that is followed. Under the net acquisitions approach, only four flows are considered, depicted by A, B, C, and D in Figure 11.1. A is the flow of new dwellings to the owner-occupied sector (that is, the expenditure owner-occupiers make to acquire new dwellings). B is the flow of self-builds to the owner-occupied sector (by definition, self-builds must flow to this sector only). C is the flow of existing dwelling stock to the owner-occupied sector. And D is the counterflow of existing dwellings from the owner-occupied sector to the nonowner-occupied sector. Under the net acquisitions approach, the net expenditure by owner-occupiers on dwelling acquisitions is given by the following formula (note that this refers to the dwelling purchase component only, and other costs, such as major renovations and transfer costs, are not included):

$$\begin{array}{cc}Acquisition=A+B+C-D& \left(11.2\right)\end{array}$$

11.132 In many countries, the flows C and D will be similar and will largely cancel each other out. Thus, the owner-occupied housing net acquisition weight will largely be determined by A and B, the purchase of new dwellings and self-builds. In exceptional circumstances, for example, after a particularly severe downturn in the property cycle, it may be that the rate of owner-occupied acquisition of new and existing dwellings becomes very low. If there is a net flow of existing dwellings from the owner-occupied sector to the nonoccupied sector (that is, if D > C), then the owner-occupied housing net acquisition weight may fall to zero (negative weights are not permissible). Conversely, if there is a construction boom, A and B may grow very large. Property boom and bust cycles will therefore have considerable effect on the owner-occupied housing weight under the net acquisitions approach, with implications for the stability of the CPI.

11.133 In the national accounts, acquisition less disposal of housing is recorded as gross fixed capital formation, which would suggest purchases of dwellings should be excluded from household final consumption expenditure. While this is unambiguously the case for housing purchased for rental, the case is less clear-cut when it comes to the treatment of owner-occupied housing in the CPI. Housing represents both an asset and a source of shelter services. Although households recognize the likelihood of making capital gains when they purchase housing and invariably regard their dwelling as an asset, they also commonly cite the primary motivation for the purchase of a dwelling as being to gain access to a service (that is, shelter and security of tenure). From the households’ perspective, therefore, the costs borne by owner-occupiers in respect of their principal dwelling represent a mix of investment and consumption expenditure, and the total exclusion of these costs from an acquisitions-based CPI would be counterintuitive and could lead to criticism by the population at large. This is particularly so in those countries where the rental sector is relatively small, with limited opportunities for substitution between owner-occupation and renting. In these circumstances it might be argued that the consumption element dominates.

11.134 The challenge confronting CPI compilers is how to separate these two elements (that is, investment and consumption expenditure) so as to include only the consumption of housing services in the CPI. Although there is no single agreed-upon technique, one approach is to regard the cost of the land as representing the investment element and the cost of the structure as representing the consumption element. The rationale for this is that, while the structure may deteriorate over time and hence be “consumed,” the land generally remains at constant quality. As the land (or location element) accounts for most of the variation in observable prices for otherwise identical dwellings sold at the same point in time, the exclusion of land values may also be seen as an attempt to exclude asset price inflation from the CPI. Measures of asset price inflation are, of course, useful in their own right. The conceptual simplicity of this approach appeals to some NSOs as a suitable method for compiling owner-occupied house price indices.

11.135 Derivation of weight reference period expenditure on the net acquisition of dwellings (excluding land), the construction of new dwellings, and alterations and additions to existing dwellings pose some problems. Although HBSs may yield reliable estimates of the amount households spend on alterations and additions and on construction of dwellings, it is unlikely that they will provide reliable estimates of net expenditure on existing dwellings exclusive of the value of the land.

11.136 An alternative approach to derive weights for the expenditure on the net acquisition of dwellings is to combine data from population censuses and housing and building activity surveys. Population censuses normally collect information on housing tenure, from which average annual growth in the number of owner-occupied households represents a good proxy for net additions to the housing stock. Building activity surveys are also conducted in most countries, providing data on the total value of dwellings constructed. These data can be used to estimate the average value of new dwellings, which can then be applied to the estimated volumes derived from the population census. The suitability of this approach would need to be assessed by each country and may be complicated if the CPI relates only to some subset of the total population, for example, by excluding the very rich who will purchase expensive homes.

11.137 A price index is required to measure the change in price over time in existing dwelling structures, newly constructed dwellings, and alterations and additions. As the appropriate price for existing dwelling structures is current replacement cost, an index measuring changes in prices of newly constructed dwellings is also appropriate for this purpose. Given that the prices for both newly constructed dwellings, and alterations and additions are, in principle, determined by costs of building materials, labor costs, and builders’ profits, it may also be satisfactory to construct a single price sample for all elements. The requirement for a separate price sample for alterations and additions will depend on the relative significance of this activity and whether the material and labor components differ significantly from those for a complete dwelling (for example, if alterations and additions are predominantly to kitchens and bathrooms). In all cases, it is important that the price indices are adjusted for the mix of these components to eliminate price variations that reflect changes in the characteristics of newly constructed dwellings.

11.138 The type of dwelling constructed in each country will significantly influence the complexity and cost of compiling appropriate price measures. If each newly constructed dwelling is essentially unique (that is, individually designed to meet site or other requirements) it will be necessary to adopt “model pricing.” This approach requires the selection of a sample of building firms, the identification of samples of recently constructed dwellings, and the collection of prices for constructing identical dwellings in subsequent periods (exclusive of site preparation costs that will vary from site to site). This is likely to entail significant costs for the respondents. Moreover, care needs to be taken to ensure that the supplied prices truly reflect all prevailing market conditions. That is, prices need to reflect the amount builders could realistically expect to be able to charge in the current market rather than the prices they would like to be able to charge based on conditions prevailing in some prior period.

11.139 It should be noted that in many countries, purchasing a new or existing dwelling can have tax implications. The transaction may be liable for “stamp duty” and “taxes on transfers” or a related registration fee. In this case, the national tax authorities may be able to provide comprehensive information on both the number and the value of new and existing dwelling purchases. If detailed dwelling characteristic information is available, including the exact location, the floor area of the dwelling, and the plot size of the land, it may be possible to decompose each individual dwelling price into implicit structure and land prices, using hedonic methods (described in Chapter 6), to arrive at aggregate owner-occupied expenditure on new and, where relevant, existing dwellings, that exclude land price. If this level of detailed information is not available in the transaction data, it may still prove possible to estimate the aggregate expenditure on dwellings (excluding land) from combining the transaction numbers with standardized building costs (typically building costs per square meter) that may be available from construction representative bodies, chartered surveyors, building insurers, or other third parties.

11.140 Whereas having price indices for new dwellings, exclusive of the land cost, is ideal under the net acquisition approach, in practice this is not always possible. Sufficient information to compile satisfactory dwelling construction price indices is not always available. In this situation, house price indices that include the land component may be a necessary compromise.

Practical Options for Measuring Owner-Occupied Housing under an Acquisitions Approach

11.141 In some countries, a significant proportion of newly constructed dwellings are of the type referred to as “project homes.” These are dwellings that builders construct on a regular basis from a suite of standard designs maintained for this purpose. This practice is most feasible in countries where a significant proportion of new dwelling construction takes place in new developments (that is, land recently developed or redeveloped specifically for residential housing). If project home construction is significant in scale, then it is possible to select a sample of these project homes for pricing over time, safe in the knowledge that the prices provided will be actual transaction prices (in this case priced net of any site preparation costs to ensure the fixed-basket approach is adhered to). Even if project homes do not account for most new dwellings constructed, they may still provide a representative measure of overall price change.

11.142 In pricing project homes, it is necessary to monitor the selected sample to ensure that the selected plans remain representative and to detect changes in quality arising from modifications in design and changes to basic inclusions. Whenever a change is made to the plans, the change in overall quality needs to be estimated. For physically measurable characteristics, such as a small increase in the overall size of the dwelling, it may be assumed that the change in quality is proportional to the change in the relevant quantity. Other changes, such as the addition of insulation, the inclusion of a free driveway, and so on, will need to be valued, preferably with regard to the current value to the consumer. These could be estimated by obtaining information on the amounts that consumers would have to pay if the items were provided separately (the option cost method). An alternative is to ask the builder if a cash rebate is available in lieu of the additional features. Where plans are modified to meet changed legal requirements, the consumer has no choice in purchase, and it may be acceptable to classify the full change in price as pure price movement (even though there may be some discernible change in quality).

11.143 In some countries, attached and semidetached dwellings such as apartments, fats, and townhouses, make up a significant share of additions to dwelling stock and the price index needs to be mix-adjusted to adhere to the principle of a fixed basket. As mentioned previously, measuring owner-occupied housing excluding land and to constant quality can be a challenge, and a matched-model approach may not be possible because of the heterogeneous nature of the buildings being constructed. In these instances, the component cost approach or hedonic models may be viable alternatives depending on the type and amount of data available. A component costs approach is most commonly used in producer price indices and entails the aggregation of a basket of representative items used to construct the type of dwelling being measured. The assumption with this measure is that price change is predominately influenced by changes in the price or cost of goods and services used to construct the dwelling. Depending on the state of the owner-occupied housing market, this may not always be representative of consumer final prices and adjustments in the index compilation method may need to occur, for example, for changes in profit margins. If undertaking a component cost approach, it is important to ensure the selected components continue to reflect current building standards, materials, and estimates for both builder and developer profit margins.

Table 11.4

Relationship between the Choice of Owner-Occupied Housing (OOH) Approach and CPI Purposes

Table 11.4

Relationship between the Choice of Owner-Occupied Housing (OOH) Approach and CPI Purposes

Approaches to OOH	Primary Purpose of CPI	OOH Price Definition	Notes
User Cost	Measures the Change Through Time of the Total Value of All Goods and Services That Are Actually Consumed by Households	Opportunity Cost Associated with the Use of a Dwelling by a Household for Own Occupancy	Approach Consistent with a COLI. Uses Imputed Prices/ Rental Equivalence. Can Be Difficult to Implement in Practice
Rental Equivalence	Measures the Change Through Time of the Total Value of All Goods and Services That Are Actually Consumed by Households	Implicit Cost That Owner-Occupier Households Would Have to Pay to Rent Their Dwelling	Approach More Consistent with a COLI. Approach Is Recommended in 2008 SNA. Uses Imputed Prices. Requires a Suitable Private Rental Index
Payments	Measures the Change Through Time of the Total Payments for All Goods and Services by Households	Cash Outlays Associated with Owner-Occupied Dwellings	More Appropriate for the Evaluation of Money Income. Consistent with a COLI. No Imputed Prices
(Net) Acquisition	Measures the Change Through Time of the Total Expenditure by Households for Acquiring and Goods and Services for Consumption	Acquisition and Maintenance Cost of a Dwelling, Usually on a Net to the Sector Basis	Approach More Suitable for Measuring Monetary Inflation. Consistent with Treatment of Other CPI Items. No Imputed Prices. Prone to Volatility in the Housing Market

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Table 11.4

Relationship between the Choice of Owner-Occupied Housing (OOH) Approach and CPI Purposes

Approaches to OOH	Primary Purpose of CPI	OOH Price Definition	Notes
User Cost	Measures the Change Through Time of the Total Value of All Goods and Services That Are Actually Consumed by Households	Opportunity Cost Associated with the Use of a Dwelling by a Household for Own Occupancy	Approach Consistent with a COLI. Uses Imputed Prices/ Rental Equivalence. Can Be Difficult to Implement in Practice
Rental Equivalence	Measures the Change Through Time of the Total Value of All Goods and Services That Are Actually Consumed by Households	Implicit Cost That Owner-Occupier Households Would Have to Pay to Rent Their Dwelling	Approach More Consistent with a COLI. Approach Is Recommended in 2008 SNA. Uses Imputed Prices. Requires a Suitable Private Rental Index
Payments	Measures the Change Through Time of the Total Payments for All Goods and Services by Households	Cash Outlays Associated with Owner-Occupied Dwellings	More Appropriate for the Evaluation of Money Income. Consistent with a COLI. No Imputed Prices
(Net) Acquisition	Measures the Change Through Time of the Total Expenditure by Households for Acquiring and Goods and Services for Consumption	Acquisition and Maintenance Cost of a Dwelling, Usually on a Net to the Sector Basis	Approach More Suitable for Measuring Monetary Inflation. Consistent with Treatment of Other CPI Items. No Imputed Prices. Prone to Volatility in the Housing Market

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11.144 As mentioned before, there is no single agreed-upon approach that is internationally recommended or applied for the treatment of owner-occupied housing services. Rather, there are four approaches that have gained recognition, each with its own conceptual basis. While the Manual refers to four approaches, in fact, there are three main approaches as rental equivalence approximates the user cost approach and would be considered a variant of this approach. These four approaches are summarized in Table 11.2. The precise approach to adopt in any given country depends very much on the primary purpose of the CPI and on practical issues such as data availability.

11.145 In general terms, the most prevalent approaches for the treatment of owner-occupied housing services are the rental equivalence approach and the net acquisitions approach. The former is relatively straightforward to apply where there is a suitable rental market. The latter, although more complex, is consistent with the treatment of most other goods and services in the CPI and is not directly affected by methods of financing for house purchases.

Weights

11.147 Obtaining the weight for renter-occupied housing in the CPI basket is relatively straightforward. HBSs typically collect data from households at their place of residence. The surveys obtain the rents from those residences that are renter-occupied, and the NSOs estimate the annual expenditure on rents using standard methods. The HBS should also inquire whether the household rents other housing in addition to its main residence, perhaps near to a job or in a holiday location.

11.148 It is important that the HBS determines if any additional services are included in the rent. This is to ensure that no double counting takes place and that a consistent approach is taken on where the expenditure is accounted for in the CPI.

11.149 Data should also be collected on the HBS on whether common expenses are charged. Common expenses include payment for common area lighting, cleaning, building porters, maintaining elevators, and other services. These payments are paid monthly along with the rent. In most cases, it is not possible to separate what portion of the payment goes for lighting or cleaning or to pay a building porter. Because these fees are mandatory, many countries regard them as part of the rent index. Data are needed to develop separate weights for actual rent and the common fees.

Prices—Rent Surveys

11.150 The rent to be recorded is the amount that the household pays, including taxes and excluding any subsidies. If the rent is subsidized or taxed, the amount the household pays will not be the same as what the landlord receives. Although information on rents may be collected from any knowledgeable respondent, the ideal respondent is the dwelling’s occupants. The goal is to collect an actual rent paid. Collecting rent data from a landlord, or the landlord’s representative, can be challenging in some countries because the landlord may not report the actual rent paid by the tenant out of fear the data will be used for taxation purposes. To respect the fixed-basket principle of the CPI, an effort should be made to continue collecting prices from the same dwelling units over time. Despite the perceived difficulties, a longitudinal survey of rental units will often be the best solution to ensure that the proper rents are collected.¹⁸

11.151 Alternatively, it may be possible to collect rents from an existing continuous household survey, such as a labor force survey. In this case, a specific module on rent can be distributed to those tenants who participate in the main survey. The respondent should be knowledgeable about the rent paid. For example, some occupants may not be the ones who actually pay the rent and may be unsuitable as respondents. The important feature of any such survey is that it provides rents at multiple time intervals but, because people may move, it will not necessarily follow the rents of a fixed set of housing units. In these circumstances, the rent data should be stratified by rent-determining characteristics so that the average rent increase for a house with preassigned characteristics, or for a fixed basket of house types, can be determined.

11.152 If rents change rather infrequently, it may be more efficient to use a relatively large sample that is divided into representative subsamples to collect the rents less frequently than every month from each household. The CPI requires monthly data on rent. Given the nature of rental contracts and the reality that rent does not change every month, the panel survey approach satisfies the monthly data needs of the CPI and minimizes respondent burden.

11.153 Where a survey of rental dwellings is undertaken, a sample can be drawn from any frame that contains the residential units of an area. This may be the population census (if it has a shelter component), postal lists, or street directories.

11.154 If the population census can provide information on the average rent or dwelling value by geographic area, sampling of the areas by probability proportional to rent will increase the final sample’s representativeness. Where a sampling frame is not readily available, a grid can be placed on a map of the area and a sample of cells in the grid can be selected. The grid method can also be used as a second stage of sampling after selecting larger areas using available information on rents. Several countries, including developing countries, have used satellite images of the selected areas to obtain an accurate view of the housing in the cells or target areas. Ideally, all the dwellings in the selected cells should be enumerated and from this, a random sample should be selected for the price collector to visit to determine if they are tenant-occupied and, if so, to obtain their rents and initiate them into the sample. The initial selection of target areas for enumeration should be small enough to be manageable and relatively homogeneous; and, on the other hand, should be large enough to allow for an initial sample selection that takes into consideration nonresponse and the fact that some dwellings will be owner-occupied. Where an enumeration exercise is not possible, for example, because of the cost, judgmental or purposive sampling may be used but, in this case, it is particularly important that the individual cells on the grid are relatively homogeneous (that is, that there is little variation in the type, size, and quality of the dwellings) to minimize the potential for drawing an unrepresentative sample.

Calculating the Rent Index When Data Collection Is Less Frequent than Monthly

11.155 As previously mentioned, spreading price observations by pricing the rent for a particular dwelling less frequently than monthly (that is, pricing a subsample of rents each month) is a strategy used for increasing the sample without necessarily having to allocate more resources to the collection exercise. Ideally, a panel survey is used to collect rent on a monthly basis. Many countries divide the sample into six panels and collect rent from each household twice each year. Another option may be to divide the sample into 12 representative panels and collect rent prices from each household one time each year.

11.156 Where rent changes are not obtained monthly for the full sample of dwellings, the monthly rent index from months t to t- 1, $${\mathrm{\Delta }}_{\mathrm{Re}nt}^{t-1\to t}$$, can be derived from a subsample of rental units for that month. To obtain the full estimates of rent change over longer periods, the values from the different monthly subsamples are chained together in succession.

11.157 To calculate the monthly rent index with a sub-sample of units, $${\mathrm{\Delta }}_{\mathrm{Re}nt}^{t-1\to t}$$, the same set of rental units is priced at intervals m months apart. The monthly change obtained at time t is the m^th root of the sum of the weighted sample rents in period t to the sum for the same dwellings in period t – m:

where

$${\mathrm{\Delta }}_{\mathrm{Re}nt}^{t-1:t}$$ is the change in rents from period t - 1 to period t

$$r_i^t$$ is the rent of sample dwelling $$r_i^{t-m}$$ is the rent of sample dwelling i in period t – m (the last time a rent for that dwelling was collected)

w_i is the optional weight of sample rented dwelling i

11.158 Sample weights may be ignored for simplicity if the sampled rental dwellings represent roughly the same number of rental dwellings in the sampling frame. Equivalently, the weights in the formula 11.3 can be set to “1” in most cases, and this will provide a mechanism to handle nonresponse and sampling anomalies appropriately.

11.159 Geometric, rather than arithmetic, averages can be taken in formula 11.3 to avoid the defects of the Dutot index that it is not invariant to changes in the units of measurement of the dwellings or, in the present context, very expensive dwellings will get a large implicit weight. Alternatively, expensive dwellings can be treated as outliers and be excluded from the calculation.

Accounting for Missing Observations

11.160 When a dwelling fails to respond because of a temporary failure to collect the information (for example, the data collector was not able to contact the respondent), but data relating to the other dwellings were collected that month, the collected dwellings should be given the weight of the missing unit. For example, if there are three assigned dwellings in a cell each with a weight of 1 (because they are equally weighted) and two are collected and one is not, the rent of the missing dwelling can be imputed from the two that are collected as follows:

11.161 If all observations in an elementary aggregate are missing (for example, because of a data collection problem), they can be omitted entirely from the calculation for that month; however, their rents must be estimated to be used the next period. If a rental dwelling is a nonresponse in period t, its imputed rent for period t is as follows:

This imputed rent is not used until period t + m. Notice that it cannot be computed until after period t, when the value for $${\mathrm{\Delta }}_{\mathrm{Re}nt}^{t-1:t}$$ is known.

11.162 If dwellings become unsuitable for inclusion in the CPI (for example, they become uninhabitable because of a fre) they can be dropped from the sample (if unlikely to be repaired) or, if there is reason to believe they will be repaired and returned to use, they can be treated as nonresponse.

11.163 Dwellings that cease to be rental dwellings (for example, they become owner-occupied or are converted to nonhousing use) should be dropped from the sample, but it is good practice to find a replacement dwelling nearby, if feasible. Until the replacement dwelling can be used in the index, the old dwelling should be treated as a nonresponse.

11.164 Geometric imputation is more desirable if a Jevons index is being constructed at the elementary level, as geometric imputation is consistent with the Jevons formula. The use of geometric weighting also avoids the problem previously referred to of large expensive houses dominating the calculation.

Updating the Sample

11.165 The rent sample, like all CPI surveys, needs to be kept up to date. This is especially important to ensure that the sample reflects new construction of rental dwellings. An entirely new sample can be drawn, run in parallel with the old one, after which the old one can be dropped. The new sample should be based on a new sampling frame. Deploying an entirely new sample at one time can be quite expensive. An alternative is to replace part of the sample each year. If the rent sample uses several panels, the usual way to do this is to rotate out one or more panels per year and replace them with equally representative panels. For example, the January/July panel can be replaced one year and the April/October one the next year. The new area cells would be selected and assigned to panels all at one time, but the data collection work would then be limited to one panel at a time. Rents for the old and new panels need to be collected at the same time so that the new panel is spliced in using the overlap method: the CPI uses the old panel for the last time while collecting the initial rents for the new panel.

11.166 The index is a chaining of the rent change values:

Depreciation, Major Home Improvements, and Quality Change

11.167 Sample rental dwellings can change between visits from CPI data collectors. Sample dwellings that undergo dramatic changes, either improvements or deteriorations, are best dropped from the sample, at least temporarily. More subtle changes affect all dwellings: they get older and depreciate. Regular maintenance (for example, replacing the roof) offsets this phenomenon to some extent at least. Some countries make an explicit quality adjustment to observed rents to take account of the fact that a rental dwelling that is older has depreciated and hence is generally not as desirable as it once was. However, an older property does not necessarily become less desirable especially when it is properly maintained (for example, a “heritage property”). In the case where the money is spent on a property for the repairs needed for the property to avoid physical deterioration¹⁹ as it gets older, care should be taken not to double count these ongoing and long-term maintenance costs associated with physical deterioration as they will often be reflected in the overall level of rents charged. Only those costs of repairs and maintenance that the tenant is responsible for paying should be included in the CPI and these can be obtained through the regular CPI survey of prices as with any other household expenditure. A study of rental agreements between landlord and tenant should provide the information needed to identify whether the dwelling is depreciating, and which maintenance costs should be covered by the price survey.

11.168 Empirical estimates of the net physical deterioration of dwellings generally, including those of owner-occupiers, mostly indicate that it can be small, at least in the short term, so that where physical deterioration is not measured either directly or indirectly, ignoring it should not be too problematic for users of a CPI who are interested in inflation trends in the short term. The compiler should nevertheless be aware of this phenomenon.

11.169 As mentioned earlier, for owner-occupied dwellings there is no internationally accepted method of treatment of the quality change associated with physical deterioration or the cost of major repairs.

Items

11.179 The factors that need to be considered when choosing a representative sample of a specific second-hand good include:

• The items chosen must be generally available and easy to find by price collectors.

• The item description must be sufficiently detailed for the item to be easily identified both initially and on repeated visits to physical and online or web-based outlets to provide sufficient guidance when a replacement needs to be chosen.

• The item must be representative of the second-hand market.

11.180 For most second-hand goods the selection of precisely which items to be priced is likely to be purposive. To facilitate this, the CPI compiler will need to identify not only which characteristics physically differentiate the items, but also which factors have a significant impact on price, including, most particularly, the age and condition of the good concerned. The latter may need to be deduced by observation based on a number of price-determining characteristics. For instance, with clothing there may be noticeable thinning of the material. The attributes may be determined in part indirectly, for instance in the case of a car by reference to its age. These should make up part of the item description and be used when selecting an item to price each month.

11.181 Specifications should be kept up to date to reflect the second-hand market so that problems relating to sample depletion and “forced” replacements are minimized. Forced replacements are to be avoided, particularly for cars, as explicit forms of quality adjustment are problematic for second-hand goods. For example, option costing, which is commonly employed for new cars, cannot be applied to second-hand cars, and hedonic regression techniques require a rich data source. In these circumstances, expert judgment is often used to inform quality adjustment for differences in technical specifications, mileage, or condition of vehicle.

Outlets

11.182 The outlet needs to be representative of where second-hand goods are purchased, whether from shops, fixed markets, street traders, or online. It also must be chosen considering the need for continuity, so price collectors are able to collect as far as possible from the same retailers each month. It is likely that selecting the locations for price collection and the sample of actual outlets selling secondhand goods will be judgmental. From a practical perspective there are two main approaches:

• Periodically conducting a full enumeration of the relevant outlets selling second-hand goods at a specific location and then selecting one at random for price collection each month. The difficulty with this approach is that it is not only resource-intensive but also may not be efficient in circumstances where it is unlikely that the item priced in an outlet at the previous price collection will still be available the following month as it is likely to have been sold. By definition, second-hand goods are unique. In addition, it is not a practical option when outlets are move-able, which can often be the case for street traders selling second-hand semidurable goods (for example, unbranded clothing).

• A form of quota sampling where the price collector visits a preselected location, for instance a market that is known to sell goods in a midprice and quality range, taking a “random” walk around the stalls until a second-hand item meeting the required description is found. This may be the preferred method, especially under the circumstances described previously and is a departure from the conventional CPI practice where the same outlet is visited each month and the same good is priced. Outlets and other points of sale for specific types of second-hand goods, such as clothing, can often be identified by their specific location on a market day. Choosing the appropriate day of the week for the collection of prices from street traders is also important because they may change their position (and prices) on different days.

11.183 In practice, a mixture of the two approaches described previously might be desirable and possible. Under both approaches, stratification by outlet type, for example, shop, market stall, street trader, and online, is recommended to keep the sample representative.

Wholesalers’ Prices

11.188 Under this approach, the prices collected for second-hand goods are wholesale prices and these are used as a proxy for consumer prices. Wholesalers are selected to be representative of the types of wholesalers who are likely to supply the retail outlets that are used by the reference population covered by the CPI, taking into account, for instance, the geographical coverage and the type of retail outlet, including the income bracket of its customers. The product descriptions of the second-hand goods that are priced are normally more oriented to the wholesale rather than retail market to be easier for the wholesaler to complete the form. For example, the wholesaler may be asked to give the indicative prices (that is, the current price they have been getting or expects to get) for a “bale” of “average quality” T-shirts with designer logos. In this case, “bales” are the standard quantity purchased wholesale that will contain some good, average, and low-quality T-shirts mounting to a bale being of “average quality” overall. It is then assumed that retail prices move in line with these wholesale prices. An example of the type of questionnaire sent to wholesalers is given in Annex 11.2.

Prices of New Goods

11.189 The use of new goods as a proxy for old should be kept regularly under review to identify anything that might challenge the historic price relationship, for instance, where new safety regulations or environmental laws reduce the value of second-hand cars compared with new ones.

11.190 If the price trend of the corresponding new good is used as a proxy, then the expenditure weight used in compiling the index must reflect expenditure on both new and second-hand goods. One approach is to include the weight of the second-hand good with that of the new good. Another is to keep the second-hand item separate with its own weight, compute an index, and then combine it with the price index for the new good. The latter approach is more transparent.

Introduction

11.191 Households can engage in various kinds of productive activities that may be either aimed at the market or intended to produce goods or services for own consumption (2008 SNA, paragraphs 1.41–1.42). When households engage in production for the market, the associated business transactions are all outside the scope of a CPI. Expenditure incurred for business purposes are excluded, even though they involve purchases of goods and services that might have been used instead to satisfy the personal needs and wants of members of the household. In practice, households also produce goods and services directly for their own consumption and this can account for a significant proportion of a country’s household final consumption expenditure. For example, households grow vegetables, fruit, and flowers or other crops for their own use, and owner-occupiers produce housing services for their own consumption. Goods and services produced by households for their own consumption are called own-account production. According to the SNA (2008 SNA, paragraphs 6.27), all services produced for own consumption are excluded from the production boundary, except services produced by employing paid domestic or household staff and the housing services produced by owner-occupiers. This means that only those services produced by employing paid domestic staff and the housing services produced by owner-occupiers would be included in the CPI. Excluded services produced for own consumption include, for example, the preparation of meals, the care of children, the sick or the elderly, the cleaning and maintenance of durables and dwellings, or the transportation of household members.

11.192 Many of the goods or services purchased by households do not provide utility directly but are used as inputs into the production of other goods and services that do provide utility: for example, raw foodstuffs, fertilizers, cleaning materials, paints, electricity, coal, oil, or petrol.

11.193 For purchased final consumption goods and services, the measurement of prices is not a problem as the price is determined at the time of purchase. However, for those goods and services produced and consumed by households, there is a problem because no purchases are involved and there are no direct prices to measure or associated expenditure for the construction of weights. For example, conceptually, the purchase of seeds and fertilizer to grow vegetables and fruits that are then consumed is, in principle, intermediate consumption whereas a CPI is based on final consumption. This is sometimes referred to as the own-account production dilemma. The CPI compiler has two options: measure output prices indirectly or measure some (but not all) input prices and use them as a proxy for the prices of goods and services consumed. The 2008 SNA recommends the indirect measurement. Although this seems a simple and conceptually acceptable solution, exceptions may be made for one or two kinds of household production that are particularly important and whose outputs can readily be identified: most particularly, subsistence agriculture and housing services produced for own consumption.

Background

11.194 How goods and services produced for own consumption are treated in the CPI depends on the scope and use of index. Assuming for the purpose of illustration that in principle a CPI should cover final consumption by households (that is, not restricted to monetary transactions). The scope and purpose of the index and implications for the treatment of own-account production are considered beginning with paragraph 11.191.

11.195 A distinction can be made between:

• Intermediate consumption. In the context of household own-account production, this refers to the goods and services that households use in the process of producing other goods and services. They are not part of the final consumption of households.

• Final consumption. This refers to goods and services produced for direct consumption where utility is derived by the household through the act of consumption.

  • - Goods and services to be used repeatedly in production over extended periods (more than one year), provide benefits to the owner over the lifetime of the goods. These goods are called fixed assets (2008 SNA, paragraph 10.33) and, in general, are recorded as gross fixed capital formation. For example, a house will normally provide shelter for many years. Similarly, a stove may provide cooking services for decades. A house is treated as gross fixed capital formation in the SNA and there are four primary approaches used for the treatment of owner-occupied housing in the CPI depending on the different conceptual approach adopted (that is, use, payments, or acquisition). However, other durable goods (for example, stoves, washing machines, or cars that are commonly referred to as “consumer durables”) are treated in both the CPI and the SNA as though they are fully consumed at the time they are purchased rather than being depreciated over time, so their price is included in the CPI in the period in which they are purchased.

  • - In practice, in the context of own-account production, it can be difficult to draw a clear distinction between intermediate and final consumption, as the same goods and services may be used for either purpose. There are numerous examples. Basic constituents of foods, such as four, cooking oils, raw meat, and vegetables, may be processed into bread, cakes, or meals, with the assistance of other inputs including fuels, the services provided by consumer durables, such as refrigerators and cookers, and the labor of members of the household. Inputs of materials, equipment, and labor are used to clean, maintain, and repair dwellings. Inputs of seeds, fertilizers, insecticides, equipment, and labor are used to produce vegetables or flowers, and so on. Some of the production activities taking place within households’ activities, for example, gardening or cooking, may provide satisfaction in themselves. Others, such as cleaning, may be regarded as chores that reduce utility. In any case, the goods or services used as inputs into these productive activities do not provide utility in themselves.

  • - Utility is derived from consuming the outputs from household production undertaken for own consumption. It is necessary, therefore, to decide whether a CPI should try to measure the changes in the prices of the outputs or the prices of the inputs. In principle, it seems desirable to measure the output prices, but there are objections to this procedure.

  • - On a conceptual level, it is difficult to decide what are the real final outputs from many of the different household production activities, such as growing vegetables or raising livestock. Even if they could be satisfactorily identified conceptually, they would have to be measured and priced. There are no prices to be observed, as there are no monetary transactions. Prices would have to be imputed for them and such prices would be not only hypothetical but inevitably very speculative. Their use in CPIs is not a realistic possibility in general and almost certainly would not be acceptable to most users who are primarily interested in the market prices paid by households.

  • - The practical alternative is to treat the goods and services acquired by households on the market for use as inputs into the various kinds of household production activities as if they were themselves final consumption goods and services. They provide utility indirectly on the assumption that they are used exclusively to produce goods and services that are directly consumed by households.

  • - There are two important areas of own-account production that warrant special consideration: subsistence agriculture and housing services produced for own consumption.

• In the national accounts, an attempt is made to record the value of subsistence agriculture, which is the agricultural output produced for own consumption (2008 SNA, paragraphs 24.47–24.49). In some countries, subsistence agriculture may account for a large part of the production and consumption of agricultural produce. The national accounts require such outputs to be valued at their market prices (2008 SNA, paragraph 6.124). A CPI may record either the actual input prices or the imputed output prices, but not both. If the imputed output prices for subsistence agriculture are included in a CPI, the prices of the purchased inputs should be excluded. This could remove from the index most of the market transactions made by such households. Expenditure on inputs may constitute the principal contact that the households have with the market and through which they experience the effects of inflation. It therefore seems preferable to record the actual prices of the inputs and not the imputed prices of the outputs in CPIs.

• The treatment of owner-occupied housing services is particularly challenging as described in paragraphs 11.102–11.161.

The Scope and Choice of Index

11.196 While the general purpose of a CPI is to measure changes in the prices of consumption goods and services, the precise scope of a CPI with regard to the goods and services and households covered should be determined by what is intended to be the main use of the index. Considering the household coverage and the item scope of the CPI, subsistence households generally have a weak connection to the formal economy, as a major part of their consumption is from their own or bartered production. However, indices designed for the indexation of wages or state benefits would exclude subsistence households from their scope. For simplicity of the following discussion, the latter indices will be referred to as “compensation indices.” Indices designed to measure price changes covering all monetary transactions will include purchases by subsistence households but will not include production for own consumption. These can be referred to as “monetary transactions indices.” There is a third type of index that includes production for own consumption within its scope. These can be referred to as “general consumption indices.”

11.197 For countries where production for own consumption represents a major part of total household final consumption, the three types of index will behave differently when the prices of basic food, imported manufactured goods, and farm inputs diverge. In such circumstances, an index that excludes subsistence households will not be representative of the whole population as it is designed to be representative of the price experience of a more limited group of households. Similarly, the monetary transactions index and the general consumption index will give divergent results. Each index provides a different picture of what is happening within the economy. The first does not attempt to be representative of the whole population and the remaining two indices attempt to be representative of all households but in different ways.

11.198 To understand the differences in the indices referred in paragraphs 11.195 and 11.196, consider, for example, that drought affects a country with a high proportion of subsistence households. Assume nonsubsistence households are included within the scope of the compensation index and have no subsistence consumption. These households are also affected by the drought but to a lesser extent. Assume that the price of basic food products increases sharply, that there is relatively little change in the prices of imported manufactured goods, and that the prices of farm inputs fall because of a sharp fall in demand from subsistence farmers.²⁵ In this example, the compensation index will rise because basic food products cost more, but the rise will be moderated because the price of imported manufactured goods has not increased to the same extent. The rise in the monetary transactions index will be moderated further because of the fall in the price of farm inputs. The general consumption index will show the greatest increase because the weight given to basic food products will be much higher, reflecting production for consumption, and no weight will be given to farm inputs.

11.199 Which index in this example is “correct”? If properly constructed, all three are “correct” in the sense that each addresses a user’s need. They are different simply because they serve different purposes and have different uses. The general consumption index would give the best picture of how the drought was affecting the whole of the country. The fact that the price of farm inputs had fallen would not reflect the problem faced by subsistence farmers who had to find ways of providing food for their families and were unable to benefit from the fall in farm input prices. The monetary transactions index would give the most relevant measure, for the country as a whole, of the change in prices of goods exchanged within the market. For the purposes of monetary policy, the general consumption index would overstate the level of inflation but for the purposes of understanding, the impact of the drought on the price of consumption products it would not. The converse is true of the monetary transactions index. The compensation index would not reflect the full impact of the drought on all households, but it would reflect the impact of the drought on indexation households. The general consumption index would overstate the impact of the drought on indexation households and the monetary transactions index would understate the impact; both would be biased if used in the context of indexation.

11.200 Each NSO needs to decide which of the three types of index is appropriate in its own national circumstances. In countries with well-developed price statistics systems, the NSO could consider compiling alternative indices to meet different user needs. They would need to educate users about their respective uses. In most countries, the NSO opts for one general-purpose index. If the primary use of the index is to use in monetary policy decisions and serve as a macroeconomic measure of inflation, it is not appropriate to include production for own consumption. If the primary use of the index is to index wages and government payments, production for own consumption should be excluded. In both cases, only monetary transactions should be included in the index. It should be noted that the housing services produced by owner-occupiers are treated differently (as described in paragraphs 11.98–11.104).

11.201 A number of countries compile and disseminate a monetary transaction index as the headline measure of price change but also compile an alternative index that includes production for own consumption in the weights. Such an index would be for analytical purposes and would meet the needs of poverty economists.

Introduction

11.212 Tariffs cover a large and diverse range of pricing structures. For example, the EU definition states that a tariff is a list of preestablished prices and conditions for the purchase and consumption of one and the same good or service, or of similar goods and services, that has been centrally fixed by the supplier, by the government, or by agreement to exert influence on the consumption patterns by means of appropriately differentiated prices and conditions according to characteristics of consumers, the level, the structure, or the timing of the consumption. A tariff price can be defined as a price within a tariff that applies to a component element or unit of consumption of the good or service in question. At its most basic, a tariff consists of a list of prices based on detailed specifications of the goods or services that are priced individually but can only be bought as part of the package.

11.213 Added complications can exist where goods and services providers adopt a range of strategies to differentiate their goods and services to attract and retain customers. For example, to appeal directly to different types of customers, suppliers of telecommunication services may bundle services in different ways or adopt tariff pricing. This is often accompanied by regular changes in the contracts offered to potential customers to encourage the take-up of services. Such contracts are often fixed-term with prices fixed for the period of the contract and a penalty clause if the contract is terminated early. A more detailed discussion of tariff pricing in the telecommunications sector is included in paragraphs 11.256–11.284. There may exist in the market many tariff pricing programs. Some of the more common include:

• Peak-load pricing (also known as “congestion” pricing). This occurs when producers charge higher fees during periods of greater demand, usually because of the higher production costs caused by capacity constraints. Peak-load pricing thus helps in balancing capacity usage over a period that decreases the need for firms to invest in costly infrastructure expansions. Such pricing practices are often found in the areas of toll roads and bridges, ferry services, electricity, long-distance phone calls, and home delivery of goods.

• Two-part tariffs. These occur when consumers are charged both an entry (or lump-sum) fee and a per unit charge. A fee is charged up front for the right to use (or buy) the product, and an additional fee is charged for each unit that the household consumes. Examples where two-part tariff pricing is often applied are the following:

• Amusement parks that charge an entry fee in addition to a fee for each ride

• “Membership” discount programs or shopping clubs that require the purchase of a membership card to access the point of sale and then the consumer pays a lower price for the products purchased

• Landline telephone services where there is a fee to use the service (“line rental”) and also a fee per call (the line rental covers the cost of providing the service and the “per minute” or metered charge, covers the cost of placing the call on the network)

• Taxi fares where a variable fare based on distance traveled is added to the base “fxed” initial charge that is not dependent on mileage

• Block pricing. This occurs when prices vary according to the volume consumed. Electric utilities, for example, often charge a per kilowatt-hour (kW h) price up to X units consumed and then charge a different price for the remaining units.

• Special group discounts. This occurs when members of certain segments of the population such as students and seniors may be charged a lower price for the good or service compared to the general population. Bus fares and haircuts are good examples of services where these group discounts are applied.

11.214 In some countries, private and public firms have come to rely increasingly on tariff-type pricing as a tool for generating additional revenues or for public policy purposes. For example, publicly administered electric or water utilities may charge a lower tariff for the first units of electricity consumed up to a certain level (the first block), followed by a higher tariff for subsequent units consumed (the second block). It is argued that such an increasing block tariff strategy is often used to promote better and greater access by lower-income households to what is considered a vital service. Similarly, other companies charge more for the first block than the second as an encouragement to increase usage. More generally, private sellers can often increase their profits by charging a higher price for a product to some consumers and a lower price to others, but this depends on whether the customer base can be successfully segmented.

11.215 Tariff-type pricing programs can be applied to a wide range of products. The extent of the practice will vary according to the country. In cases such as electricity, the expenditure weight can be relatively high, and so it is important to measure accurately the price change for such products. The CPI compiler will need to have available data on the tariff prices and weights that reflect the structure of the consumption of the product according to the characteristics of the consumers, the level, the structure, or the timing of the consumption.

Main Measurement Issues

11.216 In some cases, tariff-type pricing programs are affected by price index problems associated with services. These include:

• Charges for services can be subject to such complex pricing schedules that it is difficult to select the appropriate prices for inclusion in the price index.

• Identification or specification of individual products or units of consumption can be difficult, particularly when they are offered as bundled packages consisting of several types of microexpenditure that may be priced separately but are typically only available as a part of a package.

• Services are often provided under long-term contractual arrangements and these may include different types of “customer loyalty” rebates, clauses for the minimum duration of contracts, surcharges for the provision of services not foreseen in the contract, and so on. Loyalty rebates or coupons are usually ignored because of difficulties of measurement (see Chapter 5).

• There are often difficulties in accounting for substitution between different providers of the same type of service, and in accounting for quality differences in the services provided.

• Accounting for customers moving from one tariff to another under the same service provider might be difficult. For instance, when a mobile telephone company offers several different pricing packages targeted at different patterns of usage, current customers may undertake periodic reviews during which they may decide to move to a more advantageous tariff for their level of usage while staying with the same provider.

Price Measurement Methods

11.217 There are four basic approaches to measure tariff pricing in the CPI: matched samples, unit values, consumer profiles, and the sample of bills approach. The minimum information required includes all tariff prices and weights that reflect the structure of the consumption of the product according to the characteristics of the consumers, the level, the structure, or the timing of the consumption.

Examples of Price Measurement Methods

11.227 Examples of the different methods of incorporating tariff prices in a CPI are described in paragraphs 11.228–11.235. Quality adjustment is addressed in paragraphs 11.236–11.247.

Matched Samples

11.228 The example given in Table 11.5 is based on telecommunications services (telecommunications services are addressed in more detail in paragraphs 11.249–11.275).

^{Table 11.5}

Matched Models: Landline Telephones

^{Table 11.5}

Matched Models: Landline Telephones

	Expenditure Weights	Quantity Weights	Tariff (unit price $): Base Period	Tariff (unit price $): Period t	Change in Unit Tariff Price (percent in brackets)
National Calls
Local	50.00
Peak	30.00	33.53	1.20	1.30	+0.10 (8.3)
Off-Peak	20.00	33.53	0.80	0.80	0.0 (0.0)
Long-Distance	20.00
Peak	5.00	3.19	2.10	2.50	+0.40 (19.0)
Off-Peak	15.00	22.37	0.90	1.10	+0.20 (22.2)
International Calls	30.00
To Cape Town (service provider A)	10.00	3.84	3.50	3.50	0.0 (0.0)
To Singapore (service provider B)	10.00	3.19	4.20	4.40	+0.20 (4.8)
To Washington (service provider C)	10.00	0.35	3.90	5.10	+1.20 (30.8)
Weighted Average Tariff Price (revenue weights)	100.00	100.00	1.92	2.14	+0.22 (11.5)
Weighted Average Tariff Price (quantity weights)			1.22	1.32	+0.10 (8.3)

View Table

^{Table 11.5}

Matched Models: Landline Telephones

	Expenditure Weights	Quantity Weights	Tariff (unit price $): Base Period	Tariff (unit price $): Period t	Change in Unit Tariff Price (percent in brackets)
National Calls
Local	50.00
Peak	30.00	33.53	1.20	1.30	+0.10 (8.3)
Off-Peak	20.00	33.53	0.80	0.80	0.0 (0.0)
Long-Distance	20.00
Peak	5.00	3.19	2.10	2.50	+0.40 (19.0)
Off-Peak	15.00	22.37	0.90	1.10	+0.20 (22.2)
International Calls	30.00
To Cape Town (service provider A)	10.00	3.84	3.50	3.50	0.0 (0.0)
To Singapore (service provider B)	10.00	3.19	4.20	4.40	+0.20 (4.8)
To Washington (service provider C)	10.00	0.35	3.90	5.10	+1.20 (30.8)
Weighted Average Tariff Price (revenue weights)	100.00	100.00	1.92	2.14	+0.22 (11.5)
Weighted Average Tariff Price (quantity weights)			1.22	1.32	+0.10 (8.3)

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11.229 The example in Table 11.5 considers that there is just one service provider for national calls and three for international calls. It is assumed that in the price reference period the overall unit price is 1.9200.

11.230 Table 11.5 illustrates several issues pertinent to the different approaches to the measurement of tariff prices and the need to review and verify all calculations. For example, if the overall weighted average price is used to calculate the index, then the average fixed-weight price increase from the price reference period to current period is 11.5 percent if revenue weights are applied and 8.3 percent if quantity weights are applied. The use of quantity weights is correct, whereas the use of revenue weights should be avoided. The fixed-weight increase is 12.2 percent if the average of the price relatives is used (that is, Carli index), which is known for its upward bias. This provides a good example of why a Carli index should not be used in the computation of the CPI. If a geometric mean (that is, Jevons index) is applied, the increase is 11.6 percent. It also illustrates the importance of analyzing tariffs at a detailed level given the fact that different elements of the tariff can be subject to very different price changes. Thus, the use of overall unit values, without some form of stratification, and where weights are contemporary and not fixed could result in volatile average unit value/price changes.

Consumer Profiles

11.232 For marketing purposes, companies often classify their customers based on their consumption habits. Table 11.6 shows a typical range of representative consumer profiles for mobile telephones. Information on different consumer profiles may be obtained from service providers that use consumer profiling when planning their product pricing strategies. This type of information should generally be more readily available as it is less sensitive than actual revenue data. It can provide data for the unit value approach or for detailed weights in the matching methodology. National regulatory authorities may also be able to provide detailed customer use profiles on a confidential basis.

^{Table 11.6}

Consumer Profiles: Mobile Telephones

* In brackets, average call length in seconds. Mb, Megabyte; GB, Gigabyte.

^{Table 11.6}

Consumer Profiles: Mobile Telephones

Specification	Unit	Low Usage Customer	Medium Usage Customer	High Usage Customer
Total Usage (per billing period) Excluding Text Messages
Calls	Minutes	14	24	59
Within Same Mobile Network
Peak	Number*	5 (35)	10 (35)	15 (40)
Off-Peak	Number*	10 (55)	10 (65)	20 (80)
To Different Mobile Network
Peak	Number*	0 (0)	5 (20)	15 (25)
Off-Peak	Number*	5 (20)	10 (30)	20 (40)
To Landline
Peak	Number*	0 (0)	0 (0)	5 (20)
Off-Peak	Number*	5 (3)	5 (8)	5 (13)
Other Services	Number	5	10	30
Text Messages Data	Mb	500 Mb	2 GB	10 GB

* In brackets, average call length in seconds. Mb, Megabyte; GB, Gigabyte.

View Table

^{Table 11.6}

Consumer Profiles: Mobile Telephones

Specification	Unit	Low Usage Customer	Medium Usage Customer	High Usage Customer
Total Usage (per billing period) Excluding Text Messages
Calls	Minutes	14	24	59
Within Same Mobile Network
Peak	Number*	5 (35)	10 (35)	15 (40)
Off-Peak	Number*	10 (55)	10 (65)	20 (80)
To Different Mobile Network
Peak	Number*	0 (0)	5 (20)	15 (25)
Off-Peak	Number*	5 (20)	10 (30)	20 (40)
To Landline
Peak	Number*	0 (0)	0 (0)	5 (20)
Off-Peak	Number*	5 (3)	5 (8)	5 (13)
Other Services	Number	5	10	30
Text Messages Data	Mb	500 Mb	2 GB	10 GB

* In brackets, average call length in seconds. Mb, Megabyte; GB, Gigabyte.

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11.233 The use of consumer profiles is quite straightforward in principle. Once the profiles have been identified, each service plan selected for pricing is priced and repriced based on the (fictional) bills that these virtual customers would receive. Costs to each customer group can be estimated with reference to several plans using sales information to determine the relative importance of the different plans on offer and the corresponding consumer groups being targeted. The overall index is then derived in the usual way by weighting together the average unit costs for these user profiles according to the relative importance of each consumer profile (representing a category of consumer) in expenditure terms.

11.234 A potential disadvantage with the consumer profiles method is that if a new plan that is different and cheaper is introduced in the following year, but the old plan continues to be priced, then the fall in unit value prices will not be reflected in the index. A new plan could offer higher or lower average prices and the CPI would miss the price change going from year one to year two. This problem could be addressed by updating the weights used when introducing the new plan. Also, the consumer profile approach is sometimes based on the plan that would be cheapest for the consumer. This assumes consumers minimize their costs, have full knowledge of the options, and can move to the cheaper plan without any barriers such as a contract that ties the customer into a particular tariff for a minimum length of time.

Quality Adjustment

11.236 The practical options to account for quality change and new products are different for different tariff strategies.

Unit Values

11.239 The unit value approach regards quality differences related to different pricing programs as implicit price differences. The detection of quality change depends on the degree of detail in the specification of the unit of consumption. Unit values perform best when there is a high degree of homogeneity among the items within a product category. To prevent quality differences from affecting the price index, the specifications of the units of consumption should be as detailed as the available data permit to maximize homogeneity.

11.240 In Table 11.7, relating to bus fares for children the previous tariff categories have to be transformed into the new ones. For customers aged from 12 to 16, there was a price rise of 60 percent (from $5 to $8) while for 16-year-olds there was a price decrease of 20 percent (from $10 to $8). The proportion of customers falling in these categories (that is, the previous consumption patterns) should be used to calculate the average price change, or in the absence of such information, the CPI compiler might assume about the proportions based on the available information, including revenue information from the bus company.

^{Table 11.7}

Bus Fares: Old and New Tariffs

^{Table 11.7}

Bus Fares: Old and New Tariffs

	Current Ticket Prices ($)	New Ticket Prices ($)
Children	5–15 Years = $5	5–11 Years = $5
Teenagers		12–16 Years = $8
Adults	16 and above = $10	17 and above = $10

View Table

^{Table 11.7}

Bus Fares: Old and New Tariffs

	Current Ticket Prices ($)	New Ticket Prices ($)
Children	5–15 Years = $5	5–11 Years = $5
Teenagers		12–16 Years = $8
Adults	16 and above = $10	17 and above = $10

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Consumer Profiles

11.241 The key issue when dealing with quality changes in the context of consumer profiles is the choice of which consumer profiles should be priced through the period of tariff change and change in goods or services provider. An example of a profile is based on a situation where broadband internet service providers increase the download speed substantially (that is, an increase in quality), while keeping prices constant. It can even be the case that an increase in download speed can be accompanied by a price reduction. In Table 11.8, it is assumed that the differentiating factors of an internet-provided broadband connection are limited to the download speed and that this is reflected by different tariffs. It therefore follows that the increase in speed is a quality enhancement, in the marketplace this feature is clearly a price-determining characteristic. As a result of the increased speed, page loading times will be faster and consumers will typically experience improved streaming services such as videos and movies. Most times, only under more intensive applications (for example, downloading large files such as movies) will the difference in bandwidth be noticeable for consumers. But this case may not hold in the future with improvements to the internet infrastructure.

^{Table 11.8}

Internet Services

kbit/s, Kilobit per second.

^{Table 11.8}

Internet Services

Service Level (slow, medium, or fast speed)	Current Speed in kbit/s (down/ up)	New Speed in kbit/s (down/up)	Difference in Speed (percent) (down/up)	Current Price ($)	New Price ($)
Slow	256/64	384/96	50/50	34.90	34.90
Medium	768/128	1024/160	33/25	52.25	52.25
Fast	1536/256	2048/320	33/25	86.10	79.95

kbit/s, Kilobit per second.

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^{Table 11.8}

Internet Services

Service Level (slow, medium, or fast speed)	Current Speed in kbit/s (down/ up)	New Speed in kbit/s (down/up)	Difference in Speed (percent) (down/up)	Current Price ($)	New Price ($)
Slow	256/64	384/96	50/50	34.90	34.90
Medium	768/128	1024/160	33/25	52.25	52.25
Fast	1536/256	2048/320	33/25	86.10	79.95

kbit/s, Kilobit per second.

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11.242 The assumption may be made that the product versions provided are also, in effect, descriptions of consumer profiles, in this case essentially making the consumer profile approach equivalent to the unit value (or unit price) approach. This applies as long as the usage is such that the average price paid equals the unit price in both periods. This assumption should be tested.

11.243 The key point is that a unit price for the “volume of use” is calculated for each class of consumer, that is, in essence, a form of stratification. Implicit in the unit value approach is a specific form of quality adjustment—namely, a quantity adjustment.

11.244 Table 11.9 presents a simplified example where there are just two speeds (low and high) and where only the download speeds, expressed in megabits per second (Mbs), change. Treating the two speeds as separate elementary aggregates, the price per megabits per second both in the price reference period and in the next period can be calculated. In column G, these unit values (prices) are expressed with regard to indices with the price reference period equaling 100. Using standard fixed-based index methodology, an expenditure weighted average of each elementary aggregate index is taken to obtain the overall index for internet services. The expenditure weights are, respectively, 0.75 and 0.25 for low- and high-speed services. Although these weights are likely not available from the HBS, they could be obtained from administrative sources such as the regulators, the service providers, or market-based intelligence. The quality-adjusted index so derived in the next period is 76.7, which corresponds to a price fall of 23.3 percent. If the average of the price relatives (the Carli index) was wrongly taken, the fall in the index would have been predictably greater at 26.5 percent. If no quality (or quantity) adjustment had been applied, the price index for internet services in the next period would have been 105.4 that is obtained by using only the observed package prices in the calculation of the index (in period 1: 55.95 and 74.95, and in period 2: 60.00 and 74.95). By using the unit value as the price when computing the index, the improvement in the internet service that consumers now have access to is accounted for in the index, which is the preferred treatment in this case.

^{Table 11.9}

Changes in the Tariff for Internet Prices

Mbs, Megabytes; GB, Gigabyte.

^{Table 11.9}

Changes in the Tariff for Internet Prices

	Share of Expenditure	Download Speed in Mbs	Transfer Allowance in GB	Price for Package in $	Price per Mbs in $	Index
(a)	(b)	(c)	(d)	(e)	(f)	(g)
Base Period
Low Speed	0.75	30	150	55.95 (100)	1.87	100.0
High Speed	0.25	120	Unlimited	74.95 (100)	0.62	100.0
Weighted Average Price					1.55 (100)	100.0
Next Period
Low Speed	0.75	45	150	60.00 (107.24)	1.33	71.5
High Speed	0.25	130	Unlimited	74.95 (100.00)	0.58	92.3
Weighted Average Price					1.14 (73.58)
Expenditure Weighted Average of the Two Elementary Aggregates						76.686

Mbs, Megabytes; GB, Gigabyte.

View Table

^{Table 11.9}

Changes in the Tariff for Internet Prices

	Share of Expenditure	Download Speed in Mbs	Transfer Allowance in GB	Price for Package in $	Price per Mbs in $	Index
(a)	(b)	(c)	(d)	(e)	(f)	(g)
Base Period
Low Speed	0.75	30	150	55.95 (100)	1.87	100.0
High Speed	0.25	120	Unlimited	74.95 (100)	0.62	100.0
Weighted Average Price					1.55 (100)	100.0
Next Period
Low Speed	0.75	45	150	60.00 (107.24)	1.33	71.5
High Speed	0.25	130	Unlimited	74.95 (100.00)	0.58	92.3
Weighted Average Price					1.14 (73.58)
Expenditure Weighted Average of the Two Elementary Aggregates						76.686

Mbs, Megabytes; GB, Gigabyte.

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Classifications

11.248 COICOP, as well as other national classification systems, is not constructed with a stratification structure that is sufficiently detailed to reflect the various tariffs for those products that are subject to such pricing practices. For example, electricity under the COICOP hierarchy appears as a subclass (five-digit COICOP) in its own right (COICOP 2018 04.5.1.0) and according to its description includes associated expenditure such as hire of meters, reading of meters, or standing charges. A finer breakdown is not given in COICOP. However, when sellers of a product, such as electricity, use tariff pricing, the accuracy of the CPI can be improved if the price index for this product is constructed in a way that reflects as accurately as possible the market realities. In other words, a subclass-level price index should be composed of a number of subindices, each one corresponding to its particular tariff price. This may require the use of a specially designed classification for the purpose of stratification within an elementary aggregate.

Introduction

11.249 Telecommunications services represent a specific case of tariff pricing (detailed information on tariffs is available in paragraphs 11.211–11.248), but the tariffs tend to be less transparent, more complex, and dynamic with frequent updates of the tariff structures and prices.

11.250 The global telecommunications sector is subject to rapid change. Technological innovation has led to a proliferation of new services that has resulted in suppliers adopting a range of new strategies to differentiate their services to attract and retain customers. In this context, characteristics of significance to CPI compilers include:

• Fewer linear pricing schedules and the adoption of different pricing structures across providers

• The increasing tendency to offer contracts that bundle services in different ways to appeal to different types of consumers

• Rapid changes in the contracts offered to consumers as an effective means of encouraging the take-up of the ever-increasing range of services

11.251 Increasingly, telecommunication companies offer services via plans that require customers to enter into longer-term contractual arrangements with the providers. Two broad types of plans are typically offered. The first type of plan has no fixed duration and makes allowance for the provider to change pricing structures with advance notice to the consumer. The second type of plan, increasingly more popular, provides a fixed-term contract (generally of one to two years) with prices fixed for the duration of the contract, and with scope for annual updates by an agreed-upon measure of inflation that should be accounted for in the price index. The type of contract can influence the approach to measurement. For instance, experience suggests that a consumer profile approach can work best for computing a price index for customers on a prepaid tariff subject to the relevant information being available, otherwise an alternative could be a matched sample. Similarly, where customers are on a fixed-term contract, other approaches may be adopted. One method selects for pricing the appropriate package from each service provider and assumes a rational consumer who has perfect market information and uses this to purchase an appropriate package at the lowest price. Each user profile is assumed to switch freely between packages, picking up the cheapest available each month but constrained by the reality that customers are generally unable to move service providers without financial penalty. Thus, assuming an annual contract, each month only a twelfth of customers can move service provider. In some cases, moving to a different tariff offered by the same service provider prior to the end of the contract also is subject to a penalty.²⁸ It is often desirable to compute separate indices for the different types of tariffs and combine these using sales weights.

11.252 If NSOs follow traditional sampling approaches for fixed-term contracts and select price schedules according to some price reference period set of plans, and follow them until they expire, no price changes will be observed (likewise if plans expire and replacements are linked to show no change). The marketplace reality, by contrast, is that average prices for telecommunication services have declined significantly in many countries in recent years. Thus, perhaps the biggest challenge is the quality adjustment when there is a change of service provider. For instance, where one service provider is more reliable than another. This is generally ignored as being unmeasurable.

11.253 The lack of a harmonized method across NSOs demonstrates the complexities of this sector. It is recognized that current best practice approaches have difficulty in accounting for substitutions across providers and in adequately accounting for changes in the quality of the services provided.

11.254 With the telecommunications sector under continuous change, statistical practices should be constantly reviewed. NSOs that are considering the construction of telecommunications indices for the first time, or are reviewing their current practices, are advised to seek out the most recent research in this field. Notwithstanding, this chapter seeks to provide a general description of four approaches that are currently used by NSOs to measure changes in the prices of telecommunication services. The approaches are the following:

• Matched samples

• Unit values

• Customer profiles

• Sample of bills

11.255 The choice of approach will depend largely on the market conditions prevailing in individual countries, the sophistication of the index compilation system in use, and the extent of access to accurate and timely telecommunication services data. Depending on these factors, it may be appropriate to use different approaches for different telecommunication services, or even for the different services of specific providers.

Matched Samples—Representative Items

11.256 Matched samples are used when a full tariff list or an element of the tariff structure is treated as a product specification and repriced in subsequent periods. The use of matched samples mirrors traditional techniques adopted elsewhere in the CPI. The total expenditure of reference group households on telecommunication services in the weight reference period is derived from sources such as HBSs. A sample of service providers is contacted to obtain information on revenue by types of services (for example, line rental, local calls, international calls, handset sales or rentals, connection fees, voicemail services, or internet charges) and a number of these are selected as representative items of the different tariff elements, or all are taken, with weights derived from the revenue data.

11.257 For each representative item, detailed specifications (for example, a telephone call from location A to location B, at time X, of duration Y minutes) are developed to sufficiently represent the range of specific services purchased by consumers within each representative item or tariff element. This specification is held constant from period to period, and movements in the indices for representative items are computed, based on the movements in the prices of this matched sample. Table 11.10 illustrates this approach. The detailed application will depend on the tariff structure. For instance, in some countries, there will be a regional dimension.

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11.258 The list of representative items (that is, the lowest level in the structure) should be sufficient to be representative of price behavior as a whole, taking account of the published tariffs. As with other parts of the CPI basket, expenditure on those services not selected for pricing should be distributed over the other services within that general class for deriving weights. For example, the expenditure on any fixed- or landline services not selected for pricing should be distributed over those fixed-line services selected.

11.259 Compared to suppliers of goods, service providers have a great capacity to tailor both the services and the prices they charge, for example, based on the time at which the service is provided. A five-minute telephone call at 9 a.m. can be regarded as a different product from an equivalent call made at 9 p.m., and service providers are able to charge different prices for these calls. Representative items therefore need to be described in enough detail to capture all the price-determining characteristics.

11.260 Given the ease with which providers can adjust the differential aspects of their pricing schedules (for example, the time span designated as peak and the duration of a call before a different rate applies), it is necessary to use a sufficient number of varied specifications to capture these aspects reliably. It is not enough to simply describe a call as peak or off-peak, or from zone 1 to zone 2 without defining the call in more detail. Examples of the types of specifications that may be applicable for two representative items—international calls (fxed line) and usage fees (internet services)—are provided in Table 11.11.

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11.261 In Table 11.11, it is assumed that the origin of both the telephone calls and internet access is also identified. All minutes consumed are domestic. It should also be noted that the nature of internet access generally precludes pricing on the basis of access, and hence the timing of access cannot be as tightly defined as for international telephone calls: instead, all specifications are for total monthly usage.

11.262 The most challenging aspect of the matched samples approach is obtaining the data needed to establish the representative items and to identify suitable specifications, as this will require detailed information from service providers. Once implemented, most price information should be readily available from published fee schedules, minimizing the burden on respondents between reviews of the specifications. However, much reliance will be placed on the service provider to supply the corresponding expenditure information.

11.263 The dynamic nature of the telecommunication sector and the common use of the pricing mechanism to change consumer behavior are likely to require that the specifications be updated frequently. A major practical challenge associated with the matched samples approach is ensuring that exactly the same product specification is priced each month and that the matched samples methodology is adhered to. When a variety disappears (that is, a specific plan is no longer offered), all efforts must be made to find a suitable comparison variety. Where varieties are replaced, it is possible to argue that, because different plans involve different conditions of sale, they are fundamentally different products. It is equally reasonable to question whether the entire price difference between plans is because of quality differences, particularly in light of the evidence of ever-increasing volumes and reductions in unit values. The difficulty lies in quantifying the quality differences.

Unit Values—Representative Items

11.264 The unit value approach is used when the overall price or, more precisely, the revenue generated by one unit (for example, a long-distance telephone call for customers of a specific supplier) is used to monitor prices. Unlike the matched samples approach, individual specifications are not priced. The unit value approach can be applied instead of the matched samples approach when the quality of the service is homogeneous between providers with the advantage that it is less resource-intensive. The indicative price for each representative item is calculated from revenue and quantity data collected from the service provider. For example, the price for national long-distance calls can be derived as the total revenue received from such calls divided by the number of call minutes. Similarly, in the case of monthly line rental fees, the price can be calculated as the total revenue from line rental divided by the total number of subscribers.

11.265 Compared to the matched samples approach, the unit value approach attributes all the difference between plans, and time and duration of calls to price (that is, the quality difference is assumed to be zero). The unit value approach is also seen as providing a method for accounting for price change when the items are subject to a proliferation of discount programs or promotions (for example, $2 to call anywhere for any duration for the next week). While the approach avoids some of the customer sampling choices inherent in some other methodologies, the compilation does rest on analysis of aggregate company data and so is likely to be less timely than methodologies based on prepublished prices. However, care needs to be exercised to ensure that the measure is not affected by undesirable compositional changes. A unit value index should only be constructed for truly homogeneous items. This points to a requirement for defining the representative items at a relatively fine level of disaggregation. For example, international calls may need to be further subdivided by destination to avoid changes in unit values arising purely from shifts in the numbers of calls made to different destinations. Thus, unit values need to be calculated at a sufficient level of detail to minimize the effect of changes in customer usage being reflected in the index.

11.266 Although the unit value approach appears to address at least some of the known defciencies of the matched sample approach, it is likely to exhibit period-to-period volatility because of compositional shifts, for example, because of seasonal variations in usage patterns. There are also several respondent and data quality aspects that need to be considered. The unit value approach imposes a greater data burden on service providers, who often regard revenue and quantity data as highly sensitive. To be effective, the service providers also need to be able to furnish data relating only to households (that is, they should be able to separate out revenue and quantities relating to businesses) and the revenue information needs to conform to the requirements of the index. For example, some service providers may record certain discounts as a marketing expense, rather than a reduction in revenue as is required for the unit value index.

Customer Profiles

11.267 For marketing purposes, telecommunication companies often classify their customers according to their volume of service use. Although the number of categories can vary, a common approach is to use a three-way classification: low-volume, medium-volume, and high-volume customers. Service providers analyze customer usage patterns by category when developing new plans targeted specifically at each group. National regulatory authorities may also be able to provide detailed customer use profiles on a confidential basis.

11.268 NSOs can take a similar approach to the telecommunications companies for the construction of price indices by devising profiles that reflect the average usage patterns for each category of consumer. Costs faced by these average consumers in each period can then be estimated by reference to the rates set out in the plan that is currently most commonly applicable to each customer category. Variations on this general theme include estimation of costs based on the plan that would deliver the cheapest overall cost, individually, to each of the representative consumer profiles (based on the simplifying assumption of cost-minimizing consumer behavior with perfect knowledge). This has the advantage of providing a clear basis for choosing a comparable replacement if an existing package ceases to be available. Alternatively, costs to each customer group may be estimated with reference to several plans, where sales information indicates that this is a closer approximation to reality. The overall index is derived by weighting together the results from these user profiles according to information about the relative importance of each category of consumer.

11.269 In constructing the aggregate index, these calculations are likely to be made for a representative sample of service providers, using the information on their overall market share for sampling or weighting purposes, if available. Information on the distribution of customer profiles by service provider may not be available or at least may be very costly to obtain. Table 11.12 gives an example of a profile for mobile telephone calls. This approach can be extended to include internet usage.

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11.270 Consistent with the fixed-basket approach, the activity of consumers (with regard to numbers and types of calls, numbers of texts, and amount of internet data used) is held constant between comparison periods. Prices may change when not fixed by contract or when plans are replaced. CPI compilers may also allow tariffs to change in response to a changing mix of plans within customer categories. This approach assumes that tariff changes fundamentally represent price change rather than quality change, but eliminates the cruder compositional effects associated with the unit value approach that does not take account of customer profiles.

11.271 The success in the use of the unit value approach is determined by the degree to which the profiles truly reflect consumer behavior and therefore a great effort needs to be put into their development. The construction of the customer profiles will require a high degree of cooperation from service providers or regulators and, given the known volume changes, they will require updating at regular intervals, possibly more frequently than other items in the CPI basket. Data on plan usage by customer category for each index compilation period (a month or quarter) may also be required if compilers decide to allow for such effects.

Sample of Bills

11.272 This method is a more refined application of the customer profile approach. A fixed level of service activity from an actual sample of customers is priced each month rather than defining profiles representative of the average monthly activities of customers. A sample of customers should be selected from each category of customer (that is, low-, medium-, and high-volume customers) and, ideally, the bills (or activity statements) should cover a full year’s activity.

11.273 The perceived advantages of this approach compared to the customer profile approach are the following:

• It is able to take account of any within-year variations in customer behavior (for example, a higher incidence of international calls associated with religious or cultural events of significance). But it can be argued that this contravenes the principle of the fixed basket.

• It better reflects the diversity of consumer behavior by identifying actual activities (that is, calls actually made by a sample of consumers) and potentially captures out of contract activity charges (for example, exceeding allowances).

• It accommodates within each bill any instances of annual charges.

• It allows for the detection and recording of other sources of price change associated with customers’ overall relationship with the service provider (for example, where overall discounts are provided when aggregate monthly spending exceeds certain values, or where an aggregate discount is provided if customers acquire bundles of services from a single provider, such as landline phone plus internet).

11.274 Calculation of the index still requires monthly information on the relative significance of various plans by customer category. With the sample of bills repriced each period, the resulting index measures the cost of a full year’s consumption at the prices prevailing in each index period compared to the same cost at base prices. This assumes that the quality difference between old and new plans is zero for households changing plans. Because of the generally larger number of bills (compared with the number of available profiles), price changes can be reflected more gradually, as the proportion of bills priced using each plan can better mirror the changing population distribution.

11.275 As with the consumer profiles approach, it is important that the sample of bills is updated regularly to reflect changes in consumption patterns and the take-up of new services such as call-waiting, voicemail, and text messaging. Although, with adequate sampling, the sample of bill approach is likely to provide a better measure of the aggregate rate of price change for telecommunication services as a whole, it may not be best suited to the calculation of separate indices for the components of those services (depending on whether overall or bottom-line discounts are offered). The approach is also data-intensive, requiring many calculations each period and thus a relatively advanced data processing system capable of handling and manipulating large amounts of data. It can also suffer from a lack of timeliness.

Introduction

11.276 Transport services cover a wide range of modes of transport from airplanes, trains, buses and ferries, taxis and motorbike taxis, to private cars. The example given in paragraph 11.282 focuses on air travel.

11.277 Transport, as defined by COICOP 2018 Division 07 covers the purchase of vehicles (COICOP 2018 7.1), the operation of personal transport equipment (COICOP 2018 7.2), passenger transport services (COICOP 2018 7.3), and transport services of goods (COICOP 2018 7.4).

11.278 The current chapter does not cover the purchase of vehicles or the operation of personal transport equipment (COICOP 2018 7.1 and 7.2), rather it relates to transport services provided by and purchased from third parties as defined by COICOP 2018 7.3 and 7.4. The latter includes bus and train fares, taxi fares, and the purchase of air and ferry tickets.

11.279 There are common elements between this section and the one on tariffs. Most particularly, the section on tariffs uses examples of tariffs relating to public buses to illustrate the application of the matched samples and unit value approaches.

11.280 Some public transport services may be paid for in full or in part by government or NPISH and are provided free or at a nominal price to households, and are considered social transfers in kind in the SNA. The standard convention is that the price entering the CPI should be the subsidized price.

Public Transportation

11.281 Elementary aggregates should distinguish between different modes of transport as reflected in the structure of COICOP (purchases of transport services are generally classified by mode of transport in COICOP). The computation of prices should reflect the different tickets available for purchase from different channels. In the case of airlines, different prices may apply to online bookings compared with bookings made through an agent, and to advanced nonrefundable purchases compared with, for example, a fully flexible fare purchased close to or on the day of travel.

11.282 Let P be the total cost of providing a trip from A to B and let Q be the number of trips carried by the transport system from A to B during the period under consideration. Suppose the household sector pays only sP of this price and the quantity is Q. Obtaining the prices for inclusion in the elementary aggregate normally requires a method of sampling that takes account of complex fare structures.

11.283 The index for airline and other public transport services should use the prices of a sample of specific trips rather than revenue per kilometer or per passenger-kilometer. If the CPI has strata for different geographic locations that are typical in large countries, points of origin (for example, airports, train stations, or motor coach stops) should be chosen in each location, and trips selected within origins or destinations in those locations. There are generally multiple classes of service. In addition, transport fares may vary by day of the week, time of day, time of year in response to variations in demand, and how long in advance the ticket is purchased. The selected trips should reflect this variety but hold these variables constant.

11.284 For airfares, the sample should be stratified by domestic, short-haul, and long-haul fights as scheduling and service providers between these categories can vary widely.

11.285 Once chosen in the price reference period, the route, the departure and arrival times, and the ticket type and class of travel should remain the same throughout the year. While some flexibility should be allowed to accommodate changing schedules for specific routes, if specifications diverge too much from the price reference period, the replacement ticket should be considered noncomparable and a new base price imputed based on the movement of prices for routes in the same category. This is the standard form of implicit quality adjustment.

11.286 For sample selection of routes and providers and for weighting between routes and travel subcategories (for example, long-haul or domestic), expenditure data from appropriate surveys or administrative sources should be used. Where this is unavailable, passenger numbers and average prices can be used to calculate expenditure data. Note that the coverage of routes depends on whether the CPI covers the national or domestic concept (as defined in Chapter 2) and, if purchased online, the location of the transaction and service delivery. For instance, if a ticket is purchased online from a foreign carrier it can be argued that the purchase should be attributed to the country where the consumption first commences. This is because the consumer needs to be present at the location of the service provider for consumption to commence, and the place of consumption normally determines where the sales tax, such as VAT, is actually paid. If this reasoning is followed, then such transactions for the booking of fights totally outside the country of residence will be excluded from a CPI following the domestic concept. Paragraphs 11.65–11.71 discuss the treatment of internet purchases and the domestic concept.

11.287 Providers of transport services often practice some form of price discrimination so that different groups of travelers will be charged with different fares or prices for essentially the same service. Examples include special discount fares for students or retired people, or trips booked for weekend departure or return, and a 30-day advance booking. Since these can change frequently, CPIs usually ignore minor changes in the requirements for a discount fare.

11.288 The recommended approach to differential and complex fare structures that is most likely to ensure like-for-like comparisons is to price the cost of a journey on a specific day of the month (for example, the fourth Tuesday) between two points, pricing a ticket for transportation purchased at a fixed time in advance, and with fixed terms and conditions. This should be done for various fare classes, for example, a full economy fare (if purchased in significant quantities for personal travel) and a typical discounted economy fare that may include travel restrictions such as for a stated date and time and not being refundable. Prices can be downloaded by staff at the head office from reservation systems available on the internet, although sometimes the full cost is not shown without going through the procedures for purchase.

11.289 When selecting the sample, the NSO should also consider how far in advance of the date of travel a ticket price is collected. In airfares, for example, ticket prices can increase the closer the booking is made to the departure time, because the number of available seats for a specific route becomes limited. However, in other cases, there can be last-minute discounts to fill empty seats. Further stratification of the sample should be considered to account for this, for example, by collecting prices for the same departure time and date but collecting separate prices for booking the ticket so many months, weeks, or days in advance, depending on the nature of transport service being priced. Taking airfares as an example, once the routes, ticket types, and departure date have been selected, price collection for this sample could be repeated six, three, and one month in advance to capture the changing price as the departure date approaches.

11.290 Changes in transport schedules can cause price changes. For example, an airline might cancel its noon fight, forcing passengers to take the evening fight that is priced higher because that is a time of peak demand, unless a competitor airline can be found that offers a noon fight. If the CPI was following the price of the noon fight, it must now price the evening fight if the customer has no choice but to use it, or price a noon fight available from an alternative comparable airline if available. The replacement journey should be treated as comparable and the full price change should be reflected in the index if it is assumed that there has been no change in the quality of the service being provided. But the latter might be a strong assumption, for instance, if an evening fight is inconvenient because it means traveling the day before and staying in a hotel to attend a morning appointment the following day. In the latter case, the noon fight might best be treated as a missing item or the evening fight selected as a noncomparable replacement and a new base price calculated for it.

11.291 Data challenges can be encountered when selecting representative items, estimating weights, and pricing selected fights especially with the emergence of online booking. In the case of air transport, the main data sources alternative to HBS for both sampling and weights estimation are airports, the airlines, national civil aviation authorities that often collect detailed data covering the entire country, or market research companies and trade organizations that collect data. The data most likely to be available for the sampling of fights will generally relate to the total number of passenger fights taken and is likely to include business travelers. Nonetheless, such data will be better than using a subjective approach and assumptions can be made, such as assuming that all business and first-class bookings are for business purposes. Normally, expenditure data on last-minute deals can be gathered either through the HBS or, more likely, through an ad hoc survey of travel service providers, if not available from other sources.

11.292 Transport ticket prices should feed into the index at the time of travel, not at the time they were booked. For example, a ticket price for a December fight should feed into the December index even if the price relates to a purchase in the previous October.

Introduction

11.293 Health, education, and social protection cover a wide range of services. Transactions that involve an expenditure by a household in the health, education, and social protection services fields are in scope and should be covered by the CPI if it is to be consistent with the SNA concept of household final consumption expenditure. In many countries, various government units or NPISH²⁹ will finance and pay for the full or partial provision of a significant proportion of goods and services in the health, education, and social protection sectors.

11.294 The preferred approach regarding the treatment of health, education, and social protection services in the CPI is as follows:

• Only expenditure by households that is a direct result of purchase of individual goods or services is within the scope of CPI. These prices should be net of direct reimbursements. Reimbursements refer to payments to households by government units, social security administrations, or NPISHs that are made as direct consequences of purchases of individually specified goods and services, initially paid for by households.

• Mandatory payments are excluded from the scope of the index (for example, employee’s contributions to social security programs). These are collected to finance social security programs and these payments do not directly relate to the provision of goods or services. Reimbursements that do not directly relate to goods or services are also not in the scope of the CPI.

11.295 It should be noted that, in compiling a CPI, a number of situations may be encountered. For example, with childcare systems where the government partially subsidizes the full cost of providing the service, it is the net (or purchaser) price paid by the household that is covered by the CPI and should be included under the proper elementary aggregate (or elementary product group) entry in the classification system. This is regardless of whether the childcare service is privately or publicly run. But if these services are provided by the households themselves, they are regarded as own production and not included in the SNA production boundary, as no monetary transaction is involved even though the government might give the household money in the form of a social security payment. This approach is consistent with the conceptual basis of the national accounts.

11.296 Goods and services acquired by households and that the government or NPISH provide a social benefit either through a full or partial reimbursement should be measured net of direct reimbursements. For example, individuals who are part of a particular socioeconomic group may be eligible for a full or partial refund for dental care: if the refund covers the full cost of the dental service, then the expenditure weight would be zero and no prices would need to be monitored for the purpose of the CPI.

11.297 Where individual goods and services are provided at no charge to individual households by governments or NPISH, these transfers are regarded as social transfers in kind and costs are included in government or NPISH expenditure.³⁰ Examples include food stamps, social benefits to households prescription drugs, and job training programs. These social transfers in kind can contribute substantially to the standard of living of the individual households that receive them.

11.298 Depending on national circumstances, it could be that the public authorities have decided to partly or fully finance the provision of certain goods and services. Regardless of the practice, those expenditures incurred by government or NPISH to finance social transfers in kind are outside the scope of a CPI (although it can be argued that it is desirable to take them into account when estimating a comprehensive COLI extending beyond purchases by the household sector). However, when the consumer pays part of the cost associated with the provision of such goods and services, this element is within the scope of the CPI: although there is a social transfer, this expenditure may account for a large part of a household’s final consumption expenditure. For example, take a rental unit for which the monthly cost of providing the rental service is $800 and where, after the government transfer, the actual rent paid by the tenant is $500. While the $300 transfer is excluded from the scope of the CPI, the rent of $500 paid by the tenant is a legitimate consumption expenditure that should be included in the CPI.

11.299 Users’ expenditure on all relevant goods and services should be included in the CPI to properly reflect changes in prices and to support the addition of related services in cases where governments and NPISH introduce charges for services that were previously provided at no charge, or vice versa.

11.300 In practice, there are many possible combinations of payment and reimbursement systems and there can be a complex mix of publicly financed social security programs, employee or worker financed social security programs, and social security programs financed by households. The CPI compiler should investigate such programs in sufficient depth to facilitate a well-informed decision on their treatment in the CPI. Thus, the nature of the health, education, and social protection sectors is a challenge for price index compilation. The index methodologies used by the NSO need to be built around the national circumstances.

11.301 The procedures used in the treatment of tariffs, as described in paragraphs 11.211–11.248, are often applicable for pricing programs encountered in health, education, and social protection services.

11.302 Detailed in-depth research will be needed to identify and measure newly introduced significant charges. Additionally, some of the goods and services included in health, education, and social protection are difficult to measure at constant quality. The social security systems can also cause complications. The CPI compiler is advised to keep in close contact with data users to obtain the information that is necessary to make informed decisions about which charges should be included in the index and how they should be measured, and to gain access to relevant sources of data and advanced notice of any changes.

Health Services (Doctors and Dentists)

11.303 The treatment of health services in the compilation of individual countries’ CPIs will depend on the institutional arrangements for providing them. Government-provided free medical care is out of scope, but many countries adhere to some form of two-tier health care system whereby some health care services are provided, often for a fee, by a private system that coexists with the public system or where medical services are financed partially by the government but the consumer pays part. In both cases, fees paid by the users are in scope. Employer-provided medical care is beyond the scope of the CPI, because a monetary transaction does not take place and it is treated in the national accounts as remuneration in kind.

11.304 Although health is a broad term, for the construction of an elementary aggregate in a CPI, it generally refers to medical care provided by medical professionals, para-professionals, or medical institutions. COICOP divides the health care sector into classes according to the type of medical care provider (for example, doctors or hospitals). This facilitates sampling, price collection, and index construction.

11.305 The weights are the amounts consumers spend on each type of provider. In countries where the government provides a substantial portion of medical care free of charge, the relative importance of medical care in the CPI is less than its total expenditure share (by households, government, and NPISH), as measured by the national accounts.

11.306 The COICOP categories are based on purpose. Some critics state a preference for categorizing according to types of medical condition and are of the view that the CPI should measure the cost of treating a disease or of obtaining a fixed outcome after treatment rather than the medical service or treatment that, in their terms, is an input. But it should be noted that this medical condition approach, which would define elementary aggregates for categories of medical conditions, is not sufficiently developed to be recommended at this time.

Sampling

11.307 The general CPI approach is to select samples of providers within each COICOP category (for example, doctors in Medical Services, or dentists in Dental Services), and then choose one or more representative service items for each sampled provider. The principle of using loose specification when sampling and tight specification when pricing is followed. When first visiting a doctor or other medical provider, the price collector should find what services are provided or what medical procedures are performed and select a representative sample with guidance from the provider. The price collector should describe them as completely as possible, and then continue pricing them for as long as possible or until they are no longer part of the sample that constitutes the CPI basket. One approach to the initial sample selection of services or medical procedures is for the price collector to ask the medical practitioner or dentist what was provided recently to a typical patient with a representative medical condition or to ask the respondent to describe a simple service they recently performed. When returning to obtain prices in the following periods, the price collector should collect the price for that identical service, even if the doctor or dentist has not performed it recently. However, if the respondent has not performed it, for example, for a year or indicates they will no longer perform that particular procedure, the price collector should find a replacement procedure, preferably for the same medical purpose. The head office should then decide if it can be treated as a comparable item (see Figure 11.2). There is less need to price many types of medical services from the same doctor, when it is known that price movements among various medical services move closely together.

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Loose Specification Sampling and Tight Specification Pricing

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