Back Matter

## Abstract

The consumer price index (CPI) measures the rate at which the prices of consumer goods and services are changing over time. It is a key statistic for economic and social policymaking and has substantial and wide-ranging implications for governments, businesses, and households. This important and comprehensive Manual provides guidelines for statistical offices and other agencies responsible for constructing CPIs, and explains in-depth the methods that are used to calculate a CPI. It also examines the underlying economic and statistical concepts and principles needed for making choices in efficient and cost-effective ways, and for appreciating the full implications of those choices.

## A GLOSSARY OF MAIN TERMS

The appendix to this glossary gives the main aggregate index number formulae used for consumer price index (CPI) purposes and also explains the interrelationships between them.

### Appendix to the glossary. Some basic index number formulae and terminology

1. Throughout this Appendix, the sums are understood to be running over all items n.

A basket price index is an index of the form

$\frac{\mathrm{\Sigma }{p}_{n}^{t}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.1\right)$

which compares the prices of period t with those of (an earlier) price reference period 0, using a certain specified quantity basket. The basket does not have to consist of the actual quantities in any particular period. This general type of index is called a Lowe price index after the index number pioneer who first proposed this general type of index. The family of Lowe indices includes some well-known indices as special cases:

• when ${q}_{n}={q}_{n}^{0}$ we get the Laspeyres index;

• when ${q}_{n}={q}_{n}^{t}$ we get the Paasche index;

• when ${q}_{n}=\left({q}_{n}^{0}+{q}_{n}^{1}\right)/2$, we get the Marshall-Edgeworth index;

• and when ${q}_{n}={\left({q}_{n}^{0}{q}_{n}^{t}\right)}^{1/2}$ we get the Walsh index.

In practice, statistical offices frequently work with a Lowe index in which ${q}_{n}={q}_{n}^{b}$, where b denotes some weight reference period that is typically prior to 0.

2. A useful feature of a Lowe index for period t relative to period 0 is that it can be decomposed, or factored, into the product of two or more indices of the same type: for instance, as the product of an index for period t— 1 relative to period 0 and an index for period t relative to period t— 1. Formally,

$\frac{\mathrm{\Sigma }{p}_{n}^{t}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}=\frac{\mathrm{\Sigma }{p}_{n}^{t-1}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}\frac{\mathrm{\Sigma }{p}_{n}^{t}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{t-1}{q}_{n}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.2\right)$

In particular, when ${q}_{n}={q}_{n}^{0}$, expression (2) turns into

$\frac{\mathrm{\Sigma }{p}_{n}^{t}{q}_{n}^{0}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}^{0}}=\frac{\mathrm{\Sigma }{p}_{n}^{t-1}{q}_{n}^{0}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}^{0}}\frac{\mathrm{\Sigma }{p}_{n}^{t}{q}_{n}^{0}}{\mathrm{\Sigma }{p}_{n}^{t-1}{q}_{n}^{0}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.3\right)$

The left-hand side of expression (3) is a direct Laspeyres index. Note that only the first of the indices that make up the right-hand side is itself a Laspeyres index, the second being a Lowe index for period t relative to period t— 1 that uses the quantity basket of period 0 (not /—I). Some statistical offices describe the index on the right-hand side of expression (3) as a modified Laspeyres index.

3. In a time series context, say when t runs from 1 to T, the series

$\frac{\mathrm{\Sigma }{p}_{n}^{1}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}},\frac{\mathrm{\Sigma }{p}_{n}^{2}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}},\dots ,\frac{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.4\right)$

is termed a series of fixed basket price indices. In particular, when ${q}_{n}={q}_{n}^{0}$ we get a series of Laspeyres indices.

4. At period T one could change to a new quantity basket q′, and calculate from this period onwards

$\frac{\mathrm{\Sigma }{p}_{n}^{T+1}{q}_{n}^{\prime }}{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}^{\prime }},\frac{\mathrm{\Sigma }{p}_{n}^{T+2}{q}_{n}^{\prime }}{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}^{\prime }},\frac{\mathrm{\Sigma }{p}_{n}^{T+1}{q}_{n}^{\prime }}{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}^{\prime }},\dots \phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.5\right)$

To relate the prices of periods T+ 1, T+ 2, T+ 3,… to those of period 0, chain linking can be used to transform the series (5) into a series of the form

$\frac{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}\frac{\mathrm{\Sigma }{p}_{n}^{T+1}{q}_{n}^{\prime }}{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}^{\prime }},\frac{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}\frac{\mathrm{\Sigma }{p}_{n}^{T+2}{q}_{n}^{\prime }}{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}^{\prime }},\frac{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}\frac{\mathrm{\Sigma }{p}_{n}^{T+3}{q}_{n}^{\prime }}{\mathrm{\Sigma }{p}_{n}^{T}{q}_{n}^{\prime }},\dots \phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.6\right)$

This could be termed a series of chain-linked fixed basket price indices. In particular, when ${q}_{n}={q}_{n}^{0}$ and ${q}_{n}^{t}={q}_{n}^{T}$, we get a series of chain-linked Laspeyres indices. Since the basket is changed at period T, the adjective fixed applies literally only over a certain number of time intervals. The basket is fixed from period 1 to period T, and is again fixed from period T+ 1 onwards. When the time intervals during which the basket is kept fixed are of the same length, such as one, two or five years, this feature can be made explicit by describing the index as an annual, bi-annual or five-yearly chain-linked fixed basket price index.

5. A weighted arithmetic-average price index (so-called to distinguish it from a geometric or other kind of average) is an index of the form

$\mathrm{\Sigma }{w}_{n}\left({p}_{n}^{t}/{p}_{n}^{0}\right)\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.7\right)$

which compares the prices of period t with those of period 0, using a certain set of weights adding up to 1. In particular, when the weights are the period b value shares

${w}_{n}={s}_{n}^{b}\equiv {p}_{n}^{b}{q}_{n}^{b}/\mathrm{\Sigma }{p}_{n}^{b}{q}_{n}^{b}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.8\right)$

we obtain the Young index.

Note that any basket price index (1) can be expressed in the form (7), since

$\frac{\mathrm{\Sigma }{p}_{n}^{t}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}=\mathrm{\Sigma }\frac{{p}_{n}^{0}{q}_{n}}{\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}}\frac{{p}_{n}^{t}}{{p}_{n}^{0}}.\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.9\right)$

When the weights are the period 0 value shares,

${w}_{n}={s}_{n}^{0}\equiv {p}_{n}^{0}{q}_{n}^{0}/\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}^{0}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.10\right)$

expression (7) turns into the Laspeyres index. When

${w}_{n}={p}_{n}^{0}{q}_{n}^{t}/\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}^{t}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.11\right)$

that is, hybrid period (0, t) value shares, we get the Paasche index.

One could also think of setting

${w}_{n}={s}_{n}^{b}\left({p}_{n}^{0}/{p}_{n}^{b}\right)/\mathrm{\Sigma }{s}_{n}^{b}\left({p}_{n}^{0}/{p}_{n}^{b}\right)={p}_{n}^{0}{q}_{n}^{b}/\mathrm{\Sigma }{p}_{n}^{0}{q}_{n}^{b}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.12\right)$

that is, price-updated period b value shares.

Note that hybrid value shares, such as given by expressions (11) or (12), are not observable but must be constructed.

6. In a time series context, when t runs from 1 to T, the series

$\mathrm{\Sigma }{w}_{n}\left({p}_{n}^{1}/{p}_{n}^{0}\right),\mathrm{\Sigma }{w}_{n}\left({p}_{n}^{2}/{p}_{n}^{0}\right),\dots ..,\mathrm{\Sigma }{w}_{n}\left({p}_{n}^{T}/{p}_{n}^{0}\right)\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.13\right)$

is termed a series of fixed weighted arithmetic-average price indices. In particular, when the weights are equal to the period 0 expenditure shares, we get a series of Laspeyres indices, and when the weights are equal to the price-updated period b expenditure shares, we get a series of Lowe indices in which the quantities in the basket are those of period b.

7. In period T one could change to a new set of weights w′, and calculate from this period onwards

$\mathrm{\Sigma }{w}_{n}^{\prime }\left({p}_{n}^{T+1}/{p}_{n}^{T}\right),\mathrm{\Sigma }{w}_{n}^{\prime }\left({p}_{n}^{T+2}/{p}_{n}^{T}\right),\mathrm{\Sigma }{w}_{n}^{\prime }\left({p}_{n}^{T+3}/{p}_{n}^{T}\right)\dots ..\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.14\right)$

or, using chain-linking to relate the prices of periods T + 1, T + 2, T + 3,…. to those of period 0,

$\mathrm{\Sigma }{w}_{n}\left({p}_{n}^{T}/{p}_{n}^{0}\right)\mathrm{\Sigma }{w}_{n}^{\prime }\left({p}_{n}^{T+1}/{p}_{n}^{T}\right),\mathrm{\Sigma }{w}_{n}\left({p}_{n}^{T}/{p}_{n}^{0}\right)\mathrm{\Sigma }{w}_{n}^{\prime }\left({p}_{n}^{T+2}/{p}_{n}^{T}\right),\dots ..\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(\mathrm{A}.15\right)$

This could be termed a series of chain-linked fixed weighted. When the time intervals during which the weights are kept arithmetic-average price indices. In particular, when ${w}_{n}={s}_{n}^{0}$ and ${w}_{n}^{t}={s}_{n}^{T}$ we get a series of chain-linked Laspeyres indices. When ${w}_{n}={s}_{n}^{b}\left({p}_{n}^{0}/{p}_{n}^{b}\right)/\mathrm{\Sigma }{s}_{n}^{b}\left({p}_{n}^{0}/{p}_{n}^{b}\right)$ and ${w}_{n}^{t}={s}_{n}^{b}\left({p}_{n}^{T}/{p}_{n}^{b\prime }\right)/\mathrm{\Sigma }{s}_{n}^{b\prime }\left({p}_{n}^{T}/{p}_{n}^{b\prime }\right)$ for some later period b′, we get a series of chain-linked Lowe indices.

8. Again, since the weights are changed at period T, the adjective fixed applies literally only over a certain number of time intervals. The weights are fixed from period 1 to period T, and are again fixed from period T + 1 onwards. When the time intervals during which the weights are kept fixed are of the same length, this feature can be made explicit by adding a temporal adjective, such as annual, bi-annual or five-yearly.

## Annex 1 Harmonized Indices of Consumer Prices (European Union)

### 1 Introduction

The Harmonized Indices of Consumer Prices (HICPs) are a set of European Union consumer price indices (CPIs) calculated according to a harmonized approach and a single set of definitions. This annex outlines the aims and history of the HICPs, summarizes the most important harmonized standards and notes some key items on the agenda for further harmonization. The HICP development project is ongoing. This annex describes the state of development of the HICPs at mid-2003. The HICPs have a legal basis in that their production, and many elements of the specific methodology to be used, are stated in and required by a series of legally binding European Union Regulations. References for the full set of HICP legal standards are given at the end of this annex.

### 1.1 The main HICPs

The HICPs on which most attention is focused are:

• the Monetary Union Index of Consumer Prices (MUICP)–an aggregate index covering the countries within the euro-zone;

• the European Index of Consumer Prices (EICP)–for the euro-zone plus the other European Union countries;

• the national HICPs–for each of the Member States of the European Union (EU).

Beyond these are also the European Economic Area Index of Consumer Prices (EEAICP) and HICPs for the individual EEA countries.

There are also interim HICPs for Candidate and, in particular, Acceding Countries.1 It is expected that once those countries accede to the EU their HICPs will be fully comparable to those of the existing Member States. The national HICPs are produced by the national statistical institutes, while the country-group aggregates are produced by Eurostat.

### 1.2 Uses of the HICPs

As explained elsewhere in this manual, CPIs have a variety of potential uses, for example for indexing social benefits or contracts, or as inputs to various types of economic analyses. The drive for the harmonization project has been the use of the HICPs as convergence criteria and the main measure for monitoring price stability in the euro-zone. The HICPs have been set up to provide the best measure for international comparisons of consumer price inflation within the EU and the euro-zone, for assessing price convergence and stability in the context of monetary policy analysis.

In the early stages of the project, the most important use of the HICPs was in the assessment of the price stability and price convergence required for entry into the European Economic and Monetary Union. More recently, the focus of interest has shifted towards country-group aggregates–and in particular the MUICP. This change of emphasis reflects the European Central Bank’s objective of price stability and the view that the HICPs are the most appropriate price measure for assessing price stability.

The focus of the HICPs on measuring price stability and convergence, and on international comparisons, does not mean that a wider range of users should not or cannot use HICPs for other purposes. Depending on the precise purpose the user has in mind, the HICPs may be the best available price statistics. All users of the HICPs should note, however, that the HICPs are revisable; the indices may change after the first results are published.

### 1.3 Brief history of the HICPs

On 23 October 1995, the European Union’s Council of Ministers adopted a Regulation providing the legal basis for the establishment of a harmonized methodology for compiling consumer price indices in the Member States and European Economic Area Countries.

This Regulation2 (hereinafter referred to as the HICP Framework Regulation) required HICPs to be produced and published, that they use a common reference base, employ a common coverage of consumer goods and services, and share a common classification. In the context of the HICP Framework Regulation, a series of specific implementing measures has been adopted.

As mentioned above, early in the harmonization project the most important use of the HICPs was for the application of the criterion of price stability in preparation for Economic and Monetary Union in Europe.

On 1 January 1999, Economic and Monetary Union began, with 11 countries participating in the single currency–the euro. From that date, there has been a common monetary policy, with common interest rates, operating within the euro-zone under the control of the European Central Bank (ECB).

The maintenance of price stability is the primary objective of the European System of Central Banks. The President of the ECB announced in October 19983 that it would be operating a flexible monetary policy strategy, ensuring price stability in the euro-zone based on a monetary reference value and a mix of other indicators. In this context, the Governing Council of the ECB stated: “Price stability shall be defined as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term.”

In 2003 the ECB reaffirmed its inflation target of October 1998, founded on the HICP for the euro-zone, and added that: “At the same time, the Governing Council agreed that in the pursuit of price stability it will aim to maintain inflation rates close to 2% over the medium term.”4

### 1.4 Stepwise harmonization

The HICP Framework Regulation laid down a stepwise approach to harmonization, whereby each step requiring specific implementing measures would be legislated in the form of further legally binding standards.

The HICP Framework Regulation established that the EU’s Statistical Programme Committee would act as the so-called Regulatory Committee, and would therefore be responsible for adopting the further harmonization standards to be given legal force. The Statistical Programme Committee is the most senior statistical committee of the EU, comprising the directors of the national statistical institutes.

### 1.5 Minimum standards

The approach taken to harmonization has been to build, as far as possible, on the EU Member States’ existing data sources and methodologies for their national CPIs. The legal standards typically take the form of minimum standards, whereby more than one solution to a harmonization issue may usually be allowed so long as comparability is not threatened.

Within this framework, by mid-2003, a series of 13 legally binding standards and some additional guidelines had been drawn up and implemented in collaboration with the EU Member States.

### 1.6 Compliance monitoring

Given the importance accorded to the accuracy, reliability and comparability of the HICPs in the EU, Eurostat operates a system of compliance monitoring to ensure that the legal framework is adhered to. This includes, in particular, compliance assessments on the basis of questionnaires and visits by Eurostat officials to the EU national statistical institutes to study in more detail their work on their HICPs.

### 2.1 Aim and scope of the HICPs

The aim of the HICPs was stated to be to measure inflation on a comparable basis, taking into account differences in national definitions. This, however, requires an operational definition of the term “inflation”.

Given the opinion and the needs of the HICPs’ main users, it was decided to compute the HICPs as Laspeyres-type price indices, based on the prices of goods and services available for purchase in the economic territory of each EU Member State for the purpose of directly satisfying consumer needs.

Based on this concept and by reference to national accounts, specifically the European System of Accounts (ESA 95), the coverage in practice of the HICPs was taken to be household final monetary consumption expenditure5 (HFMCE). This definition effectively prescribes the goods and services, the population and the geographic territory to be covered, as well as the prices and the weights to be used.

The HICP may thus be described as a Laspeyres-type “consumer inflation” or “pure price” index, which measures average price changes on the basis of the changed expenditure of maintaining the consumption pattern of households and the composition of the consumer population in the base or reference period.

The term “pure price index” indicates that it is only changes in prices that should be reflected in the HICP measure between the current and the base or reference period. The HICP is therefore not a cost of living index. That is, it is not intended to be a measure of the change in the minimum cost for achieving the same standard of living (i.e. constant utility) from two different consumption patterns realized in the two periods compared, and where factors other than pure price changes may enter the index.

### 2.2 Household final monetary consumption expenditure

The coverage of the HICPs is delimited by HFMCE, and so concerns that part of final consumption expenditure which is:

• by households irrespective of their nationality or residence status;

• in monetary transactions;

• on the economic territory of the EU Member State;

• on goods and services that are used for the direct satisfaction of individual needs or wants;

• in one or both of the time periods being compared.

The prices used in the HICP should be the prices paid by households to purchase individual goods and services in monetary transactions. The purchaser’s price is the price for the products that the purchaser actually pays at the time of purchase.

The weights of the HICP are the aggregate expenditures by households on any set of goods and services covered by the HICP, expressed as a proportion of the total expenditure on all goods and services within the coverage of the HICP.

The HICPs are classified according to the four-digit categories and sub-categories of the COICOP/HICP (Classification of Individual Consumption according to Purpose, adapted to the needs of HICPs).

### 2.3 Links to national accounts concepts

The concept of HFMCE not only specified the coverage, the prices and the weights for the HICP, but also established a link between HICPs and ESA 95 that has proved useful to analysts and policy-makers. HICP definitions follow ESA 95 wherever possible and when to do so is consistent with the aims and uses of the HICP.

That said, there are some differences between the coverage of the HICPs and that of household final consumption expenditure (HFCE) as defined by national accounts, in particular the treatment of owner-occupied housing. A full list of these differences is given below.

### 2.4 Some basic requirements for HICPs

The relative distribution of consumers’ expenditure on individual products varies from country to country. Hence, there is no uniform basket applying to all EU Member States. The weights used in the compilation of HICPs may relate to a reference period up to seven years prior to the current year. In practice, this results in a complete weight and sample revision of national HICPs in at least five-yearly intervals, taking into account that a period of about two years may be needed to integrate results of a full consumer expenditure survey. Adjustments must nevertheless be made each year for any especially large changes in expenditure patterns, to minimize any disparities that could arise from different update frequencies.

To keep the HICPs broadly in step with each other and up to date, new products must be included when they achieve a significant relative importance. HICPs must also be shown to be based on appropriate sampling procedures, taking into account the national diversity of products and prices.

The samples must be kept up to date, in particular by banning the practice whereby missing prices are simply assumed to be equal to the last observed prices. In order to measure pure price changes, the prices included in HICPs need to be adjusted for changes in the quality of goods and services. Certain inappropriate quality adjustment practices, such as so-called automatic linking, may not be used.

HICP aggregates for country groups are calculated as the weighted averages of the national HICPs, using the weights of the countries and sub-indices concerned. The weight of a country is its share of HFMCE in the total. For the MUICP the weights are all naturally expressed in euros, whereas for the EICP and the EEAICP the aggregations use purchasing power standards. The MUICP is treated as a single entity within the EICP and EEAICP aggregates.6

### 3.1 Goods and services

The coverage of goods and services in the HICPs has been expanded over time. The HICPs now cover virtually all of HMFCE. The main difference to the ESA 95 concept of HFCE is the exclusion of imputed expenditures of owner-occupied housing.

The initial coverage of goods and services in the HICPs, although fairly comprehensive, reflected for the most part what was common to the national consumer price indices. Since then, with considerable effort and cooperation by EU Member States, coverage has been extended to virtually all consumers’ expenditure, in the sense of HFMCE. In particular, the difficult areas of health, education and social protection services are now covered, as are insurance and financial services. These are included in the HICPs according to agreed definitions, thus ensuring comparability despite major institutional differences.

In the initial coverage of the HICPs,7 some difficult categories such as health and educational services, where there are major institutional differences between EU Member States, were not fully covered. In 1998 a further legal standard8 amended the initial coverage of goods and services and laid down a staged procedure to extend the coverage of the HICP. Another legal standard extending the coverage entered into effect with the index for January 2000.9 The next step took place with the publication of the January 2001 index.10

### 3.2 Geographic and population coverage

The HICP Framework Regulation required the HICPs to be based on the prices of goods and services available for purchase on the economic territory of the EU Member State for the purposes of directly satisfying consumer needs. As regards the economic territory and the consumers concerned, a harmonized definition of the geographic and population coverage of the HICP was necessary, both to achieve comparability and to avoid gaps or double counting when aggregating national HICPs.

In 1998 a legal standard11 specified that the HICP should cover all HFMCE which takes place on the economic territory of an EU Member State. In particular, HICP coverage should include expenditure by foreign visitors and expenditure by individuals living in institutions, but should exclude the expenditure by residents whilst in a foreign country (the so-called domestic concept). All private households should be included, irrespective of the area in which they live or their position in the income distribution. Expenditure incurred for business purposes should be excluded.

The choice of the domestic concept reflected the role of the MUICP in measuring price stability in the euro-zone. Price changes in the euro-zone are measured by aggregating price changes taking place within the individual EU Member States. Expenditure and price changes to be measured within the economic territory should include those affecting foreign visitors and exclude those affecting residents whilst in a foreign country.

It is an HICP requirement that HICPs should be compiled using weights which reflect the HFMCE of all households. HICPs which cover only a subset of households should nevertheless be regarded as comparable if this difference in practice accounts for less than one part per thousand of the total expenditure to be covered by the HICP.

### 4.1 Weights

The HICP Framework Regulation requires HICP weights to be sufficiently up to date to ensure comparability, whilst at the same time avoiding the cost of conducting household budget surveys more than every five years.

An HICP legal standard12 gives minimum standards for the quality of HICP weights. It aims to guarantee the quality of weights used to construct the HICP and minimize the disparities between HICPs which might arise from different update frequencies.

Concerning the quality of HICP weights, the weights should be sufficiently up to date to ensure comparability whilst avoiding unnecessary costs. Differences in the frequency of updating of the weights could, but not necessarily would, lead to differences in measured inflation and non-comparability. Imposing the cost of high precision for all weights or frequent updating of weights was not considered justified. On the other hand, it is difficult to be sure that an HICP using weights up to seven years old will provide a reliable and relevant measure of current inflation.

The legal standard on the quality of HICP weights requires a minimum action of review and adjustment to ensure that the quality of weights used to construct HICPs is sufficient. It establishes a comparability threshold in relation to the proposed reference practice.

The review requirement involves checking each year those weights which are judged to be most critical for reliability and relevance and, hence, for the comparability of the overall HICP. These are primarily the weights for index components where significant market changes have accompanied atypical price movements. Where a weight is identified as deficient, EU Member States should make an improved estimate and introduce an appropriate adjustment, from the following January index, where this would exceed the threshold effect of 0.1 percentage points (on average for one year compared with the previous year). The aim is to ensure that the adjusted weights are the best estimates that can be made on the information available.

### 4.2 Index formulae

The choice of the index formula to be used for the HICP is made at two levels:

• the level of the macro-formula; that is, the choice between a chained index with annual links and a fixed base index with links up to five years.

• the level of the micro-formula; within each level there is the issue of reference period, both for prices and for weights.

### 4.2.1 Macro index formula

The HICP is required to be a Laspeyres-type index.13 Although the HICPs produced by the EU Member States differ in detail, they can all be broadly described as Laspeyres-type indices. They are all price indices in which the month-to-month movements in prices are measured as an average of price indices using expenditure weights which are an appropriate reflection of the consumption pattern of the consumer population in the weight reference period.

In practice, there are three types of base period used in the construction of HICPs:

• the base period to which the volumes of the current expenditure weights refer (“weight reference period”);

• the base period from which the current price change is measured, i.e. the time reference of the prices used for the valuation of the volumes in the current weights (“index reference period”);

• the period in which the index base is set to 100 (“index base period”).

The HICP is, depending on to the macro-formula applied in practice for its computation, potentially a chained index. It should be stressed that this is the equivalent chain form of the fixed base index which simply allows chained and fixed indices to be expressed by a common formula. The chaining becomes effective if and only if there are changes to the weights currently used, for instance on the grounds of the review as required by the HICP standard on the quality of HICP weightings.14

In practice, some EU Member States compile fixed base HICPs, while others compute chain HICPs with annual weight updating. In order to obtain a set of HICPs with sub-indices allowing for consistent aggregations, it is necessary to present the HICPs as if they were all computed with the same formula. Hence, it was necessary to apply a common index base period and reference period.

By mid-2003, the HICP Framework Regulation defined the common index base period with 1996= 100. In order to obtain also a common index reference period, the weights are “price updated” to each December.

### 4.2.2 Elementary aggregates

An HICP legal standard15 defines elementary aggregates by reference to the expenditure or consumption covered by the most detailed level of stratification of the HICP, and within which reliable expenditure information is not available for weighting purposes. An elementary aggregate index is a price index for an elementary aggregate comprising only price data.

For the HICPs the ratio of geometric mean prices or the ratio of arithmetic mean prices are the two formulae which should be used within elementary aggregates. The arithmetic mean of price relatives may only be applied in exceptional cases and where it can be shown that it is comparable.

### 4.2.3 The level at which macro-aggregation changes into elementary aggregation

The level of elementary aggregation interacts with other design features such as sampling procedures and the availability of weighting information. Depending on the sources of the weights used, elementary aggregation may start at different levels in different countries in the product, geographic and outlet hierarchies.

Differences in national practices can affect the resulting HICPs but this issue was, in the first instance, not considered to be a priority for harmonization and no action has been undertaken up until now. This issue is likely to be taken up again as the harmonization process develops.

### 4.3 Sampling of prices

There are three important sampling dimensions to take into account:

• the item dimension;

• the outlet dimension;

• the regional dimension.

Each of these dimensions may in turn be divided into sampling stages.

In the product dimension, a selection or sample of representative items is sometimes first made within the national statistical office, and then a further selection is made by price collectors in the field. In the outlet dimension, there is often first a selection of geographical areas, followed by a sample of outlets being taken within each of them.

Random sampling is not easily achieved when it comes to the collection of prices for a CPI and in practice most EU Member States follow purposive sampling procedures for their HICPs. Irrespective of the sampling method used, small effective sampling sizes may lead to random errors of a size that in itself may constitute a comparability problem.

For Member States using purposive sampling, the numbers of elementary aggregates and of prices within the elementary aggregates give an indication of the degree of coverage of the universe of outlets and items.

HICPs should be constructed from target samples which take into account the weight of each Classification of Individual Consumption according to Purpose (COICOP)/HICP category. HICPs which have sufficient elementary aggregates to represent the diversity of items within the category and sufficient prices within each elementary aggregate to take account of the variation of price movements in the population are regarded as reliable and comparable.

Concerning the replacement of products and outlets, a replacement may take place because an item or an outlet has disappeared from the market or because an item or an outlet is no longer considered to be representative. Market developments with regard to products and outlets are likely to constitute an important source of non-comparability. However, there is an important interaction with the choice of the index formula and sampling practices here. For example, the use of tight as opposed to loose product specifications may lead to quite different issues in respect to quality adjustment.

### 5.1 Timing of entering purchaser prices into the HICP

Differences between Member States in the time of entering purchaser prices into the HICP may be particularly important for products where there is a significant time difference between the time of purchase, payment, or delivery and the time of consumption.

An HICP legal standard16 harmonized practices and made the compilation of the HICP more transparent by setting down detailed rules for the timing of entering purchaser prices into the HICP. It uses ESA 95 as the source of its definitions and it is consistent with the ESA 95 definitions in as far as they are consistent with the purposes of the HICP.

In particular, ESA 95 states that goods and services should in general be recorded when the payables are created, that is, when the purchaser incurs a liability to the seller. However, expenditure on services in ESA 95 is recorded when the delivery of the service is completed. In the HICP, volumes are generally valued at purchaser prices following the acquisition principle. This implies for the purposes of the HICP that prices for goods shall be entered into the HICP for the month in which they are observed, and that prices for services shall be entered into the HICP for the month in which the consumption of the service at the observed prices can commence.

### 5.2 The treatment of price reductions

An HICP legal standard17 lays down detailed rules for the treatment of price reductions. The standard reflects what was common practice in many EU Member States. The standard defines the general principles under which transient reductions in prices should be taken into account. It requires that price reductions must be: (i) attributable to the purchase of an individual good or service; (ii) available to all potential consumers with no special conditions attached; (iii) known to the buyer at the time when he or she entered into the agreement to buy the product concerned; and (iv) claimable at the time of purchase or within such a time period from the actual purchase that they might be expected to have a significant influence on the quantities buyers are willing to buy.

Further guidelines supplement the legal standard, giving advice on how various price reduction schemes should be treated, such as:

• sales prices (e.g. stock-clearing sales and closing-down sales, seasonal sales, end of range or line sales, and damaged, shop-soiled or defective goods);

• credit and payment arrangements: a zero-interest loan when buying a new durable;

• inducements in the form of extra quantities or gifts;

• discounts available only to a restricted group of households;

• regular rebates or refunds (e.g. bottle deposits);

• irregular rebates or refunds (e.g. loyalty rebates schemes and cards).

### 5.3 Missing observations

In order to ban practices which can lead to serious biases, EU Member States are asked to maintain and provide a statement of their target sample from month to month. Where prices are not observed, they must be estimated by an appropriate procedure.

A legal standard18 deals with minimum standards for price observation. Where the target sample requires monthly price observation, but observation fails because of the non-availability of the item or for any other reason, estimated prices may be used for the first or second month but replacement prices shall be used from the third month.

For the HICPs, quality change is said to occur whenever the Member State judges that a change in specification has resulted in a significant difference in utility (or functionality) to the consumer between a new variety or model of a good or service and the good or service previously selected for pricing. A quality change does not arise when there is a comprehensive revision of the HICP sample.

Quality adjustment is defined as the procedure of making an allowance for a quality change by increasing or reducing the observed current or reference prices by a factor or an amount equivalent to the value of that quality change.

Under the HICP legal standard19 EU Member States are required to examine their quality adjustment procedures and to avoid the so-called automatic linking method, which is equivalent to the assumption that the difference in price between two successive models is wholly attributable to a difference in quality.

Where quality changes occur, EU Member States should make appropriate quality adjustments based on explicit estimates of the value of the quality change. In the absence of national estimates, EU Member States should use Eurostat estimates where these are available and relevant. Eurostat should assist in this process by setting up a database of quality change estimates provided both by Member States themselves and from other sources. Where no estimates are available, price changes should be estimated as the whole difference between the price of the substitute and that of the item it has replaced. Furthermore, Member Sates are required to monitor the incidence of quality changes and the adjustments made in order to demonstrate their compliance.

Despite the existing legal standards, differences between HICPs may arise because the same changes in the physical characteristics of an item are still perceived and treated in different ways in different countries. This is not to say that the same quality characteristic must be valued to the same extent in different EU Member States, only that the principles and procedures for valuation should be harmonized. In practice, differences in quality adjustment procedures between countries may not average out across the goods and services covered by the indices. On the contrary, they are likely to cumulate to differences well in excess of 0.1 percentage points.

Quality adjustment is one of the most, if not the most, intractable harmonization issues for the HICP. Eurostat and the EU Member States are currently involved in both general and conceptual discussions of methods and in the examination of the results of empirical studies of quality change and quality adjustment.

### 5.5 Rejected price observations

HICP guidelines concerning the rejection of price observations specify the procedures to be followed for the validation and adjustment of price observations. The guidelines require that, in general, the prices reported by the price collectors should be accepted. Rejection or adjustment of reported prices, for example the correction of an unusually high or low price change, should not be carried out by automatic procedures, but only by reference to specific information on the individual price observation, such as a repeated observation. If, following a validation procedure, the reported price has nevertheless still to be rejected, the rejected price should be treated according to the rules for missing observations.

The guidelines leave it to the EU Member States to apply methods other than the specified methods. Where an EU Member State does not use the described methods, Eurostat may request it to show that the resulting HICP does not differ systematically from an HICP constructed in line with the described methods by more than 0.1 percentage points on average, taking one year against the previous year.

### 5.6 Newly significant goods and services

What is meant by the term “new goods” is not always precise. In particular, there is no sharp dividing-line between new models and varieties of previously existing products and genuinely new innovative products which fulfil needs that could not be fulfilled before.

Neither the formulae used to calculate the index, nor the frequency of renewing the basket of goods and services, can fully address the basic problem: the risk of bias if the introduction of new models and varieties is used as an occasion to implement price increases or decreases.

The HICP Framework Regulation20 contains a requirement to maintain the relevance of HICPs, meaning that steps must be taken to ensure that HICPs keep broadly in step with each other and are up to date in terms of market developments. The HICP legal standard concerning newly significant goods and services (NSGS) aims to ensure that new products are incorporated in the HICP as soon as they achieve a sales volume of one part per thousand of total consumers’ expenditure in the EU Member State.21

The term “newly significant” can be interpreted in a wide sense, that is in the sense of being new to the index.

There are two ways whereby new products are introduced into the HICP if they have gained a significant part of consumption:

• replacement: the new product replaces an already existing product that has lost importance, so a more up-to-date representative is brought into the sample;

• addition: the new product is brought into the index in addition to the products which are already covered, as representative for a purpose not yet represented in the index.

The HICP standard on NSGS relates to additions, not to replacements.

Additions are brought into the index for two main reasons:

• a new product (e.g. mobile phones), which had not been represented in the index, and would not normally be considered as a replacement because it was radically different from the existing products. It would be added as a new category within an existing category;

• a product had been previously available, but not explicitly represented in the index because the consumption of the product was too low. Inclusion is not undertaken as a replacement within a category, but by adding a new category within an existing category.

In the case of additions, the price of the new product is collected in addition to the already observed products; and the minimum standard on NSGS offers the following treatments:

• either adjust the weights of the relevant category of COICOP/HICP; or

• adjust the weights within the relevant category of COICOP/HICP; or

• assign part of the weight specifically to the new product (i.e. below the 4-digit level of COICOP/HICP).

### 5.7 Tariff prices

Many tariff prices faced by consumers relate to products which are or have been regulated by government, or are or have been provided in a monopoly or a monopoly-like situation. Changes are, however, taking place in many EU countries in such markets, as the markets are opened up, and it is important that the impact on consumer inflation is appropriately captured in the HICPs since such products account for a large proportion of the total expenditure.

HICP sub-indices involving tariff prices are, in practice, often obtained centrally or directly from suppliers such as major retail chains, or computed by the Member States based on data on tariff prices and their underlying consumption patterns provided by suppliers.

The requirement for the HICP was not only to determine what statistical standards are required to ensure that EU Member States measure the same price change in a comparable and reliable way, but also to give such legal powers as are necessary to ensure that Member States are in position to have access to the data they need.

An HICP legal standard22 lays down minimum standards for the treatment of tariffs:

• It clarifies the obligation of suppliers to provide Member States with the necessary data.23

• It defines the procedure to follow in the case of changes in the tariff structure. The HICP approach is based on the Laspeyres fixed basket concept, with consumption patterns as up to date as necessary to determine the immediate impact of the tariff change on the index population. The HICP should reflect the price change on the basis of the changed expenditure of maintaining the consumption pattern chosen by households prior to the given change in the tariff. The aim of this principle is to avoid showing the changes in the consumption pattern because of a change in a tariff.

### 5.8 Insurance

The initial coverage of the HICP included home-contents insurance and motor insurance. Since January 2000, the HICPs have also covered all insurance connected with the dwelling which is typically paid by the tenant, not only contents insurance, and private health, civil liability and travel insurance.24 Life insurance is excluded from the coverage of the HICP, as it is considered as a household saving.

In 1997, an HICP legal standard25 stated that the weights and prices for insurance should be measured net of claims. However, a price index for gross premiums may be used as a proxy or estimate for changes in the “prices” of net premiums.

As the initial legal standard still left scope for some procedural differences, a further standard26 was adopted in 1999. Following the HFMCE concept, the standard retained the net concept for insurance, reflecting the use of the HICP as a measure of consumer price inflation in terms of prices actually charged.

EU household budget surveys cover all expenditure, including expenditure financed out of claims. Hence, the use of the net concept avoids the possibility of double counting or gaps. It also ensures that the overall HICP measures the change in the price for the insurance service, and that the other sub-indices, in particular those for the purchase and the repair of vehicles, major household appliances and other durables, measure the change in price for the repair and replacement of such products.

### 5.8.1 Weights for insurance

According to the HICP legal standard,27 weights should reflect the so-called service charge. This is defined as follows:

Gross insurance premiums (net of insurance tax)

The actuarial provisions in the above definition are the technical provisions for outstanding risks which exist for almost any insurance type. The HICP legal standard also states that the weights should be based on average expenditure over three years. This is aimed at using more stable estimates of the service charge and minimizing the risk of negative weights.

According to ESA 95, payments as a result of claims are treated as current transfers from the insurance companies to policy-holders and other parties to the claim and, therefore, enter into households’ disposable income. The HICP standard28 on the treatment of insurance requires explicitly that the weights of other sub-indices (e.g. those for the purchase or repair of vehicles, for major household appliances and other durables) should include all expenditure financed out of claims where it is incurred by or on behalf of the household sector. If, for example, a damaged car is repaired then the expenditure should be reflected in the weight for car maintenance and repairs. The same holds true if the repair is paid directly by the insurance company, since the latter is considered to be acting on the policy-holder’s behalf.

### 5.8.2 Prices for insurance

As the net concept of insurance is not applicable at the individual consumer level for pricing in practice, and because the information is not available each month, gross premiums are followed. In practice, gross premiums (or the value of the insured good) are often indexed by the CPI or by other price or cost indices. This effect should be reflected in the HICP; the gross insurance premiums should not be adjusted to exclude this indexation.

Supplementary guidelines on insurance are in the process of being elaborated. They will aim at providing practical guidance on some further technically difficult areas.

### 5.9 Health, education and social protection services

Several HICP legal standards concern health, education and social protection services.29 The standards state that the purchaser prices of goods and services in the health, education and social protection sectors to be used in the HICP should, in accordance with the usual approach and with ESA 95, concern the amounts to be paid by consumers net of reimbursements. Reimbursements are defined as payments to households by government units, social security administrations or nonprofit institutions serving households, that are made as direct consequences of purchases of individually specified goods and services, initially paid for by households. Payments of claims to households by insurance companies do not constitute reimbursements.

The HICP sub-indices concerned should be calculated using a formula consistent with the Laspeyres type formula used for other sub-indices, i.e., they should reflect the price change on the basis of the changed expenditure of maintaining the consumption pattern of households and the composition of the consumer population in the base or reference period. In accordance with the Laspeyres principle and the HICP standards on tariff prices, changes in purchaser prices, which reflect changes in the rules determining them, should be shown as price changes in the HICP, as should changes in the purchaser prices resulting from changes in purchasers’ incomes.

If EU Member States choose to use a procedure which differs from that described above, they are required to describe the procedure before it is used so that it may be assessed against the legal standard.

### 5.10 Financial services

EU Member States had traditionally followed different practices in the measurement of prices for financial services in their national CPIs and applied different methods for defining the weights. There was scope for non-comparability by excluding service charges expressed as a proportion of transaction values. A harmonized methodology for the treatment of such charges was thus considered necessary.

The HICP legal standard concerning prices expressed as a proportion of transaction values provides some clarifications, in particular with respect to the coverage of administrative charges of “private pension funds and the like” and “estate agent fees”.

The standard says that where service charges are defined as a proportion of the transaction value, the purchaser prices should be defined as the proportion itself, multiplied by the value of a representative unit transaction in the base or reference period. The HICP should include charges expressed as a flat fee or flat rate but exclude interest payments and interest-like charges. Changes in purchaser prices which reflect changes in the rules determining them, as well as changes in the purchaser prices resulting from changes in the values of the representative unit transactions, should be shown as price changes in the HICP. The change in the values of the representative unit transactions may be estimated by the change in a price index which represents appropriately the unit transactions concerned.

Supplementary guidelines on financial services are in the process of being elaborated. These guidelines aim at providing practical guidance on some technically difficult issues in this area.

### 5.11 Data processing equipment

Prices for data processing equipment tend to differ very much from the development of the all-items HICP. At the same time, there has been a considerable increase in the relative importance of such equipment in HFMCE. In view of these circumstances and the significant differences in national practices in the treatment of data processing equipment, there was a need to establish some minimum common guidelines for the HICPs.

The HICP guidelines on data processing equipment specify that Member States should cover personal computers and associated items in their HICPs. Where direct sellers are a significant source of supply, they should be covered in addition to other outlets. Prices may be obtained from magazines instead of, or as well as, direct observation in retail outlets.

The HICP standards concerning the annual review of the weights31 are extended to verifying the weights to the level of the major components of the sub-index for data processing equipment. Those major components should comprise a component index for personal computers.

### 5.12 Owner-occupied housing

Measurement of the services provided by owner-occupied housing is a notoriously difficult issue for CPIs. It is sometimes stated that these services are not an issue that should concern consumer price indices, and sometimes that they are an issue and so should be covered, but that practical solutions concerning how they should be measured are elusive.

In the HICPs, the imputed prices for the services provided by owner-occupied housing are currently excluded. The exclusion of imputed services relating to owner-occupied housing has removed a potentially very important source of non-comparability between HICPs. It should be noted that, for their national CPIs, EU Member States use a variety of methods-for example, some use an approach involving imputed rents, some include mortgage interest in their CPI, while others entirely exclude the shelter costs of owner-occupiers. Other monetary consumption expenditures related to owner-occupied housing, for example, expenditure on minor property maintenance and repairs, are included in the HICP.

Currently a price index based on the net acquisitions of housing by the consumers is being piloted for possible inclusion in the HICP in future. It will be compiled separately from the HICPs on an experimental basis before any decision is made to incorporate it within the HICPs.

### 5.13 Revisions

Since the main purpose of the HICP is to inform the monetary policy for the euro-zone by the ECB, and the HICP is a revisable index, a clear and transparent policy with respect to revisions is of paramount importance. Also, for the HICP harmonization process, a decision was necessary on how to implement improvements whilst at the same time minimizing the difficulties caused to users by introducing discontinuities into the published HICP series.

A legal standard32 states that the published HICP series may be revised for mistakes, new or improved information, and changes in the system of harmonized rules. In particular:

• Mistakes should be corrected and any revisions that may result from such corrections should be implemented without unnecessary delay.

• New or improved information, for example a more up-to-date weighting structure, may result in revisions which should be implemented, provided that Eurostat does not oppose the timing of the revisions to be made.

• Changes in the system of harmonized rules should not require revisions of published HICPs unless otherwise stated in the particular implementing measure. The impact of such changes should be assessed. Only if it is likely that the impact is significant should the impact then be estimated for each of the 12 following months, starting with the index for January in which the change takes place.

### 6.1 Monetary expenditures

There are some differences between the concept of household final consumption expenditure (HFCE) used in national accounts and that of household final monetary consumption expenditure (HFMCE) used for the HICP. The HICP covers only the part of HFCE that is considered relevant to inflation measurement for monetary policy purposes, that is, only the part which involves actual monetary transactions. Imputed expenditures, in particular imputed services provided by owner-occupied shelter, are thus excluded from the HICP.

### 6.2 Domestic concept

For the HICP, HFMCE is defined on the domestic concept, while HFCE in national accounts is defined on the national concept. Thus HFMCE in the HICPs excludes household final monetary consumption expenditure by residents abroad, outside the economic territory of the EU Member State, but includes household final monetary consumption expenditure by non-residents on the economic territory of the EU Member State. HFMCE includes extraterritorial enclaves such as embassies and foreign military bases situated within the EU Member State but excludes territorial enclaves situated in the rest of the world.

### 6.3 Imputed expenditures and owner-occupied housing

As noted above, HFMCE excludes imputed services from owner-occupied housing. Also excluded are incomes in kind and own final consumption, to the extent that they are covered within HFCE, because they also do not involve monetary transactions.

### 6.4 Life insurance and pension funds

HFMCE excludes the service charge of life insurance and the administrative charges of private pension funds.

### 6.5 Commissions

HFMCE excludes commissions to estate agents in connection with the sale or purchase of non-financial assets. It includes payments for services of housing agents in connection with rental transactions.

### 6.6 Games of chance, prostitution and narcotics

On price measurement grounds, HFMCE is defined to exclude games of chance, prostitution and narcotics.

### 6.7 Time of recording

Both in HICPs and ESA 95, volumes are generally valued at purchaser prices, following the acquisition principle. However, expenditure on services in ESA 95 is recorded when the delivery of the service is completed, whilst service prices are recorded in the HICP in the month for which consumption at the observed prices can commence.

### 6.8 Household consumption deflator

The points listed above can result in differences between the national accounts deflator of HFCE and the HICP. Furthermore, there are differences between these two price measures regarding the index formulae and the weighting schemes applied. While the HICP is defined as a Laspeyres type price index, national accounts deflators are Paasche type indices. Deflators are used to derive volume indices that are of the Laspeyres type.

### 7.1 Full HICPs

The full set of HICPs is published each month according to a pre-announced schedule–in general between 17 and 19 days after the end of the month in question. This schedule has advanced significantly since the HICP was first published, as a result of a series of improvements to timeliness made in both the EU Member States and at Eurostat.

### 7.2 Flash estimate of the MUICP

Eurostat also publishes each month a flash estimate for the MUICP–the HICP for the euro-zone as a whole. This flash estimate is based on the results from the first countries to publish their national estimates and on energy price data. It gives an early indication of what the MUICP is likely to show when the full data set is available. The estimation procedure combines historical information with partial information on price developments in the most recent months to give a total index for the euro-zone. No detailed breakdown is available. Over the two years up to June 2003, the flash estimate exactly anticipated the full estimate 14 times, eight times differed by 0.1, and twice differed by 0.2 -the last time in April 2002. The MUICP flash estimate is generally released on the last working day of the month in question.

### 7.3 Data

The HICP data which are released each month cover the price indices themselves, annual average price indices and rates of change, and monthly and annual rates of change. None of these are seasonally adjusted.

As well as the all-items HICPs, the full range of around 100 COICOP/HICP indices for different goods and services are made available. The main headings are as follows:

• food;

• alcohol and tobacco;

• clothing;

• housing;

• household equipment;

• health;

• transport;

• communications;

• recreation and culture;

• education;

• hotels and restaurants;

• miscellaneous.

In addition, a series of special aggregates is released, including, for example:

• the MUICP, excluding energy;

• the MUICP, excluding energy, food, alcohol and tobacco;

• the MUICP, excluding unprocessed food;

• the MUICP, excluding energy and seasonal goods;

• the MUICP, excluding tobacco.

The weights for the component goods and services and the individual countries are also made available.

All of the HICPs, including the complete list of component indices and special aggregates, are accessible via the Eurostat web site33 and Euro-indicators web site.34

The Euro-indicators web site gives quick access to the latest headline figures and most important sub-indices. The Eurostat web site also gives access to the monthly news releases, more detailed data, and contact points in many countries through which comprehensive data can be obtained.

The Eurostat web site also gives access to the compendium of HICP reference documents,35 which contains detailed reports on the functioning of the HICP, in addition to the HICP legal standards and guidelines, and some technical notes.

### 8 Agenda for further harmonization

The progress made on the harmonization of CPIs does not mean that development is at an end. There are several major issues where further harmonization will still be necessary. Currently, work is in progress on:

• Quality adjustment and sampling: Eurostat and the EU Member States are following up an action plan concerning this subject. The aim is to agree on some more concrete best practices for a range of specific goods and services, in particular for cars, consumer durables, books and CDs, clothing, computers and telecommunications services. The existing HICP standard which addressed this issue in 1996 was only a first step–it is not in itself a sufficient guarantee of full comparability.

• Owner-occupied housing: the imputed expenditures for the consumption of the service provided by owner-occupied housing are currently excluded from the HICPs. Pilot calculations are being carried out using an approach based on the acquisition prices of housing that is new to the household sector–mainly newly constructed dwellings. Indices will be compiled separately from the HICPs on an experimental basis before any decision is made to incorporate them within the HICPs.

Other issues currently on the agenda include:

• minimum sampling standards in the field of price collection;

• more comprehensive systems to assess EU Member States’ compliance with the existing Regulations and other guidance. More comprehensive quality assurance of the HICP compilation process in the widest sense is needed;

• support for those countries seeking to join the EU, the Acceding and Candidate Countries, to ensure that their HICPs are fully comparable;

• the consolidation of the legal framework for HICPs, and the production in due course of a methodological manual to assist both compilers and users.

### 9 Regulations concerning HICPs (as at June 2003)

Council Regulation (EC) No 2494/95 of 23 October 1995 concerning Harmonized Indices of Consumer Prices (OJ L 257, 27.10.1995, p. 1).

Commission Regulation (EC) No. 1749/96 of 9 September 1996 on initial implementing measures for Council Regulation (EC) No. 2494/95 concerning Harmonized Indices of Consumer Prices (OJ L 229, 10.9.1996, p. 3).

Commission Regulation (EC) No. 2214/96 of 20 November 1996 concerning Harmonized Indices of Consumer Prices: transmission and dissemination of sub-indices of the HICP (OJ L 296, 21.11.1996, p. 8).

Commission Regulation (EC) No. 2454/97 of 10 December 1997 laying down detailed rules for the implementation of Council Regulation (EC) No. 2494/ 95 as regards minimum standards for the quality of HICP weightings (OJ L 340, 11.12.1997, p. 24).

Council Regulation (EC) No. 1687/98 of 20 July 1998 amending Commission Regulation (EC) No. 1749/96 concerning the coverage of goods and services of the Harmonized Index of Consumer Prices (OJ L 214, 31.7.1998, p. 12).

Council Regulation (EC) No. 1688/98 of 20 July 1998 amending Commission Regulation (EC) No. 1749/96 concerning the geographic and population coverage of the Harmonized Index of Consumer Prices (OJ L 214, 31.7.1998, p. 23).

Commission Regulation (EC) No. 2646/98 of 9 December 1998 laying down detailed rules for the implementation of Council Regulation (EC) No. 2494/ 95 as regards minimum standards for the treatment of tariffs in the Harmonized Index of Consumer Prices (OJ L335, 10.12.1998, p. 30).

Commission Regulation (EC) No. 1617/1999 of 23 July 1999 laying down detailed rules for the implementation of Council Regulation (EC) No. 2494/95 as regards minimum standards for the treatment of insurance in the Harmonized Index of Consumer Prices and modifying Commission Regulation (EC) No. 2214/ 96 (OJ L 192, 24.7.1999, p. 9).

Commission Regulation (EC) No. 1749/1999 of 23 July 1999 amending Regulation (EC) No. 2214/96, concerning the sub-indices of the Harmonized Indices of Consumer Prices (OJ L 214, 13.8.1999, p. 1–corrigenda published in OJ L 214, 13.8.1999, p. 1).

Council Regulation (EC) No. 2166/1999 of 8 October 1999 laying down detailed rules for the implementation of Regulation (EC) No. 2494/95 as regards minimum standards for the treatment of products in the health, education and social protection sectors in the Harmonized Index of Consumer Prices (OJ L 266, 14.10.1999, p. 1).

Commission Regulation (EC) No. 2601/2000 of 17 November 2000 laying down detailed rules for the implementation of Council Regulation (EC) No. 2494/ 95 as regards the timing of entering purchaser prices into the Harmonized Index of Consumer Prices (OJ L 300, 29.11.2000, p. 14).

Commission Regulation (EC) No. 2602/2000 of 17 November 2000 laying down detailed rules for the implementation of Council Regulation (EC) No. 2494/95 as regards minimum standards for the treatment of price reductions in the Harmonized Index of Consumer Prices (OJ L 300, 29.11.2000, p. 16).

Commission Regulation (EC) No. 1920/2001 of 28 September 2001 laying down detailed rules for the implementation of Council Regulation (EC) No. 2494/95 as regards minimum standards for the treatment of service charges proportional to transaction values in the Harmonized Index of Consumer Prices and amending Commission (EC) No. 2214/96. (OJ L 261, 29.9.2001, p. 46–corrigenda published in OJ L 295, 13.11.2001, p. 34).

Commission Regulation (EC) No. 1921/2001 of 28 September 2001 laying down detailed rules for the implementation of Council Regulation (EC) No. 2494/95 as regards minimum standards for revisions of the Harmonized Index of Consumer Prices and amending Regulation (EC) No. 2602/2000 (OJ L 261, 29.9.2001, p. 49–corrigenda published in OJ L 295, 13.11.2001, p. 34).

All these legal acts can be found on the following web site: http://europa.eu.int/celex/

The composition of the country groups at the end of 2003 is as follows:

Euro-zone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain.

EU countries: Euro-zone countries plus Denmark, Sweden, United Kingdom.

European Economic Area countries: EU countries plus Iceland, Norway.

Acceding countries: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia.

Candidate countries: Acceding countries plus Bulgaria, Romania, Turkey.

When countries accede to the EU or the euro-zone, the composition of those aggregates is revised accordingly.

Council Regulation (EC) No. 2494/95.

ECB press release of 13 Oct. 1998.

ECB press release of 8 May 2003.

Council Regulation (EC) No. 1688/98.

For technical notes see:

Eurostat News Release 21/97 of 5 March 1997, Harmonizing the way EU measures inflation.

Eurostat Memo 8/98 of 4 May 1998, New monetary union index of consumer prices (MUICP).

Eurostat Memo 02/00 of 18 February 2000, Improved EU Harmonized Index of Consumer Prices: Extended coverage and earlier release dates for the HICP.

Further details can be found in the Compendium of HICP reference documents : http://europa.eu.int/comm/eurostat/Public/datashop/print-catalogue/EN?catalogue=Eurostat&=KS-AO-01-005-_-I-EN

Commission Regulation (EC) No. 1749/96.

Council Regulation (EC) No. 1687/98.

Commission Regulation (EC) No. 1749/1999.

Commission Regulation (EC) No. 2166/1999.

Council Regulation (EC) No. 1688/98.

Commission Regulation (EC) No. 2454/97.

Council Regulation (EC) No. 2494/95, Article 9.

Commission Regulation (EC) No. 2454/97.

Commission Regulation (EC) No. 1749/96.

Commission Regulation (EC) No. 2601/2000.

Commission Regulation (EC) No. 2602/2000.

Commission Regulation (EC) No. 1749/96, Article 6.

Commission Regulation (EC) No. 1749/96.

Council Regulation (EC) No. 2494/95.

Commission Regulation (EC) No. 1749/96, Article 2(b).

Commission Regulation (EC) No. 2464/98.

The legal basis is provided by Council Regulation (EC) No. 2494/95.

Council Regulation (EC) No. 1687/98.

Commission Regulation (EC) No. 2214/97.

Commission Regulation (EC) No. 1617/1999.

Commission Regulation (EC) No. 1617/1999.

Commission Regulation (EC) No. 1617/1999.

Commission Regulation (EC) No. 1749/96, as amended by Council Regulation (EC) No. 1687/98, requires extended coverage in the health, education an d social protection sectors. Council Regulation (EC) No. 2166/1999 defines the methodological details.

30

Commission Regulation (EC) No. 1920/2001.

Commission Regulation (EC) No. 2454/97.

Commission Regulation (EC) No. 1921/2001.

## Annex 2 Classification of Individual Consumption according to Purpose (COICOP)-Extract

COICOP: BREAKDOWN OF INDIVIDUAL CONSUMPTION EXPENDITURE OF HOUSEHOLDS BY DIVISION AND GROUP

COICOP: DEFINITION BY CLASS

### 01.1 FOOD

The food products classified here are those purchased for consumption at home. The group excludes: food products sold for immediate consumption away from the home by hotels, restaurants, cafés, bars, kiosks, street vendors, automatic vending machines, etc. (11.1.1); cooked dishes prepared by restaurants for consumption off their premises (11.1.1); cooked dishes prepared by catering contractors whether collected by the customer or delivered to the customer’s home (11.1.1); and products sold specifically as pet foods (09.3.4).

### 01.1.1 Bread and cereals (ND)

• –Rice in all forms;

• –maize, wheat, barley, oats, rye and other cereals in the form of grain, flour or meal;

• –bread and other bakery products (crispbread, rusks, toasted bread, biscuits, gingerbread, wafers, waffles, crumpets, muffins, croissants, cakes, tarts, pies, quiches, pizzas, etc.);

• –mixes and doughs for the preparation of bakery products;

• –pasta products in all forms; couscous;

• –cereal preparations (cornflakes, oatflakes, etc.) and other cereal products (malt, malt flour, malt extract, potato starch, tapioca, sago and other starches).

Includes: farinaceous-based products prepared with meat, fish, seafood, cheese, vegetables or fruit.

Excludes: meat pies (01.1.2); fish pies (01.1.3); sweetcorn (01.1.7).

### 01.1.2 Meat (ND)

• - Fresh, chilled or frozen meat of:

• - bovine animals, swine, sheep and goat;

• - horse, mule, donkey, camel and the like;

• - poultry (chicken, duck, goose, turkey, guinea fowl);

• - hare, rabbit and game (antelope, deer, boar, pheasant, grouse, pigeon, quail, etc.);

• –fresh, chilled or frozen edible offal;

• –dried, salted or smoked meat and edible offal (sausages, salami, bacon, ham, pâté, etc.);

• –other preserved or processed meat and meat-based preparations (canned meat, meat extracts, meat juices, meat pies, etc.).

Includes: meat and edible offal of marine mammals (seals, walruses, whales, etc.) and exotic animals (kangaroo, ostrich, alligator, etc.); animals and poultry purchased live for consumption as food.

Excludes: land and sea snails (01.1.3); lard and other edible animal fats (01.1.5); soups, broths and stocks containing meat (01.1.9).

### 01.1.3 Fish and seafood (ND)

• –Fresh, chilled or frozen fish;

• –fresh, chilled or frozen seafood (crustaceans, molluscs and other shellfish, sea snails);

• –dried, smoked or salted fish and seafood;

• –other preserved or processed fish and seafood and fish and seafood-based preparations (canned fish and seafood, caviar and other hard roes, fish pies, etc.).

Includes: land crabs, land snails and frogs; fish and seafood purchased live for consumption as food.

Excludes: soups, broths and stocks containing fish and seafood (01.1.9).

### 01.1.4 Milk, cheese and eggs (ND)

• –Raw milk; pasteurized or sterilized milk;

• –condensed, evaporated or powdered milk;

• –yoghurt, cream, milk-based desserts, milk-based beverages and other similar milk-based products;

• –cheese and curd;

• –eggs and egg products made wholly from eggs.

Includes: milk, cream and yoghurt containing sugar, cocoa, fruit or flavourings; dairy products not based on milk such as soya milk.

Excludes: butter and butter products (01.1.5).

### 01.1.5 Oils and fats (ND)

• –Butter and butter products (butter oil, ghee, etc.);

• –margarine (including “diet” margarine) and other vegetable fats (including peanut butter);

• –edible oils (olive oil, corn oil, sunflower-seed oil, cottonseed oil, soybean oil, groundnut oil, walnut oil, etc.);

• –edible animal fats (lard, etc.).

Excludes: cod or halibut liver oil (06.1.1).

### 01.1.6 Fruit (ND)

• –Fresh, chilled or frozen fruit;

• –dried fruit, fruit peel, fruit kernels, nuts and edible seeds;

• –preserved fruit and fruit-based products.

Includes: melons and water melons.

Excludes: vegetables cultivated for their fruit such as aubergines, cucumbers and tomatoes (01.1.7); jams, marmalades, compotes, jellies, fruit purees and pastes (01.1.8); parts of plants preserved in sugar (01.1.8); fruit juices and syrups (01.2.2).

### 01.1.7 Vegetables (ND)

• –Fresh, chilled, frozen or dried vegetables cultivated for their leaves or stalks (asparagus, broccoli, cauliflower, endives, fennel, spinach, etc.), for their fruit (aubergines, cucumbers, courgettes, green peppers, pumpkins, tomatoes, etc.), and for their roots (beetroots, carrots, onions, parsnips, radishes, turnips, etc);

• –fresh or chilled potatoes and other tuber vegetables (manioc, arrowroot, cassava, sweet potatoes, etc);

• –preserved or processed vegetables and vegetable-based products;

• –products of tuber vegetables (flours, meals, flakes, purees, chips and crisps) including frozen preparations such as chipped potatoes.

Includes: olives; garlic; pulses; sweetcorn; sea fennel and other edible seaweed; mushrooms and other edible fungi.

Excludes: potato starch, tapioca, sago and other starches (01.1.1); soups, broths and stocks containing vegetables (01.1.9); culinary herbs (parsley, rosemary, thyme, etc.) and spices (pepper, pimento, ginger, etc.) (01.1.9); vegetable juices (01.2.2).

### 01.1.8 Sugar, jam, honey, chocolate and confectionery (ND)

• –Cane or beet sugar, unrefined or refined, powdered, crystallized or in lumps;

• –jams, marmalades, compotes, jellies, fruit purees and pastes, natural and artificial honey, maple syrup, molasses and parts of plants preserved in sugar;

• –chocolate in bars or slabs, chewing gum, sweets, toffees, pastilles and other confectionery products;

• –cocoa-based foods and cocoa-based dessert preparations;

• –edible ice, ice cream and sorbet.

Includes: artificial sugar substitutes.

Excludes: cocoa and chocolate-based powder (01.2.1).

### 01.1.9 Food products n.e.c. (ND)

• –Salt, spices (pepper, pimento, ginger, etc.), culinary herbs (parsley, rosemary, thyme, etc.), sauces, condiments, seasonings (mustard, mayonnaise, ketchup, soy sauce, etc.), vinegar;

• –prepared baking powders, baker’s yeast, dessert preparations, soups, broths, stocks, culinary ingredients, etc.;

• –homogenized baby food and dietary preparations irrespective of the composition.

Excludes: milk-based desserts (01.1.4); soya milk (01.1.4); artificial sugar substitutes (01.1.8); cocoa-based dessert preparations (01.1.8).

### 01.2 NON-ALCOHOLIC BEVERAGES

The non-alcoholic beverages classified here are those purchased for consumption at home. The group excludes non-alcoholic beverages sold for immediate consumption away from the home by hotels, restaurants, cafes, bars, kiosks, street vendors, automatic vending machines, etc. (11.1.1).

### 01.2.1 Coffee, tea and cocoa (ND)

• –Coffee, whether or not decaffeinated, roasted or ground, including instant coffee;

• –tea, maté and other plant products for infusions;

• –cocoa, whether or not sweetened, and chocolate-based powder.

Includes: cocoa-based beverage preparations; coffee and tea substitutes; extracts and essences of coffee and tea.

Excludes: chocolate in bars or slabs (01.1.8); cocoa-based food and cocoa-based dessert preparations (01.1.8).

### 01.2.2 Mineral waters, soft drinks, fruit and vegetable juices (ND)

• –Mineral or spring waters; all drinking water sold in containers;

• –soft drinks such as sodas, lemonades and colas;

• –fruit and vegetable juices;

• –syrups and concentrates for the preparation of beverages.

Excludes: non-alcoholic beverages which are generally alcoholic such as non-alcoholic beer (02.1).

### 02.1 ALCOHOLIC BEVERAGES

The alcoholic beverages classified here are those purchased for consumption at home. The group excludes alcoholic beverages sold for immediate consumption away from the home by hotels, restaurants, cafes, bars, kiosks, street vendors, automatic vending machines, etc. (11.1.1).

The beverages classified here include low- or non-alcoholic beverages which are generally alcoholic such as non-alcoholic beer.

### 02.1.1 Spirits (ND)

• –Eaux-de-vie, liqueurs and other spirits.

Includes: mead; aperitifs other than wine-based aperitifs (02.1.2).

### 02.1.2 Wine (ND)

• –Wine, cider and perry, including sake;

• –wine-based aperitifs, fortified wines, champagne and other sparkling wines.

### 02.1.3 Beer (ND)

• –All kinds of beer such as ale, lager and porter.

Includes: low-alcoholic beer and non-alcoholic beer; shandy.

### 02.2 TOBACCO

This group covers all purchases of tobacco by households, including purchases of tobacco in restaurants, cafes, bars, service stations, etc.

### 02.2.0 Tobacco (ND)

• –Cigarettes; cigarette tobacco and cigarette papers;

• –cigars, pipe tobacco, chewing tobacco or snuff.

Excludes: other smokers’ articles (12.3.2).

### 02.3.0 Narcotics (ND)

• –Marijuana, opium, cocaine and their derivatives;

• –other vegetable-based narcotics such as cola nuts, betel leaves and betel nuts;

• –other narcotics including chemicals and man-made drugs.

### 03.1.1 Clothing materials (SD)

• –Clothing materials of natural fibres, of man-made fibres and of their mixtures.

Excludes: furnishing fabrics (05.2.0).

### 03.1.2 Garments (SD)

• –Garments for men, women, children (3 to 13 years) and infants (0 to 2 years), either ready-to-wear or made-to-measure, in all materials (including leather, furs, plastics and rubber), for everyday wear, for sport or for work:

• - capes, overcoats, raincoats, anoraks, parkas, blousons, jackets, trousers, waistcoats, suits, costumes, dresses, skirts, etc.;

• - shirts, blouses, pullovers, sweaters, cardigans, shorts, swimsuits, tracksuits, jogging suits, sweatshirts, T-shirts, leotards, etc.;

• - vests, underpants, socks, stockings, tights, petticoats, brassieres, knickers, slips, girdles, corsets, body stockings, etc.;

• - pyjamas, nightshirts, nightdresses, housecoats, dressing gowns, bathrobes, etc.;

• - baby clothes and babies’ booties made of fabric.

Excludes: articles of medical hosiery such as elasticated stockings (06.1.2); babies’ napkins (12.1.3).

### 03.1.3 Other articles of clothing and clothing accessories (SD)

• –Ties, handkerchiefs, scarves, squares, gloves, mittens, muffs, belts, braces, aprons, smocks, bibs, sleeve protectors, hats, caps, berets, bonnets, etc.;

• –sewing threads, knitting yarns and accessories for making clothing such as buckles, buttons, press studs, zip fasteners, ribbons, laces, trimmings, etc.

Includes: gardening gloves and working gloves; crash helmets for motorcycles and bicycles.

Excludes: gloves and other articles made of rubber (05.6.1); pins, safety pins, sewing needles, knitting needles, thimbles (05.6.1); protective headgear for sports (09.3.2); other protective gear for sports such as life jackets, boxing gloves, body padding, belts, supports, etc. (09.3.2); paper handkerchiefs (12.1.3); watches, jewellery, cuff links, tiepins (12.3.1); walking sticks and canes, umbrellas and parasols, fans, keyrings (12.3.2).

### 03.1.4 Cleaning, repair and hire of clothing (S)

• –Dry-cleaning, laundering and dyeing of garments;

• –darning, mending, repair and altering of garments;

• –hire of garments.

Includes: total value of the repair service (that is, both the cost of labour and the cost of materials are covered).

Excludes: materials, threads, accessories, etc. purchased by households with the intention of undertaking the repairs themselves (03.1.1) or (03.1.3); repair of household linen and other household textiles (05.2.0); dry-cleaning, laundering, dyeing and hiring of household linen and other household textiles (05.6.2).

### 03.2.1 Shoes and other footwear (SD)

• –All footwear for men, women, children (3 to 13 years) and infants (0 to 2 years) including sports footwear suitable for everyday or leisure wear (shoes for jogging, cross-training, tennis, basket ball, boating, etc.).

Includes: gaiters, leggings and similar articles; shoelaces; parts of footwear, such as heels, soles, etc., purchased by households with the intention of repairing footwear themselves.

Excludes: babies’ booties made of fabric (03.1.2); shoe-trees, shoehorns and polishes, creams and other shoe-cleaning articles (05.6.1); orthopaedic footwear (06.1.3); game-specific footwear (ski boots, football boots, golfing shoes and other such footwear fitted with ice-skates, rollers, spikes, studs, etc.) (09.3.2); shin-guards, cricket pads and other such protective secarel for sport (09.3.2).

### 03.2.2 Repair and hire of footwear (S)

• –Repair of footwear; shoe-cleaning services;

• –hire of footwear.

Includes: total value of the repair service (that is, both the cost of labour and the cost of materials are covered).

Excludes: parts of footwear, such as heels, soles, etc., purchased by households with the intention of undertaking the repair themselves (03.2.1); polishes, creams and other shoe-cleaning articles (05.6.1); repair (09.3.2) or hire (09.4.1) of game-specific footwear (ski boots, football boots, golfing shoes and other such footwear fitted with ice-skates, rollers, spikes, studs, etc.).

### 04.1 ACTUAL RENTALS FOR HOUSING

Rentals normally include payment for the use of the land on which the property stands, the dwelling occupied, the fixtures and fittings for heating, plumbing, lighting, etc., and, in the case of a dwelling let furnished, the furniture.

Rentals also include payment for the use of a garage to provide parking in connection with the dwelling. The garage does not have to be physically contiguous to the dwelling; nor does it have to be leased from the same landlord.

Rentals do not include payment for the use of garages or parking spaces not providing parking in connection with the dwelling (07.2.4). Nor do they include charges for water supply (04.4.1), refuse collection (04.4.2) and sewage collection (04.4.3); co-proprietor charges for caretaking, gardening, stairwell cleaning, heating and lighting, maintenance of lifts and refuse disposal chutes, etc. in multi-occupied buildings (04.4.4); charges for electricity (04.5.1) and gas (04.5.2); charges for heating and hot water supplied by district heating plants (04.5.5).

### 04.1.1 Actual rentals paid by tenants (S)

• –Rentals actually paid by tenants or subtenants occupying unfurnished or furnished premises as their main residence.

Includes: payments by households occupying a room in a hotel or boarding house as their main residence.

Excludes: accommodation services of educational establishments and hostels (11.2.0) and of retirement homes for elderly persons (12.4.0).

### 04.1.2 Other actual rentals (S)

• –Rentals actually paid for secondary residences.

Excludes: accommodation services of holiday villages and holiday centres (11.2.0).

### 04.2 IMPUTED RENTALS FOR HOUSING

For coverage see note to (04.1) above.

### 04.2.1 Imputed rentals of owner-occupiers (S)

• –Imputed rentals of owners occupying their main residence.

### 04.2.2 Other imputed rentals (S)

• –Imputed rentals for secondary residences;

• –imputed rentals of households paying a reduced rental or housed free.

### 04.3 MAINTENANCE AND REPAIR OF THE DWELLING

Maintenance and repair of dwellings are distinguished by two features: first, they are activities that have to be undertaken regularly in order to maintain the dwelling in good working order; second, they do not change the dwelling’s performance, capacity or expected service life.

There are two types of maintenance and repair of dwellings: those which are minor, such as interior decoration and repairs to fittings, and which are commonly carried out by both tenants and owners; and those which are major, such as replastering walls or repairing roofs, and which are carried out by owners only.

Only expenditures which tenants and owner-occupiers incur on materials and services for minor maintenance and repair are part of individual consumption expenditure of households. Expenditures which owner-occupiers incur on materials and services for major maintenance and repair are not part of individual consumption expenditure of households.

Purchases of materials made by tenants or owner-occupiers with the intention of undertaking the maintenance or repair themselves should be shown under (04.3.1). If tenants or owner-occupiers pay an enterprise to carry out the maintenance or repair, the total value of the service, including the costs of the materials used, should be shown under (04.3.2).

### 04.3.1 Materials for the maintenance and repair of the dwelling (ND)

• –Products and materials, such as paints and varnishes, renderings, wallpapers, fabric wall coverings, window panes, plaster, cement, putty, wallpaper pastes, etc., purchased for minor maintenance and repair of the dwelling.

Includes: small plumbing items (pipes, taps, joints, etc.), surfacing materials (floorboards, ceramic tiles, etc.) and brushes and scrapers for paint, varnish and wallpaper.

Excludes: fitted carpets and linoleum (05.1.2); hand tools, door fittings, power sockets, wiring flex and lamp bulbs (05.5.2); brooms, scrubbing brushes, dusting brushes and cleaning products (05.6.1); products, materials and fixtures used for major maintenance and repair (intermediate consumption) or for extension and conversion of the dwelling (capital formation).

### 04.3.2 Services for the maintenance and repair of the dwelling (S)

• –Services of plumbers, electricians, carpenters, glaziers, painters, decorators, floor polishers, etc. engaged for minor maintenance and repair of the dwelling.

Includes: total value of the service (that is, both the cost of labour and the cost of materials are covered).

Excludes: separate purchases of materials made by households with the intention of undertaking the maintenance or repair themselves (04.3.1); services engaged for major maintenance and repair (intermediate consumption) or for extension and conversion of the dwelling (capital formation).

### 04.4.1 Water supply (ND)

• –Water supply.

Includes: associated expenditure such as hire of meters, reading of meters, standing charges, etc.

Excludes: drinking water sold in bottles or containers (01.2.2); hot water or steam purchased from district heating plants (04.5.5).

### 04.4.2 Refuse collection (S)

• –Refuse collection and disposal.

### 04.4.3 Sewage collection (S)

• –Sewage collection and disposal.

### 04.4.4 Other services relating to the dwelling n.e.c. (S)

• –Co-proprietor charges for caretaking, gardening, stairwell cleaning, heating and lighting, maintenance of lifts and refuse disposal chutes, etc. in multi-occupied buildings;

• –security services;

• –snow removal and chimney sweeping.

Excludes: household services such as window cleaning, disinfecting, fumigation and pest extermination (05.6.2); bodyguards (12.7.0).

### 04.5.1 Electricity (ND)

• –Electricity.

Includes: associated expenditure such as hire of meters, reading of meters, standing charges, etc.

### 04.5.2 Gas (ND)

• –Town gas and natural gas;

• –liquefied hydrocarbons (butane, propane, etc.).

Includes: associated expenditure such as hire of meters, reading of meters, storage containers, standing charges, etc.

### 04.5.3 Liquid fuels (ND)

• –Domestic heating and lighting oils.

### 04.5.4 Solid fuels (ND)

• –Coal, coke, briquettes, firewood, charcoal, peat and the like.

### 04.5.5 Heat energy (ND)

• –Hot water and steam purchased from district heating plants.

Includes: associated expenditure such as hire of meters, reading of meters, standing charges, etc.; ice used for cooling and refrigeration purposes.

### 05.1.1 Furniture and furnishings (D)

• –Beds, sofas, couches, tables, chairs, cupboards, chests of drawers and bookshelves;

• –lighting equipment such as ceiling lights, standard lamps, globe lights and bedside lamps;

• –pictures, sculptures, engravings, tapestries and other art objects including reproductions of works of art and other ornaments;

• –screens, folding partitions and other furniture and fixtures.

Includes: delivery and installation when applicable; base mattresses, mattresses, tatamis; bathroom cabinets; baby furniture such as cradles, high chairs and playpens; blinds; camping and garden furniture; mirrors, candleholders and candlesticks.

Excludes: bedding and sunshades (05.2.0); safes (05.3.1); ornamental glass and ceramic articles (05.4.0); clocks (12.3.1); wall thermometers and barometers (12.3.2); carrycots and pushchairs (12.3.2); works of art and antique furniture acquired primarily as stores of value (capital formation).

### 05.1.2 Carpets and other floor coverings (D)

• –Loose carpets, fitted carpets, linoleum and other such floor coverings.

Includes: laying of floor coverings.

Excludes: bathroom mats, rush mats and doormats (05.2.0); antique floor coverings acquired primarily as stores of value (capital formation).

### 05.1.3 Repair of furniture, furnishings and floor coverings (S)

• –Repair of furniture, furnishings and floor coverings.

Includes: total value of the service (that is, both the cost of labour and the cost of materials are covered); restoration of works of art, antique furniture and antique floor coverings other than those acquired primarily as stores of value (capital formation).

Excludes: separate purchases of materials made by households with the intention of undertaking the repair themselves (05.1.1) or (05.1.2); dry-cleaning of carpets (05.6.2).

### 05.2.0 Household textiles (SD)

• –Furnishing fabrics, curtain material, curtains, double curtains, awnings, door curtains and fabric blinds;

• –bedding such as futons, pillows, bolsters and hammocks;

• –bedlinen such as sheets, pillowcases, blankets, travelling rugs, plaids, eiderdowns, counterpanes and mosquito nets;

• –table linen and bathroom linen such as tablecloths, table napkins, towels and face cloths;

• –other household textiles such as shopping bags, laundry bags, shoe bags, covers for clothes and furniture, flags, sunshades, etc.;

• –repair of such articles.

Includes: cloth bought by the piece; oilcloth; bathroom mats, rush mats and doormats.

Excludes: fabric wall coverings (04.3.1); tapestries (05.1.1); floor coverings such as carpets and fitted carpets (05.1.2); electric blankets (05.3.2); covers for motor cars, motorcycles, etc. (07.2.1); air mattresses and sleeping bags (09.3.2).

### 05.3.1 Major household appliances whether electric or not (D)

• –Refrigerators, freezers and fridge-freezers;

• –washing machines, dryers, drying cabinets, dishwashers, ironing and pressing machines;

• –cookers, spit roasters, hobs, ranges, ovens and microwave ovens;

• –air-conditioners, humidifiers, space heaters, water heaters, ventilators and extractor hoods;

• –vacuum cleaners, steam-cleaning machines, carpet shampooing machines and machines for scrubbing, waxing and polishing floors;

• –other major household appliances such as safes, sewing machines, knitting machines, water softeners, etc.

Includes: delivery and installation of the appliances when applicable.

Excludes: such appliances that are built into the structure of the building (capital formation).

### 05.3.2 Small electric household appliances (SD)

• –Coffee mills, coffee-makers, juice extractors, can-openers, food mixers, deep fryers, meat grills, knives, toasters, ice cream makers, sorbet makers, yoghurt makers, hotplates, irons, kettles, fans, electric blankets, etc.

Excludes: small non-electric household articles and kitchen utensils (05.4.0); household scales (05.4.0); personal weighing machines and baby scales (12.1.3).

### 05.3.3 Repair of household appliances (S)

• –Repair of household appliances.

Includes: total value of the service (that is, both the cost of labour and the cost of materials are covered); charges for the leasing or rental of major household appliances.

Excludes: separate purchases of materials made by households with the intention of undertaking the repair themselves (05.3.1) or (05.3.2).

### 05.4.0 Glassware, tableware and household utensils (SD)

• –Glassware, crystal ware, ceramic ware and china ware of the kind used for table, kitchen, bathroom, toilet, office and indoor decoration;

• –cutlery, flatware and silverware;

• –non-electric kitchen utensils of all materials such as saucepans, stewpots, pressure cookers, frying pans, coffee mills, purée makers, mincers, hotplates, household scales and other such mechanical devices;

• –non-electric household articles of all materials such as containers for bread, coffee, spices, etc., waste bins, waste-paper baskets, laundry baskets, portable money boxes and strongboxes, towel rails, bottle racks, irons and ironing boards, letter boxes, feeding bottles, thermos flasks and iceboxes;

• –repair of such articles.

Excludes: lighting equipment (05.1.1); electric household appliances (05.3.1) or (05.3.2); cardboard tableware (05.6.1); personal weighing machines and baby scales (12.1.3); ashtrays (12.3.2).

### 05.5.1 Major tools and equipment (D)

• –Motorized tools and equipment such as electric drills, saws, sanders and hedge cutters, garden tractors, lawnmowers, cultivators, chainsaws and water pumps;

• –repair of such articles.

Includes: charges for the leasing or rental of do-it-yourself machinery and equipment.

### 05.5.2 Small tools and miscellaneous accessories (SD)

• –Hand tools such as saws, hammers, screwdrivers, wrenches, spanners, pliers, trimming knives, rasps and files;

• –garden tools such as wheelbarrows, watering cans, hoses, spades, shovels, rakes, forks, scythes, sickles and secateurs;

• –door fittings (hinges, handles and locks), fittings for radiators and fireplaces, other metal articles for the house (curtain rails, carpet rods, hooks, etc.) or for the garden (chains, grids, stakes and hoop segments for fencing and bordering);

• –small electric accessories such as power sockets, switches, wiring flex, electric bulbs, fluorescent lighting tubes, torches, flashlights, hand lamps, electric batteries for general use, bells and alarms;

• –repair of such articles.

### 05.6.1 Non-durable household goods (ND)

• –Cleaning and maintenance products such as soaps, washing powders, washing liquids, scouring powders, detergents, disinfectant bleaches, softeners, conditioners, window-cleaning products, waxes, polishes, dyes, unblocking agents, disinfectants, insecticides, pesticides, fungicides and distilled water;

• –articles for cleaning such as brooms, scrubbing brushes, dustpans and dust brushes, dusters, tea towels, floorcloths, household sponges, scourers, steel wool and chamois leathers;

• –paper products such as filters, tablecloths and table napkins, kitchen paper, vacuum cleaner bags and cardboard tableware, including aluminium foil and plastic bin liners;

• –other non-durable household articles such as matches, candles, lamp wicks, methylated spirits, clothes-pegs, clothes hangers, pins, safety pins, sewing needles, knitting needles, thimbles, nails, screws, nuts and bolts, tacks, washers, glues and adhesive tapes for household use, string, twine and rubber gloves.

Includes: polishes, creams and other shoe-cleaning articles; fire extinguishers for households.

Excludes: brushes and scrapers for paint, varnish and wallpaper (04.3.1); fire extinguishers for transport equipment (07.2.1); products specifically for the cleaning and maintenance of transport equipment such as paints, chrome cleaners, sealing compounds and bodywork polishes (07.2.1); horticultural products for the upkeep of ornamental gardens (09.3.3); paper handkerchiefs, toilet paper, toilet soaps, toilet sponges and other products for personal hygiene (12.1.3); cigarette, cigar and pipe lighters and lighter fuel (12.3.2).

### 05.6.2 Domestic services and household services (S)

• –Domestic services supplied by paid staff employed in private service such as butlers, cooks, maids, drivers, gardeners, governesses, secretaries, tutors and au pairs;

• –similar services, including babysitting and housework, supplied by enterprises or self-empioyed persons;

• –household services such as window cleaning, disinfecting, fumigation and pest extermination;

• –dry-cleaning, laundering and dyeing of household linen, household textiles and carpets;

• –hire of furniture, furnishings, carpets, household equipment and household linen.

Excludes: dry-cleaning, laundering and dyeing of garments (03.1.4); refuse collection (04.4.2); sewerage collection (04.4.3); co-proprietor charges for caretaking, gardening, stairwell cleaning, heating and lighting, maintenance of lifts and refuse disposal chutes, etc. in multi-occupied buildings (04.4.4); security services (04.4.4); snow removal and chimney sweeping (04.4.4); removal and storage services (07.3.6); services of wet-nurses, créches, day-care centres and other child-minding facilities (12.4.0); bodyguards (12.7.0).

### 06 HEALTH

This division also includes health services purchased from school and university health centres.

### 06.1 MEDICAL PRODUCTS, APPLIANCES AND EQUIPMENT

This group covers medicaments, prostheses, medical appliances and equipment and other health-related products purchased by individuals or households, either with or without a prescription, usually from dispensing chemists, pharmacists or medical equipment suppliers. They are intended for consumption or use outside a health facility or institution. Such products supplied directly to outpatients by medical, dental and paramedical practitioners or to in-patients by hospitals and the like are included in outpatient services (06.2) or hospital services (06.3).

### 06.1.1 Pharmaceutical products (ND)

• –Medicinal preparations, medicinal drugs, patent medicines, serums and vaccines, vitamins and minerals, cod liver oil and halibut liver oil, oral contraceptives.

Excludes: veterinary products (09.3.4); articles for personal hygiene such as medicinal soaps (12.1.3).

### 06.1.2 Other medical products (ND)

• –Clinical thermometers, adhesive and non-adhesive bandages, hypodermic syringes, first-aid kits, hot-water bottles and ice bags, medical hosiery items such as elasticated stockings and knee supports, pregnancy tests, condoms and other mechanical contraceptive devices.

### 06.1.3 Therapeutic appliances and equipment (D)

• –Corrective eyeglasses and contact lenses, hearing aids, glass eyes, artificial limbs and other prosthetic devices, orthopaedic braces and supports, orthopaedic footwear, surgical belts, trusses and supports, neck braces, medical massage equipment and health lamps, powered and unpowered wheelchairs and invalid carriages, “special” beds, crutches, electronic and other devices for monitoring blood pressure, etc.;

• –repair of such articles.

Includes: dentures but not fitting costs.

Excludes: hire of therapeutic equipment (06.2.3); protective goggles, belts and supports for sport (09.3.2); sunglasses not fitted with corrective lenses (12.3.2).

### 06.2 OUTPATIENT SERVICES

This group covers medical, dental and paramedical services delivered to outpatients by medical, dental and paramedical practitioners and auxiliaries. The services may be delivered at home, in individual or group consulting facilities, dispensaries or the outpatient clinics of hospitals and the like.

Outpatient services include the medicaments, prostheses, medical appliances and equipment and other health-related products supplied directly to outpatients by medical, dental and paramedical practitioners and auxiliaries.

Medical, dental and paramedical services provided to in-patients by hospitals and the like are included in hospital services (06.3).

### 06.2.1 Medical services (S)

• –Consultations of physicians in general or specialist practice.

Includes: services of orthodontic specialists.

Excludes: services of medical analysis laboratories and x-ray centres (06.2.3); services of practitioners of traditional medicine (06.2.3).

### 06.2.2 Dental services (S)

• –Services of dentists, oral hygienists and other dental auxiliaries.

Includes: fitting costs of dentures.

Excludes: dentures (06.1.3); services of orthodontic specialists (06.2.1); services of medical analysis laboratories and x-ray centres (06.2.3).

### 06.2.3 Paramedical services (S)

• –Services of medical analysis laboratories and x-ray centres;

• –services of freelance nurses and midwives;

• –services of freelance acupuncturists, chiropractors, optometrists, physiotherapists, speech therapists, etc.;

• –medically prescribed corrective-gymnastic therapy;

• –outpatient thermal bath or sea-water treatments;

• –ambulance services;

• –hire of therapeutic equipment.

Includes: services of practitioners of traditional medicine.

### 06.3 HOSPITAL SERVICES

Hospitalization is defined as occurring when a patient is accommodated in a hospital for the duration of the treatment. Hospital day-care and home-based hospital treatment are included, as are hospices for terminally ill persons.

This group covers the services of general and specialist hospitals, the services of medical centres, maternity centres, nursing homes and convalescent homes which chiefly provide inpatient health care, the services of institutions serving old people in which medical monitoring is an essential component and the services of rehabilitation centres providing in-patient health care and rehabilitative therapy where the objective is to treat the patient rather than to provide long-term support.

Hospitals are defined as institutions which offer in-patient care under direct supervision of qualified medical doctors. Medical centres, maternity centres, nursing homes and convalescent homes also provide in-patient care but their services are supervised and frequently delivered by staff of lower qualification than medical doctors.

This group does not cover the services of facilities, such as surgeries, clinics and dispensaries, devoted exclusively to outpatient care (06.2). Nor does it include the services of retirement homes for elderly persons, institutions for disabled persons and rehabilitation centres providing primarily long-term support (12.4).

### 06.3.0 Hospital services (S)

• –Hospital services comprise the provision of the following services to hospital in-patients:

• - basic services: administration; accommodation; food and drink; supervision and care by non-specialist staff (nursing auxiliaries); first aid and resuscitation; ambulance transport; provision of medicines and other pharmaceutical products; provision of therapeutic appliances and equipment;

• - medical services: services of physicians in general or specialist practice, of surgeons and of dentists; medical analyses and x-rays; paramedical services such as those of nurses, midwives, chiropractors, optometrists, physiotherapists, speech therapists, etc.

### 07.1 PURCHASE OF VEHICLES

Purchases of recreational vehicles such as camper vans, caravans, trailers, aeroplanes and boats are covered by (09.2.1).

### 07.1.1 Motor cars (D)

• –Motor cars, passenger vans, station wagons, estate cars and the like with either two-wheel drive or four-wheel drive.

Excludes: invalid carriages (06.1.3); camper vans (09.2.1); golf carts (09.2.1).

### 07.1.2 Motor cycles (D)

• –Motor cycles of all types, scooters and powered bicycles.

Includes: sidecars; snowmobiles.

Excludes: invalid carriages (06.1.3); golf carts (09.2.1).

### 07.1.3 Bicycles (D)

• –Bicycles and tricycles of all types.

Includes: rickshaws.

Excludes: toy bicycles and tricycles (09.3.1).

### 07.1.4 Animal-drawn vehicles (D)

• –Animal-drawn vehicles.

Includes: animals required to draw the vehicles and related equipment (yokes, collars, harnesses, bridles, reins, etc.).

Excludes: horses and ponies, horse- or pony-drawn vehicles and related equipment purchased for recreational purposes (09.2.1).

### 07.2 OPERATION OF PERSONAL TRANSPORT EQUIPMENT

Purchases of spare parts, accessories or lubricants made by households with the intention of undertaking the maintenance, repair or intervention themselves should be shown under (07.2.1) or (07.2.2). If households pay an enterprise to carry out the maintenance, repair or fitting, the total value of the service, including the costs of the materials used, should be shown under (07.2.3).

### 07.2.1 Spare parts and accessories for personal transport equipment (SD)

• –Tyres (new, used or retreaded), inner tubes, spark plugs, batteries, shock absorbers, filters, pumps and other spare parts or accessories for personal transport equipment.

Includes: fire extinguishers for transport equipment; products specifically for the cleaning and maintenance of transport equipment such as paints, chrome cleaners, sealing compounds and bodywork polishes; covers for motor cars, motorcycles, etc.

Excludes: crash helmets for motorcycles and bicycles (03.1.3); non-specific products for cleaning and maintenance such as distilled water, household sponges, chamois leathers, detergents, etc. (05.6.1); charges for the fitting of spare parts and accessories and for the painting, washing and polishing of bodywork (07.2.3); radio-telephones (08.2.0); car radios (09.1.1); baby seats for cars (12.3.2).

### 07.2.2 Fuels and lubricants for personal transport equipment (ND)

• –Petrol and other fuels such as diesel, liquid petroleum gas, alcohol and two-stroke mixtures;

• –lubricants, brake and transmission fluids, coolants and additives.

Includes: fuel for major tools and equipment covered under (05.5.1) and recreational vehicles covered under (09.2.1).

Excludes: charges for oil changes and greasing (07.2.3).

### 07.2.3 Maintenance and repair of personal transport equipment (S)

• –Services purchased for the maintenance and repair of personal transport equipment such as fitting of parts and accessories, wheel balancing, technical inspection, breakdown services, oil changes, greasing and washing.

Includes: total value of the service (that is, both the cost of labour and the cost of materials are covered).

Excludes: separate purchases of spare parts, accessories or lubricants made by households with the intention of undertaking the maintenance or repair themselves (07.2.1) or (07.2.2); roadworthiness tests (07.2.4).

### 07.2.4 Other services in respect of personal transport equipment (S)

• –Hire of garages or parking spaces not providing parking in connection with the dwelling;

• –toll facilities (bridges, tunnels, shuttle ferries, motorways) and parking meters;

• –driving lessons, driving tests and driving licences;

• –hire of personal transport equipment without drivers.

Excludes: hire of a car with driver (07.3.2); service charges for insurance in respect of personal transport equipment (12.5.4).

### 07.3 TRANSPORT SERVICES

Purchases of transport services are generally classified by mode of transport. When a ticket covers two or more modes of transport–for example, intra-urban bus and underground or inter-urban train and ferry–and the expenditure cannot be apportioned between them, then such purchases should be classified in (07.3.5).

Costs of meals, snacks, drinks, refreshments or accommodation services have to be included if covered by the fare and not separately priced. If separately priced, these costs have to be classified in Division 11.

School transport services are included, but ambulance services are excluded (06.2.3).

### 07.3.1 Passenger transport by railway (S)

• –Transport of individuals and groups of persons and luggage by train, tram and underground.

Includes: transport of private vehicles.

Excludes: funicular transport (07.3.6).

### 07.3.2 Passenger transport by road (S)

• –Transport of individuals and groups of persons and luggage by bus, coach, taxi and hired car with driver.

### 07.3.3 Passenger transport by air (S)

• –Transport of individuals and groups of persons and luggage by aeroplane and helicopter.

### 07.3.4 Passenger transport by sea and inland waterway (S)

• –Transport of individuals and groups of persons and luggage by ship, boat, ferry, hovercraft and hydrofoil.

Includes: transport of private vehicles.

### 07.3.5 Combined passenger transport (S)

• –Transport of individuals and groups of persons and luggage by two or more modes of transport when the expenditure cannot be apportioned between them.

Includes: transport of private vehicles. Excludes: package holidays (09.6.0).

### 07.3.6 Other purchased transport services (S)

• –Funicular, cable-car and chairlift transport;

• –removal and storage services;

• –services of porters and left-luggage and luggage-forwarding offices;

• –travel agents’ commissions, if separately priced.

Excludes: cable-car and chairlift transport at ski resorts and holiday centres (09.4.1).

### 08.1.0 Postal services (S)

• –Payments for the delivery of letters, postcards and parcels;

• –private mail and parcel delivery.

Includes: all purchases of new postage stamps, pre-franked postcards and aerogrammes.

Excludes: purchase of used or cancelled postage stamps (09.3.1); financial services of post offices (12.6.2).

### 08.2.0 Telephone and telefax equipment (D)

• –Purchases of telephones, radio-telephones, telefax machines, telephone-answering machines and telephone loudspeakers;

• –repair of such equipment.

Excludes: telefax and telephone-answering facilities provided by personal computers (09.1.3).

### 08.3.0 Telephone and telefax services (S)

• –Installation and subscription costs of personal telephone equipment;

• –telephone calls from a private line or from a public line (public telephone box, post office cabin, etc.); telephone calls from hotels, cafes, restaurants and the like;

• –telegraphy, telex and telefax services;

• –information transmission services; Internet connection services;

• –hire of telephones, telefax machines, telephone-answering machines and telephone loudspeakers.

### 09.1.1 Equipment for the reception, recording and reproduction of sound and pictures (D)

• –Television sets, video cassette players and recorders, television aerials of all types;

• –gramophones, tape players and recorders, cassette players and recorders, CD-players, personal stereos, stereo systems and their constituent units (turntables, tuners, amplifiers, speakers, etc.), microphones and earphones.

Excludes: video cameras, camcorders and sound-recording cameras (09.1.2).

### 09.1.2 Photographic and cinematographic equipment and optical instruments (D)

• –Still cameras, movie cameras and sound-recording cameras, video cameras and camcorders, film and slide projectors, enlargers and film processing equipment, accessories (screens, viewers, lenses, flash attachments, filters, exposure meters, etc.);

• –binoculars, microscopes, telescopes and compasses.

### 09.1.3 Information processing equipment (D)

• –Personal computers, visual display units, printers and miscellaneous accessories accompanying them; computer software packages such as operating systems, applications, languages, etc.;

• –calculators, including pocket calculators;

• –typewriters and word processors.

Includes: telefax and telephone-answering facilities provided by personal computers.

Excludes: pre-recorded diskettes and CD-ROMs containing books, dictionaries, encyclopaedias, foreign language trainers, multimedia presentations, etc., in the form of software (09.1.4); video game software (09.3.1); video game computers that plug into a television set (09.3.1); typewriter ribbons (09.5.4); toner and ink cartridges (09.5.4); slide rules (09.5.4).

### 09.1.4 Recording media (SD)

• –Records and compact discs;

• –pre-recorded tapes, cassettes, video cassettes, diskettes and CD-ROMs for tape recorders, cassette recorders, video recorders and personal computers;

• –unrecorded tapes, cassettes, video cassettes, diskettes and CD-ROMs for tape recorders, cassette recorders, video recorders and personal computers;

• –unexposed films, cartridges and disks for photographic and cinematographic use.

Includes: pre-recorded tapes and compact discs of novels, plays, poetry, etc.; pre-recorded diskettes and CD-ROMs containing books, dictionaries, encyclopaedias, foreign language trainers, multimedia presentations, etc, in the form of software; photographic supplies such as paper and flashbulbs; unexposed film the price of which includes the cost of processing without separately identifying it.

Excludes: batteries (05.5.2); computer software packages such as operating systems, applications, languages, etc. (09.1.3); video game software, video game cassettes and video game CD-ROMs (09.3.1); development of films and printing of photographs (09.4.2).

### 09.1.5 Repair of audio-visual, photographic and information processing equipment (S)

• –Repair of audio-visual, photographic and information processing equipment.

Includes: total value of the service (that is, both the cost of labour and the cost of materials are covered).

Excludes: separate purchases of materials made by households with the intention of undertaking the repair themselves (09.1.1), (09.1.2) or (09.1.3).

### 09.2.1 Major durables for outdoor recreation (D)

• –Camper vans, caravans and trailers;

• –aeroplanes, microlight aircraft, gliders, hang-gliders and hot-air balloons;

• –boats, outboard motors, sails, rigging and superstructures;

• –horses and ponies, horse- or pony-drawn vehicles and related equipment (harnesses, bridles, reins, saddles, etc.);

• –major items for games and sport such as canoes, kayaks, windsurfing boards, sea-diving equipment and golf carts.

Includes: fitting out of boats, camper vans, caravans, etc.

Excludes: horses and ponies, horse- or pony-drawn vehicles and related equipment purchased for personal transport (07.1.4); inflatable boats, rafts and swimming pools for children and the beach (09.3.2).

### 09.2.2 Musical instruments and major durables for indoor recreation (D)

• –Musical instruments of all sizes, including electronic musical instruments, such as pianos, organs, violins, guitars, drums, trumpets, clarinets, flutes, recorders, harmonicas, etc.;

• –billiard tables, ping-pong tables, pinball machines, gaming machines, etc.

Excludes: toys (09.3.1).

### 09.2.3 Maintenance and repair of other major durables for recreation and culture (S)

• –Maintenance and repair of other major durables for recreation and culture.

Includes: total value of the service (that is, both the cost of labour and the cost of materials are covered); laying up for winter of boats, camper vans, caravans, etc.; hangar services for private planes; marina services for boats; veterinary and other services (stabling, feeding, farriery, etc.) for horses and ponies purchased for recreational purposes.

Excludes: fuel for recreational vehicles (07.2.2); separate purchases of materials made by households with the intention of undertaking the maintenance or repair themselves (09.2.1) or (09.2.2); veterinary and other services for pets (09.3.5).

### 09.3.1 Games, toys and hobbies (SD)

• –Card games, parlour games, chess sets and the like;

• –toys of all kinds including dolls, soft toys, toy cars and trains, toy bicycles and tricycles, toy construction sets, puzzles, plasticine, electronic games, masks, disguises, jokes, novelties, fireworks and rockets, festoons and Christmas tree decorations;

• –stamp-collecting requisites (used or cancelled postage stamps, stamp albums, etc.), other items for collections (coins, medals, minerals, zoological and botanical specimens, etc.) and other tools and articles n.e.c. for hobbies.

Includes: video-game software; video-game computers that plug into a television set; videogame cassettes and video-game CD-ROMs.

Excludes: collectors’ items falling into the category of works of art or antiques (05.1.1); unused postage stamps (08.1.0); Christmas trees (09.3.3); children’s scrapbooks (09.5.1).

### 09.3.2 Equipment for sport, camping and open-air recreation (SD)

• –Gymnastic, physical education and sport equipment such as balls, shuttlecocks, nets, rackets, bats, skis, golf clubs, foils, sabres, poles, weights, discuses, javelins, dumb-bells, chest expanders and other body-building equipment;

• –parachutes and other sky-diving equipment;

• –firearms and ammunition for hunting, sport and personal protection;

• –fishing rods and other equipment for fishing;

• –equipment for beach and open-air games, such as bowls, croquet, frisbee, volleyball, and inflatable boats, rafts and swimming pools;

• –camping equipment such as tents and accessories, sleeping bags, backpacks, air mattresses and inflating pumps, camping stoves and barbecues;

• –repair of such articles.

Includes: game-specific footwear (ski boots, football boots, golfing shoes and other such footwear fitted with ice-skates, rollers, spikes, studs, etc.); protective headgear for sports; other protective gear for sports such as life jackets, boxing gloves, body padding, shin-guards, goggles, belts, supports, etc.

Excludes: crash helmets for motor cycles and bicycles (03.1.3); camping and garden furniture (05.1.1).

### 09.3.3 Gardens, plants and flowers (ND)

• –Natural or artificial flowers and foliage, plants, shrubs, bulbs, tubers, seeds, fertilizers, composts, garden peat, turf for lawns, specially treated soils for ornamental gardens, horticultural preparations, pots and pot holders.

Includes: natural and artificial Christmas trees; delivery charges for flowers and plants.

Excludes: gardening gloves (03.1.3); gardening services (04.4.4) or (05.6.2); gardening equipment (05.5.1); gardening tools (05.5.2); insecticides and pesticides for household use (05.6.1).

### 09.3.4 Pets and related products (ND)

• –Pets, pet foods, veterinary and grooming products for pets, collars, leashes, kennels, birdcages, fish tanks, cat litter, etc.

Excludes: horses and ponies (07.1.4) or (09.2.1); veterinary services (09.3.5).

### 09.3.5 Veterinary and other services for pets (S)

• –Veterinary and other services for pets such as grooming, boarding, tattooing and training.

Excludes: veterinary and other services (stabling, farriery, etc.) for horses and ponies purchased for recreational purposes (09.2.3).

### 09.4.1 Recreational and sporting services (S)

• –Services provided by:

• - sports stadiums, horse-racing courses, motor-racing circuits, velodromes, etc.;

• - skating rinks, swimming pools, golf courses, gymnasia, fitness centres, tennis courts, squash courts and bowling alleys;

• - fairgrounds and amusement parks;

• - roundabouts, see-saws and other playground facilities for children;

• - pin-ball machines and other games for adults other than games of chance;

• - ski slopes, ski lifts and the like;

• –hire of equipment and accessories for sport and recreation, such as aeroplanes, boats, horses, skiing and camping equipment;

• –out-of-school individual or group lessons in bridge, chess, aerobics, dancing, music, skating, skiing, swimming or other pastimes;

• –services of mountain guides, tour guides, etc.;

• –navigational aid services for boating.

Includes: hire of game-specific footwear (ski boots, football boots, golfing shoes and other such footwear fitted with ice-skates, rollers, spikes, studs, etc.).

Excludes: cable-car and chairlift transport not at ski resorts or holiday centres (07.3.6).

### 09.4.2 Cultural services (S)

• –Services provided by:

• - cinemas, theatres, opera houses, concert halls, music halls, circuses, sound and light shows;

• - museums, libraries, art galleries, exhibitions;

• - historic monuments, national parks, zoological and botanical gardens, aquaria;

• –hire of equipment and accessories for culture, such as television sets, video cassettes, etc.;

• –television and radio broadcasting, in particular licence fees for television equipment and subscriptions to television networks;

• –services of photographers such as film developing, print processing, enlarging, portrait photography, wedding photography, etc.

Includes: services of musicians, clowns, performers for private entertainments.

### 09.4.3 Games of chance (S)

• –Service charges for lotteries, bookmakers, totalizators, casinos and other gambling establishments, gaming machines, bingo halls, scratch cards, sweepstakes, etc. (Service charge is defined as the difference between the amounts paid for lottery tickets or placed in bets and the amounts paid out to winners.)

### 09.5.1 Books (SD)

• –Books, including atlases, dictionaries, encyclopaedias, textbooks, guidebooks and musical scores.

Includes: scrapbooks and albums for children; bookbinding.

Excludes: pre-recorded tapes and compact discs of novels, plays, poetry, etc. (09.1.4); prerecorded diskettes and CD-ROMs containing books, dictionaries, encyclopaedias, foreign language trainers, etc. in the form of software (09.1.4); stamp albums (09.3.1).

### 09.5.2 Newspapers and periodicals (ND)

• –Newspapers, magazines and other periodicals.

### 09.5.3 Miscellaneous printed matter (ND)

• –posters, plain or picture postcards, calendars;

• –greeting cards and visiting cards, announcement and message cards;

• –maps and globes.

Excludes: pre-franked postcards and aerogrammes (08.1.0); stamp albums (09.3.1).

### 09.5.4 Stationery and drawing materials (ND)

• –Writing pads, envelopes, account books, notebooks, diaries, etc.;

• –pens, pencils, fountain pens, ballpoint pens, felt-tip pens, inks, erasers, pencil sharpeners, etc.;

• –stencils, carbon paper, typewriter ribbons, inking pads, correcting fluids, etc.;

• –paper punches, paper cutters, paper scissors, office glues and adhesives, staplers and staples, paper clips, drawing pins, etc.;

• –drawing and painting materials such as canvas, paper, card, paints, crayons, pastels and brushes.

Includes: toner and ink cartridges; educational materials such as exercise books, slide rules, geometry instruments, slates, chalks and pencil boxes.

Excludes: pocket calculators (09.1.3).

### 09.6.0 Package holidays (S)

• –All-inclusive holidays or tours which provide for travel, food, accommodation, guides, etc.

Includes: half-day and one-day excursion tours; pilgrimages.

### 10 EDUCATION

This division covers educational services only. It does not include expenditures on educational materials, such as books (09.5.1) and stationery (09.5.4), or education support services, such as health-care services (06), transport services (07.3), catering services (11.1.2) and accommodation services (11.2.0).

The breakdown of educational services is based upon the level categories of the 1997 International Standard Classification of Education (ISCED-97) of the United Nations Educational, Scientific and Cultural Organization (UNESCO).

### 10.1.0 Pre-primary and primary education (S)

• –Levels 0 and 1 of ISCED-97: pre-primary and primary education.

Includes: literacy programmes for students too old for primary school.

### 10.2.0 Secondary education (S)

• –Levels 2 and 3 of ISCED-97: lower-secondary and upper-secondary education.

Includes: out-of-school secondary education for adults and young people.

### 10.3.0 Post-secondary non-tertiary education (S)

• –Level 4 of ISCED-97: post-secondary non-tertiary education.

Includes: out-of-school post-secondary non-tertiary education for adults and young people.

### 10.4.0 Tertiary education (S)

• –Levels 5 and 6 of ISCED-97: first stage and second stage of tertiary education.

### 10.5.0 Education not definable by level (S)

• –Educational programmes, generally for adults, which do not require any special prior instruction, in particular vocational training and cultural development.

Excludes: driving lessons (07.2.4); recreational training courses such as sport or bridge lessons given by independent teachers (09.4.1).

### 11.1.1 Restaurants, cafés and the like (S)

• –Catering services (meals, snacks, drinks and refreshments) provided by restaurants, cafes, buffets, bars, tearooms, etc., including those provided:

• - in places providing recreational, cultural, sporting or entertainment services: theatres, cinemas, sports stadiums, swimming pools, sports complexes, museums, art galleries, nightclubs, dancing establishments, etc.;

• - on public transport (coaches, trains, boats, aeroplanes, etc.) when priced separately;

• –also included are:

• - the sale of food products and beverages for immediate consumption by kiosks, street vendors and the like, including food products and beverages dispensed ready for consumption by automatic vending machines;

• - the sale of cooked dishes by restaurants for consumption off their premises;

• - the sale of cooked dishes by catering contractors whether collected by the customer or delivered to the customer’s home.

Includes: tips.

Excludes: tobacco purchases (02.2.0); telephone calls (08.3.0).

### 11.1.2 Canteens (S)

• –Catering services of works canteens, office canteens and canteens in schools, universities and other educational establishments.

Includes: university refectories, military messes and wardrooms.

Excludes: food and drink provided to hospital in-patients (06.3.0).

### 11.2.0 Accommodation services (S)

• –Accommodation services of:

• - hotels, boarding houses, motels, inns and establishments offering “bed and breakfast”;

• - holiday villages and holiday centres, camping and caravan sites, youth hostels and mountain chalets;

• - boarding schools, universities and other educational establishments;

• - public transport (trains, boats, etc.) when priced separately;

• - hostels for young workers or immigrants.

Includes: tips, porters.

Excludes: payments of households occupying a room in a hotel or boarding house as their main residence (04.1.1); rentals paid by households for a secondary residence for the duration of a holiday (04.1.2); telephone calls (08.3.0); catering services in such establishments except for breakfast or other meals included in the price of the accommodation (11.1.1); housing in orphanages, homes for disabled or maladjusted persons (12.4.0).

### 12.1.1 Hairdressing salons and personal grooming establishments (S)

• –Services of hairdressing salons, barbers, beauty shops, manicures, pedicures, Turkish baths, saunas, solariums, non-medical massages, etc.

Includes: bodycare, depilation and the like.

Excludes: spas (06.2.3) or (06.3.0); fitness centres (09.4.1).

### 12.1.2 Electric appliances for personal care (SD)

• –Electric razors and hair trimmers, hand-held and hood hairdryers, curling tongs and styling combs, sunlamps, vibrators, electric toothbrushes and other electric appliances for dental hygiene, etc.;

• –repair of such appliances.

### 12.1.3 Other appliances, articles and products for personal care (ND)

• –Non-electric appliances: razors and hair trimmers and blades therefor, scissors, nail files, combs, shaving brushes, hairbrushes, toothbrushes, nail brushes, hairpins, curlers, personal weighing machines, baby scales, etc.;

• –articles for personal hygiene: toilet soap, medicinal soap, cleansing oil and milk, shaving soap, shaving cream and foam, toothpaste, etc.;

• –beauty products: lipstick, nail varnish, makeup and make-up removal products (including powder compacts, brushes and powder puffs), hair lacquers and lotions, pre-shave and after-shave products, sunbathing products, hair removers, perfumes and toilet waters, personal deodorants, bath products, etc.;

• –other products: toilet paper, paper handkerchiefs, paper towels, sanitary towels, cotton wool, cotton tops, babies’ napkins, toilet sponges, etc.

Excludes: handkerchiefs made of fabric (03.1.3).

### 12.2.0 Prostitution (S)

• –Services provided by prostitutes and the like.

### 12.3.1 Jewellery, clocks and watches (D)

• –Precious stones and metals and jewellery fashioned out of such stones and metals;

• –costume jewellery, cuff links and tiepins;

• –clocks, watches, stopwatches, alarm clocks, travel clocks;

• –repair of such articles.

Excludes: ornaments (05.1.1) or (05.4.0); radio clocks (09.1.1); precious stones and metals and jewellery fashioned out of such stones and metals acquired primarily as stores of value (capital formation),

### 12.3.2 Other personal effects (SD)

• –Travel goods and other carriers of personal effects: suitcases, trunks, travel bags, attache cases, satchels, hand-bags, wallets, purses, etc.;

• –articles for babies: baby carriages, pushchairs, carrycots, recliners, car beds and seats, back-carriers, front carriers, reins and harnesses, etc.;

• –articles for smokers: pipes, lighters, cigarette cases, cigar cutters, ashtrays, etc.;

• –miscellaneous personal articles: sunglasses, walking sticks and canes, umbrellas and parasols, fans, keyrings, etc.;

• –funerary articles: coffins, gravestones, urns, etc.;

• –repair of such articles.

Includes: lighter fuel; wall thermometers and barometers.

Excludes: baby furniture (05.1.1); shopping bags (05.2.0); feeding bottles (05.4.0).

### 12.4 SOCIAL PROTECTION

Social protection as defined here covers assistance and support services provided to persons who are: elderly, disabled, having occupational injuries and diseases, survivors, unemployed, destitute, homeless, low-income earners, indigenous people, immigrants, refugees, alcohol and substance abusers, etc. It also covers assistance and support services provided to families and children.

### 12.4.0 Social protection (S)

Such services include residential care, home help, day care and rehabilitation. More specifically, this class covers payments by households for:

• –Retirement homes for elderly persons, residences for disabled persons, rehabilitation centres providing long-term support for patients rather than health care and rehabilitative therapy, schools for disabled persons where the main aim is to help students overcome their disability;

• –help to maintain elderly and disabled persons at home (home-cleaning services, meal programmes, day-care centres, day-care services and holiday-care services);

• –wet-nurses, creches, play schools and other child-minding facilities;

• –counselling, guidance, arbitration, fostering and adoption services for families.

### 12.5 INSURANCE

Service charges for insurance are classified by type of insurance, namely: life insurance and non-life insurance (that is, insurance in connection with the dwelling, health, transport, etc.). Service charges for multi-risk insurance covering several risks should be classified on the basis of the cost of the principal risk if it is not possible to allocate the service charges to the various risks covered.

Service charge is defined as the difference between claims due and premiums earned and premium supplement.

### 12.5.1 Life insurance (S)

• –Service charges for life assurance, death benefit assurance, education assurance, etc.

### 12.5.2 Insurance connected with the dwelling (S)

• –Service charges paid by owner-occupiers and by tenants for the kinds of insurance typically taken out by tenants against fire, theft, water damage, etc.

Excludes: service charges paid by owner-occupiers for the kinds of insurance typically taken out by landlords (intermediate consumption).

### 12.5.3 Insurance connected with health (S)

• –Service charges for private sickness and accident insurance.

### 12.5.4 Insurance connected with transport (S)

• –Service charges for insurance in respect of personal transport equipment;

• –service charges for travel insurance and luggage insurance.

### 12.5.5 Other insurance (S)

• –Service charges for other insurance such as civil liability for injury or damage to third parties or their property.

Excludes: civil liability or damage to third parties or their property arising from the operation of personal transport equipment (12.5.4).

### 12.6.1 FISIM (S)

• –Financial intermediation services indirectly measured.

### 12.6.2 Other financial services n.e.c. (S)

• –Actual charges for the financial services of banks, post offices, saving banks, money changers and similar financial institutions;

• –fees and service charges of brokers, investment counsellors, tax consultants and the like;

• –administrative charges of private pension funds and the like.

### 12.7.0 Other services n.e.c. (S)

• –Fees for legal services, employment agencies, etc.;

• –charges for undertaking and other funeral services;

• –payment for the services of estate agents, housing agents, auctioneers, salesroom operators and other intermediaries;

• –payment for photocopies and other reproductions of documents;

• –fees for the issue of birth, marriage and death certificates and other administrative documents;

• –payment for the services of graphologists, astrologers, private detectives, bodyguards, matrimonial agencies and marriage guidance counsellors, public writers, miscellaneous concessions (seats, toilets, cloakrooms), etc.

Note: ND, SD, D and S denote non-durable goods, semi-durable goods, durable goods and services, respectively.

## Annex 3 Resolution concerning consumer price indices adopted by the Seventeenth International Conference of Labour Statisticians, 2003

### Preamble*

The Seventeenth International Conference of Labour Statisticians,

Having been convened at Geneva by the Governing Body of the ILO and having met from 24 November to 3 December 2003,

Recalling the resolution adopted by the Fourteenth International Conference of Labour Statisticians concerning consumer price indices and recognizing the continuing validity of the basic principles recommended therein and, in particular, the fact that the consumer price index (CPI) is designed primarily to measure the changes over time in the general level of prices of goods and services that a reference population acquires, uses or pays for,

Recognizing the need to modify and broaden the existing standards in the light of recent methodological and computational developments to enhance the usefulness of the international standards in the provision of technical guidelines to all countries,

Recognizing the usefulness of such standards in enhancing the international comparability of the statistics,

Recognizing that the CPI is used for a wide variety of purposes and that governments should be encouraged to identify the (priority) purposes a CPI is to serve, to provide adequate resources for its compilation, and to guarantee the professional independence of its compilers,

Recognizing that the (priority) objectives and uses of a CPI differ among countries and that, therefore, a single standard could not be applied universally,

Recognizing that the CPI needs to be credible to observers and users, both national and international, and that better understanding of the principles and procedures used to compile the index will enhance the users’ confidence in the index,

Agrees that the principles and methods used in constructing a CPI should be based on the guidelines and methods that are generally accepted as constituting good statistical practices;

Adopts, this third day of December 2003, the following resolution which replaces the previous one adopted in 1987:

### The nature and meaning of a consumer price index

1. The CPI is a current social and economic indicator that is constructed to measure changes over time in the general level of prices of consumer goods and services that households acquire, use or pay for consumption.

2. The index aims to measure the change in consumer prices over time. This may be done by measuring the cost of purchasing a fixed basket of consumer goods and services of constant quality and similar characteristics, with the products in the basket being selected to be representative of households’ expenditure during a year or other specified period. Such an index is called a fixed basket price index.

3. The index may also aim to measure the effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare). This concept is called a cost-of-living index (COLI). A fixed basket price index, or another appropriate design, may be employed as an approximation to a COLI.

### The uses of a consumer price index

4. The CPI is used for a wide variety of purposes, the two most common ones being: (i) to adjust wages as well as social security and other benefits to compensate, partly or completely, for changes in the cost of living or in consumer prices; and (ii) to provide an average measure of price inflation for the household sector as a whole, for use as a macroeconomic indicator. CPI sub-indices are also used to deflate components of household final consumption expenditure in the national accounts and the value of retail sales to obtain estimates of changes in their volume.

5. CPIs are also used for other purposes, such as monitoring the overall rate of price inflation for all sectors of the economy, the adjustment of government fees and charges, the adjustment of payments in commercial contracts, and for formulating and assessing fiscal and monetary policies and trade and exchange rate policies. In these types of cases, the CPI is used as more appropriate measures do not exist at present, or because other characteristics of the CPI (e.g. high profile, wide acceptance, predictable publication schedule, etc.) are seen to outweigh any conceptual or technical deficiencies.

6. Given that the CPI may be used for many purposes, it is unlikely that one index can perform equally satisfactorily in all applications. It may therefore be appropriate to construct a number of alternative price indices for specific purposes, if the requirements of the users justify the extra expense. Each index should be properly defined and named to avoid confusion and a “headline” CPI measure should be explicitly identified.

7. Where only one index is compiled, it is the main use that should determine the type οf index compiled, the range of goods and services covered, its geographic coverage, the households it relates to, as well as to the concept of price and the formula used. If there are several major uses, it is likely that compromises may have to be made with regard to how the CPI is constructed. Users should be informed of the compromises made and of the limitations of such an index.

### Scope of the index

8. The scope of the index depends on the main use for which it is intended, and should be defined in terms of the type of households, geographic areas, and the categories of consumer goods and services acquired, used or paid for by the reference population.

9. If the primary use of the CPI is for adjusting money incomes, a relevant group of households, such as wage and salary earners, may be the appropriate target population. For this use, all consumption expenditures by these households, at home and abroad, may be covered. If the primary use of the CPI is to measure inflation in the domestic economy, it may be appropriate to cover consumption expenditures made within the country, rather than the expenditures of households resident within the country.

10. In general, the reference population for a national index should be defined very widely. If any income groups, types of households or particular geographic areas are excluded, for example, for cost or practical considerations, then this should be explicitly stated.

11. The geographic scope refers to the geographic coverage of price collection and of consumption expenditures of the reference population and both should be defined as widely as possible, and preferably consistently. If price collection is restricted to particular areas due to resource constraints, then this should be specified. The geographic coverage of the consumption expenditure may be defined either as covering consumption expenditure of the resident population (resident consumption) or consumption expenditure within the country (domestic consumption).

12. Significant differences in the expenditure patterns and/or price movements between specific population groups or regions may exist, and care should be taken to ensure that they are represented in the index. Separate indices for these population groups or regions may be computed if there is sufficient demand to justify the additional cost.

13. In accordance with its main purpose, the CPI should conceptually cover all types of consumer goods and services of significance to the reference population, without any omission of those that may not be legally available or may be considered socially undesirable. Where appropriate, special aggregates may be constructed to assist those users who may wish to exclude certain categories of goods or services for particular applications or for analysis. Whenever certain goods or services have been excluded from the index, this should be clearly documented.

14. Goods and services purchased for business purposes, expenditures on assets such as works of art, financial investment (as distinct from financial services), and payments of income taxes, social security contributions and fines are not considered to be consumer goods or services and should be excluded from the coverage of the index. Some countries regard expenditures on the purchase of houses entirely as a capital investment and, as such, exclude them from the index.

### Acquisition, use or payment

15. In determining the scope of the index, the time of recording and valuation of consumption, it is important to consider whether the purposes for which the index is used are best satisfied by defining consumption in terms of “acquisition”, “use”, or “payment”.1 The “acquisition” approach is often used when the primary purpose of the index is to serve as a macroeconomic indicator. The “payment” approach is often used when the primary purpose of the index is for the adjustment of compensation or income. Where the aim of the index is to measure changes in the cost of living, the “use” approach may be most suitable. The decision regarding the approach to follow for a particular group of products should in principle be based on the purpose of the index, as well as on the costs and the acceptability of the decision to the users who should be informed of the approach followed for different products. Because of the practical difficulties in uniformly defining consumption and estimating the flow of services provided by other durable goods in terms of “use”, it may be necessary to adopt a mixed approach, e.g. “use” for owner-occupied housing and “acquisition” or “payment” basis for other consumer durables.

16. The differences between the three approaches are most pronounced in dealing with products for which the times of acquisition, use and payment do not coincide, such as owner-occupied housing, durable goods and products acquired on credit.

17. The most complex and important of the products mentioned above is owner-occupied housing. In most countries, a significant proportion of households are owner-occupiers of their housing, with the housing being characterized by a long useful life and a high purchase outlay (price). Under the “acquisition” approach, the value of the new dwellings acquired in the weight reference period may be used for deriving the weight (and the full price of the dwelling is included in the CPI at the time of acquisition, regardless of when the consumption is taking place). Under the “payment” approach, the weights reflect the amounts actually paid out for housing (and the prices enter the CPI in the period(s) when the prices are paid). Under the “use” approach the weights are based on the value of the flow of housing services consumed during the weight reference period estimated using an implicit or notional cost (and prices or estimated opportunity costs enter the CPI when the consumption is taking place).

18. Own-account consumption, remuneration in kind and/or goods and services provided without charge or subsidized by governments and non-profit institutions serving households may be important in some countries where the purpose of the index is best satisfied by defining consumption in terms of “use” or “acquisition” (under the payment approach these are out of scope). The inclusion of these products will require special valuation and pricing techniques.

19. Decisions on the composition of the basket and the weights follow directly from the scope, as well as from the choice between the “acquisition”, “use” or “payment” approaches.

20. Once defined, the expenditures that fall within the scope of the index should be grouped into similar categories in a hierarchical classification system, e.g. divisions/groups/classes, for compilation as well as analytical purposes. There should be consistency between the classification used for index compilation and the one used for household expenditure statistics. The CPI classification should meet the needs of users for special sub-indices. For the purposes of international comparisons, the classification should also be reconcilable with the most recent version of the UN Classification of Individual Consumption according to Purpose(COICOP), at least at its division level.2

21. In order to facilitate the analysis and interpretation of the results of the index, it may be desirable to classify goods and services according to various supplementary classifications, e.g. source of origin, durability and seasonality. Calculation of the CPI by using various classifications should generate the same overall results as the original index.

22. The classification should also provide a framework for the allocation of expenditure weights. Expenditures at the lowest level of the classification system, expressed as a proportion of the total expenditure, determine the weights to be used at this level. When the weights are to remain fixed for several years, the objective should be to adopt weights that are representative of the contemporary household behaviour.

23. The two main sources for deriving the weights are the results from household expenditure surveys (HESs) and national accounts estimates on household consumption expenditure. The results from an HES are appropriate for an index defined to cover the consumption expenditures of reference population groups resident within the country, while national account estimates are suitable for an index defined to cover consumption expenditures within the country. The decision about what source or sources to use and how they should be used depends on the main purpose of the index and on the availability and quality of appropriate data.

24. The information from the main source (HESs or national accounts) should be supplemented with all other available information on the expenditure pattern. Sources of such information that can be used for disaggregating the expenditures are surveys of sales in retail outlets, point-of-purchase surveys, surveys of production, export and import data and administrative sources. Based on these data the weights for certain products may be further disaggregated by region and type of outlet. Where the data obtained from different sources relate to different periods, it is important to ensure, before weights are allocated, that expenditures are adjusted so that they have the same reference period.

25. Where the weight reference period differs significantly from the price reference period, the weights should be price updated to take account of price changes between the weight reference period and price reference period. Where it is likely that price-updated weights are less representative of the consumption pattern in the price reference period this procedure may be omitted.

26. Weights should be reviewed and if appropriate revised as often as accurate and reliable data are available for this to be done, but at least once every five years. Revisions are important to reduce the impact on the index of product substitutions and to ensure the basket of goods and services and their weights remain representative.3 For some categories, it may be necessary to update the weights more frequently as such weights are likely to become out of date more quickly than higher-level weights. In periods of high inflation, the weights should be updated frequently.

27. When a new basket (structure or weights) replaces the old, a continuous CPI series should be created by linking4 together the index numbers based on the new basket of goods and services to those based on the earlier basket. The particular procedure used to link index number series will depend on the particular index compilation technique used. The objective is to ensure that the technique used to introduce a new basket does not, of itself, alter the level of the index.

28. Completely new types of goods and services (i.e. goods and services that cannot be classified to any of the existing elementary aggregates) should normally be considered for inclusion only during one of the periodic review and reweighting exercises. A new model or variety of an existing product that can be fitted within an existing elementary aggregate should be included at the time it is assessed as having a significant and sustainable market share. If a quality change is detected an appropriate quality adjustment should be made.5

29. Some products such as seasonal products, insurance, second-hand goods, expenditure abroad, interest, own production, expenditures on purchase and construction of dwellings, etc., may need special treatment when constructing their weights. The way these products are dealt with should be determined by the main purpose of the index, national circumstances and the practicalities of compilation.

30. Seasonal products should be included in the basket. It is possible to use: (i) a fixed weight approach which uses the same weight for the seasonal product in all months using an imputed price in the out-of-season months; or (ii) a variable weights approach where a changing weight is attached to the product in various months. The decision on the approach should be based on national circumstances.

31. The expenditure weights for second-hand goods should be based either on the net expenditure of the reference population on such goods, or the gross expenditure, depending on the purpose of the index.

32. When consumption from own production is within the scope of the index, the weights should be based on the value of quantities consumed from own production. Valuation of consumption from own production should be made on the basis of prices prevailing on the market, unless there is some reason to conclude that market prices are not relevant or cannot be reliably observed, or there is no interest in using hypothetically imputed prices. In this case the expenditures and prices for the inputs into the production of these goods and services could be used instead. The third option is to valuate it by using quality-adjusted market prices.

### Sampling for price collection

33. A CPI is an estimate based on a sample of households to estimate weights, and a sample of zones within regions, a sample of outlets, a sample of goods and services and a sample of time periods for price observation.

34. The sample size and sample selection methods for both outlets and the goods and services for which price movements over time are to be observed should ensure that the prices collected are representative and sufficient to meet the requirements for the accuracy of the index, but also that the collection process is cost-effective. The sample of prices should reflect the importance, in terms of relative expenditures, of the goods and services available for purchase by consumers in the reference period, the number, types and geographic spread of outlets that are relevant for each good and service, and the dispersion of prices and price changes across outlets.

35. Probability sampling techniques are the preferred methods, in principle, as they permit sound statistical inference and control over the representativity of the sample. In addition, they permit estimation of sampling variation (errors). However, they may be costly to implement and can result in the selection of products that are very difficult to price to constant quality.

36. In cases where appropriate sampling frames are lacking and it is too costly to obtain them, samples of outlets and products have to be obtained by non-probability methods. Statisticians should use available information and apply their best judgement to ensure that representative samples are selected. The possibility of applying cut-off or detailed quota sampling6 strategy may be considered, especially where the sample size is small. A mixture of probability and non-probability sampling techniques may be used.

37. Efficient and representative sampling, whether random or purposive, requires comprehensive and up-to-date sampling frames for outlets and products. Sample selection can be done either by head office from centrally held sampling frames, or in the field by price collectors, or by a mixture of the two. In the first case, price collectors should be given precise instructions on which outlets to visit and which products to price. In the second case, price collectors should be given detailed and unambiguous guidelines on the local sampling procedures to be adopted. Statistical business registers, business telephone directories, results from the point-of-purchase surveys or from surveys of sales in different types of outlets, and lists of Internet sellers may be used as sampling frames for the central selection of outlets. Catalogues or other product lists drawn up by major manufacturers, wholesalers or trade associations, or lists of products that are specific to individual outlets such as large supermarkets might be used as the sampling frame for selection of products. Data scanned by bar-code readers at the cashier’s desk (electronic databases) can be particularly helpful in the selection of goods and services.

38. The sample of outlets and of goods and services should be reviewed periodically and updated where necessary to maintain its representativeness.

### Index calculation

39. The compilation of a CPI consists of collecting and processing price and expenditure data according to specified concepts, definitions, methods and practices. The detailed procedures that are applied will depend on particular circumstances.

40. CPIs are calculated in steps. In the first step, the elementary aggregate indices are calculated. In the subsequent steps, higher-level indices are calculated by aggregating the elementary aggregate indices.

### Elementary aggregate indices

41. The elementary aggregate is the smallest and relatively homogeneous set of goods or services for which expenditure data are defined (used) for CPI purposes. It is the only aggregate for which an index number is constructed without any explicit expenditure weights, although other kinds of weights might be explicitly or implicitly introduced into the calculation. The set of goods or services covered by an elementary aggregate should be similar in their end-uses and are expected to have similar price movements. They may be defined not only in terms of their characteristics but also in terms of the type of location and outlet in which they are sold. The degree of homogeneity achieved in practice will depend on the availability of corresponding expenditure data.

42. An elementary index is a price index for an elementary aggregate. As expenditure weights usually cannot be attached to the prices or price relatives for the sampled products within the elementary aggregate, an elementary index is usually calculated as an unweighted average of the prices or price relatives. When some information on weights is available, this should be taken into account when compiling the elementary indices.

43. There are several ways in which the prices, or the price relatives, might be averaged. The three most commonly used formulae are the ratio of arithmetic mean prices (RAP), the geometric mean (GM) and the arithmetic mean of price relatives (APR). The choice of formula depends on the purpose of the index, the sample design and the mathematical properties of the formula. It is possible to use different formulae for different elementary aggregates within the same CPI. It is recommended that the GM formula be used, particularly where there is a need to reflect substitution within the elementary aggregate or where the dispersion in prices or price changes within the elementary aggregate is large. The GM has many advantages because of its mathematical properties. The RAP may be used for elementary aggregates that are homogeneous and where consumers have only limited opportunity to substitute or where substitution is not to be reflected in the index. The APR formula should be avoided in its chained form, as it is known to result in biased estimates of the elementary indices.

44. The elementary index may be computed by using either a chained or direct form of the formula chosen. The use of a chained form may make the estimation of missing prices and the introduction of replacement products easier.

### Upper-level indices

45. These price indices are constructed as weighted averages of elementary aggregate indices. Several types of formulae can be used to average the elementary aggregate indices. In order to compile a timely index, the practical option is to use a formula that relies on the weights relating to some past period. One such formula is the Laspeyres-type index, the formula used by most national statistical agencies.

46. For some purposes it may be appropriate to calculate the index retrospectively by using an index number formula that employs both base period weights and current period weights, such as the Fisher, Törnqvist or Walsh index. Comparing the difference between the index of this type and the Laspeyres-type index can give some indication of the combined impact of income changes, preference changes and substitution effects over the period in question, providing important information for producers and users of the CPI.

47. Where the change in an upper-level index between two consecutive periods such as t-1 and t is calculated as the weighted average of the individual indices between t-1 and t,care should be taken to ensure that the weights are updated to take account of the price changes between the price reference period 0 and the preceding period t–1. Failure to do so may result in a biased index.

### Price observations

48. The number and quality of the prices collected are critical determinants of the reliability of the index, along with the specifications of the products priced. Standard methods for collecting and processing price information should be developed and procedures put in place for collecting them systematically and accurately at regular intervals. Price collectors should be well trained and well supervised, and should be provided with a comprehensive manual explaining the procedures they have to follow.

### Collection

49. An important consideration is whether the index or parts of the index should relate to monthly (or quarterly) average prices or to prices for a specific period of time (e.g. a single day or week in a month). This decision is related to a number of issues, which include the use of an index, the practicalities of carrying out price collection and the pattern of price movements. When point-in-time pricing is adopted, prices should be collected over a very small number of days each month (or quarter). The interval between price observations should be uniform for each product. Since the length of the month (or quarter) varies, this uniformity needs to be defined carefully. When the aim is monthly (or quarterly) average prices, the prices collected should be representative of the period to which they refer.

50. Attention should also be paid to the time of day selected for price observation. For example, in the case of perishable goods, price observations may need to be collected at the same time on the same day of the week and not just before closing time, when stocks may be low, or sold cheaply to minimize wastage.

51. Price collection should be carried out in such a way as to be representative of all geographical areas within the scope of the index. Special care should be taken where significant differences in price movements between areas may be expected.

52. Prices should be collected in all types of outlets that are important, including Internet sellers, open-air markets and informal markets, and in free markets as well as price-controlled markets. Where more than one type of outlet is important for a particular type of product, this should be reflected in the initial sample design and an appropriately weighted average should be used in the calculation of the index.

53. Specifications should be provided detailing the variety and size of the products for which price information is to be collected. These should be precise enough to identify all the price-determining characteristics that are necessary to ensure that, as far as possible, the same goods and services are priced in successive periods in the same outlet. The specifications should include, for example, make, model, size, terms of payment, conditions of delivery, type of guarantees and type of outlet. This information could be used in the procedures used for replacement and for quality adjustment.

54. Prices to be collected are actual transaction prices, including indirect taxes and non-conditional discounts, that would be paid, agreed or costed (accepted) by the reference population. Where prices are not displayed or have to be negotiated, where quantity units are poorly defined or where actual purchase prices may deviate from listed or fixed prices, it may be necessary for the price collectors to purchase products in order to determine the transaction prices. A budget may be provided for any such purchases. When this is not possible, consideration may be given to interviewing customers about the prices actually paid. Tips for services, where compulsory, should be treated as part of the price paid.

55. Exceptional prices charged for stale, shop-soiled, damaged or otherwise imperfect goods sold at clearance prices should be excluded, unless the sale of such products is a permanent and widespread phenomenon. Sale prices, discounts, cut prices and special offers should be included when applicable to all customers without there being significant limits to the quantities that can be purchased by each customer.

56. In periods of price control or rationing, where limited supplies are available at prices which are held at a low level by measures such as subsidies to the sellers, government procurement, price control, etc., such prices as well as those charged on any significant unrestricted markets should be collected. The different price observations should be combined in a way that uses the best information available with respect to the actual prices paid and the relative importance of the different types of sales.

57. For each type of product, different alternatives for collecting prices should be carefully investigated, to ensure that the price observations could be made reliably and effectively. Means of collection could include visits to outlets with paper forms or hand-held devices, interviews with customers, computer-assisted telephone interviews, mail-out questionnaires, brochures, price lists provided by large or monopoly suppliers of services, scanner data and prices posted on the Internet. For each alternative, the possible cost advantages need to be balanced against an assessment of the reliability and timeliness of each of the alternatives.

58. Where centrally regulated or centrally fixed prices are collected from the regulatory authorities, checks should be made to ascertain whether the goods and services in question are actually sold and whether these prices are in fact paid. For goods and services where the prices paid are determined by combinations of subscription fees and piece rates (e.g. for newspapers, journals, public transport, electricity and telecommunications) care must be taken to ensure that a representative range of price offers is observed. Care must also be taken to ensure that prices charged to different types of consumers are observed, e.g. those linked to the age of the purchaser or to memberships of particular associations.

59. The collected price information should be reviewed for comparability and consistency with previous observations, the presence of replacements, unusual or large price changes and to ensure that price conversions of goods priced in multiple units or varying quantities are properly calculated. Extremely large or unusual price changes should be examined to determine whether they are genuine price changes or are due to changes in quality. Procedures should be put in place for checking the reliability of all price observations. This could include a programme of direct pricing and/or selective repricing of some products shortly after the initial observation was made.

60. Consistent procedures should be established for dealing with missing price observations because of, e.g. inability to contact the seller, non-response, observation rejected as unreliable or products temporarily unavailable. Prices of non-seasonal products that are temporarily unavailable should be estimated until they reappear or are replaced, by using appropriate estimation procedures, e.g. imputation on the basis of price changes of similar non-missing products. Carrying forward the last observed price should be avoided, especially in periods of high inflation.

### Replacements

61. Replacement of a product will be necessary when it disappears permanently. Replacement should be made within the first three months (quarter) of the product becoming unavailable. It may also be necessary when the product is no longer available or sold in significant quantities or under normal sale conditions. Clear and precise rules should be developed for selecting the replacement product. Depending on the frequency of sampling and the potential for accurate quality adjustment, the most commonly used alternatives are to select: (i) the most similar to the replaced variety; (ii) the most popular variety among those that belong to the same elementary aggregate; and (iii) the variety most likely to be available in the future. Precise procedures should be laid down for price adjustments with respect to the difference in characteristics when replacements are necessary, so that the impact of changes in quality is excluded from the observed price.

62. Replacement of an outlet may be motivated if prices cannot be obtained, e.g. because it has closed permanently, because of a decline in representativeness or because the outlet no longer cooperates. Clear rules should be established on when to discontinue price observations from a selected outlet, on the criteria for selecting a replacement, as well as on the adjustments that may be required to price observations or weights. Such rules should be consistent with the objectives of the index and with the way in which the outlet sample has been determined.

63. Deletion of an entire elementary aggregate will be necessary if all products in that elementary aggregate disappear from most or all outlets and it is not possible to locate a sufficient number of price observations to continue to compile a reliable index for this elementary aggregate. In such situations, it is necessary to redistribute the weight assigned to the elementary aggregate among the other elementary aggregates included in the next level of aggregation.

### Quality changes

64. The same product should be priced in each period as long as it is representative. However, in practice, products that can be observed at different time periods may differ with respect to package sizes, weights, volumes, features and terms of sale, as well as other characteristics. Thus it is necessary to monitor the characteristics of the products being priced to ensure that the impact of any differences in price-relevant or utility-relevant characteristics can be excluded from the estimated price change.

65. Identifying changes in quality or utility is relatively more difficult for complex durable goods and services. It is necessary, therefore, to collect a considerable amount of information on the relevant characteristics of the products for which prices are collected. The most important information can be obtained in the course of collecting prices. Other sources of information on price-relevant or utility-relevant characteristics can be producers, importers or wholesalers of the goods included and the study of articles and advertisements in trade publications.

66. When a quality change is detected, an adjustment must be made to the price, so that the index reflects as nearly as possible the pure price change. If this is not done, the index will either record a price change that has not taken place or fail to record a price change that did happen. The choice of method for such adjustments will depend on the particular goods and services involved. Great care needs to be exercised because the accuracy of the resulting index depends on the quality of this process. To assume automatically that all price change is a reflection of the change in quality should be avoided, as should the automatic assumption that products with different qualities are essentially equivalent.

67. The methods for estimating quality-adjusted prices7 may be:

• (a) Explicit (or direct) quality adjustment methods that directly estimate the value of the quality difference between the old and new product and adjust one of the prices accordingly. Pure price change is then implicitly estimated as the difference in the adjusted prices.

• (b) Implicit (or indirect) quality adjustment methods which estimate the pure price change component of the price difference between the old and new products based on the price changes observed for similar products. The difference between the estimate of pure price change and the observed price change is considered as change due to quality difference.

Some of these methods are complex, costly and difficult to apply. The methods used should as far as possible be based on objective criteria.

### Accuracy

68. As with all statistics, CPI estimates are subject to errors that may arise from a variety of sources.8 Compilers of CPIs need to be aware of the possible sources of error, and to take steps during the design of the index, its construction and compilation processes to minimize their impact, for which adequate resources should be allocated.

69. The following are some well-known sources of potential error, either in pricing or in index construction, that over time can lead to errors in the overall CPI: incorrect selection of products and incorrect observation and recording of their prices; incorrect selection of outlets and timing of price collection; failure to observe and adjust correctly for quality changes; appearance of new goods and outlets; failure to adjust for product and outlet substitution or loss of representativity; the use of inappropriate formulae for computing elementary aggregate and upper level indices.

70. To reduce the index’s potential for giving a misleading picture, it is in general essential to update weights and baskets regularly, to employ unbiased elementary aggregate formulae, to make appropriate adjustments for quality change, to allow adequately and correctly for new products, and to take proper account of substitution issues as well as quality control of the entire compilation process.

### Dissemination

71. The CPI estimate should be computed and publicly released as quickly as possible after the end of the period to which it refers, and according to a preannounced timetable. It should be made available to all users at the same time, in a convenient form, and should be accompanied by a short methodological explanation. Rules relating to its release should be made publicly available and strictly observed. In particular, they should include details of who has pre-release access to the results, why, under what conditions, and how long before the official release time.

72. The general CPI should be compiled and released monthly. Where there is no strong user demand for a monthly series or countries do not have the necessary resources, the CPI may be prepared and released quarterly. Depending on national circumstances, sub-indices may be released with a frequency that corresponds to users’ needs.

73. When it is found that published index estimates have been seriously distorted because of errors or mistakes made in their compilation, corrections should be made and published. Such corrections should be made as soon as possible after detection according to publicly available policy for correction. Where the CPI is widely used for adjustment purposes for wages and contracts, retrospective revisions should be avoided to the extent possible.

74. The publication of the CPI results should show the index level from the index reference period. It is also useful to present derived indices, such as the one that shows changes in the major aggregates between: (i) the current month and the previous month; (ii) the current month and the same month of the previous year; and (iii) the average of the latest 12 months and the average of the previous 12 months. The indices should be presented in both seasonally adjusted and unadjusted terms, if seasonally adjusted data are available.

75. Comments and interpretation of the index should accompany its publication to assist users. An analysis of the contributions of various products or group of products to the overall change and an explanation of any unusual factors affecting the price changes of the major contributors to the overall change should be included.

76. Indices for the major expenditure groups should also be compiled and released. Consideration should be given to compiling indices for the divisions and groups of the COICOP.9 Sub-indices for different regions or population groups, and alternative indices designed for analytical purposes, may be compiled and publicly released if there is a demand from users, they are judged to be reliable and their preparation is cost effective.

77. The index reference period may be chosen to coincide with the latest weight reference period or it could be established to coincide with the base period of other statistical series. It should be changed as frequently as necessary to ensure that the index numbers remain easy to present and understand.

78. Average prices and price ranges for important and reasonably homogeneous products may be estimated and published in order to support the research and analytical needs of users.

79. Countries should report national CPI results and methodological information to the International Labour Office as soon as possible after their national release.

80. Comparing national CPI movements across countries is difficult because of the different measurement approaches used by countries for certain products, particularly housing and financial services. The exclusion of housing (actual rents and either imputed rents or acquisition of new houses, and maintenance and repair of dwelling) and financial services from the all-items index will make the resulting estimates of price change for the remaining products more comparable across countries. Therefore, in addition to the all-items index, countries should, if possible, compile and provide for dissemination to the international community an index that excludes housing and financial services. It should be emphasized, though, that even for the remaining products in scope, there can still be difficulties when making international comparisons of changes in consumer prices.

### Consultations and integrity

81. The compiling agency should have the professional independence, competence and resources necessary to support a high quality CPI programme. The UN Fundamental Principles of Official Statistics10 and the ILO Guidelines concerning dissemination practices for labour statistics11 should be respected.

82. The agency responsible for the index should consult representatives of users on issues of importance for the CPI, particularly during preparations for any changes to the methodology used in compiling the CPI. One way of organizing such consultations is through the establishment of advisory committee(s) on which social partners, as well as other users and independent experts, might be represented.

83. In order to ensure public confidence in the index, a full description of the data collection procedures and the index methodology should be prepared and made widely available. Reference to this description should be made when the CPI is published. The documentation should include an explanation of the main objectives of the index, details of the weights, the index number formulae used, and a discussion of the accuracy of the index estimates. The precise identities of the outlets and goods and services used for price collection should not be revealed.

84. Users should be informed in advance of any changes that are going to be made to the scope, weights or methodology used to estimate the CPI.

85. Technical guidance on the compilation of consumer price indices is provided in the Consumer price index manual: Theory and practice.12 This manual should be updated periodically in order to reflect current best practice.

### Terminology and definitions

• (a) “Consumer goods” are goods or services that are used by households for the satisfaction of individual needs or wants.

• (b) “Consumption expenditures” are expenditure on consumer goods and services and can be defined in terms of “acquisition”,13 “use”, or “payment”:

• –“acquisition” indicates that it is the total value of the goods and services acquired during a given period that should be taken into account, irrespective of whether they were wholly paid for or used during the period. This approach could be extended to include the estimated values of own-account production and social transfers in kind received from government or non-profit institutions. The prices enter the CPI in the period when consumers accept or agree prices, as distinct from the time payment is made;

• –“use” indicates that it is the total value of all goods and services actually consumed during a given period that should be taken into account; for durable goods this approach requires valuing the services provided by these goods during the period. The prices (opportunity costs) enter the CPI in the period of consumption;

• –“payment” indicates that it is the total payment made for goods and services during a given period that should be taken into account, without regard to whether they were delivered or used during the period. The prices enter the CPI in the period or periods when the payment is made.

• (c) “Scope of the index” refers to the population groups, geographic areas, products and outlets for which the index is constructed.

• (d) “Coverage” of the index is the set of goods and services represented in the index. For practical reasons, coverage may have to be less than what corresponds to the defined scope of the index.

• (e) “Reference population” refers to that specific population group for which the index has been constructed.

• (f) “Weights” are the aggregate consumption expenditures on any set of goods and services expressed as a proportion of the total consumption expenditures on all goods and services within the scope of the index in the weight reference period. They are a set of numbers summing up to unity.

• (g) “Price updating of weights” is a procedure that is used to bring the expenditure weights in line with the index or price reference period. The price-updated weights are calculated by multiplying the weights from the weight reference period by elementary indices measuring the price changes between weight reference and price reference period and rescaling to sum to unity.

• (h) “Index reference period” is the period for which the value of the index is set at 100.0.

• (i) “Price reference period” is the period whose prices are compared with the prices in the current period. The period whose prices appear in the denominators of the price relatives.

• (j) The “weight reference period” is the period, usually a year, whose estimates of the volume of consumption and its components are used to calculate the weights.

• (k) “Probability sampling” is the selection of a sample of units, such as outlets or products, in such a way that each unit in the universe has a known non-zero probability of selection.

• (l) “Cut-off sampling” is a sampling procedure in which a predetermined threshold is established with all units in the relevant population at or above the threshold being eligible for inclusion in the sample and all units below the threshold being excluded. The threshold is usually specified in terms of the size of some relevant variable (such as some percentage of total sales), the largest sampling units being included and the rest excluded.

• (m) “Quota sampling” is a non-probability method where the population is divided into certain strata. For each stratum, the number (“quota”) of elements to be included in the sample is specified. The price collector simply “fills the quotas”, which means, in the case of outlet sampling, that the selection of the outlets is based on the judgement of the price collectors and the specified criteria.

• (n) “Imputed expenditures” are the expenditures assigned to a product that has not been purchased, such as a product that has been produced by the household for its own consumption (including housing services produced by owner-occupiers), a product received as payment in kind or as a free transfer from government or non-profit institutions.

• (o) “Imputed price” refers to the estimated price of a product whose price during a particular period has not been observed and is therefore missing. It is also the price assigned to a product for which the expenditures have been imputed, see (n).

• (p) “Outlet” indicates a shop, market stall, service establishment, Internet seller or other place where goods and/or services are sold or provided to consumers for non-business use.

• (q) “Linking” means joining together two consecutive sequences of price observations, or price indices, that overlap in one or more periods, by rescaling one of them so that the value in the overlap period is the same in both sequences, thus combining them into a single continuous series.

• (r) “Price” is defined as the value of one unit of a product, for which the quantities are perfectly homogeneous not only in a physical sense but also in respect of a number of other characteristics.

• (s) “Pure price change” is that change in the price of a good or service which is not due to any change in its quality. When the quality does change, the pure price change is the price change remaining after eliminating the estimated contribution of the change in quality to the observed price change.

• (t) “Quality adjustment” refers to the process of adjusting the observed prices of a product to remove the effect of any changes in the quality of that product over time so that pure price change may be identified.

• (u) “Consumer substitution” occurs when, faced with changes in relative price, consumers buy more of the good that has become relatively cheaper and less of the good that has become relatively more expensive. It may occur between varieties of the same product or between different expenditure categories.

### Annex 2

• 1. The “overlap” method assumes that the entire price difference at a common point in time between the disappearing product and its replacement is due to a difference in quality.

• 2. The “overall mean imputation” method first calculates the average price change for an aggregate without the disappearing product and its replacement, and then uses that rate of price change to impute a price change for the disappearing product. It assumes that the pure price difference between the disappearing product and its replacement is equal to the average price changes for continuing (non-missing) products.

• 3. The “class mean imputation” method is a variant of the overall mean imputation method. The only difference is in the source of the imputed rate of price change to period t + 1 for the disappearing product. Rather than using the average index change for all the non-missing products in the aggregate, the imputed rate of price change is estimated using only those price changes of the products that were judged essentially equivalent or were directly quality-adjusted.

• 4. The “expert’s adjustment” method relies on the judgement of one or more industry experts, commodity specialists, price statisticians or price collectors on the value of any quality difference between the old and replacement product. None, some, or all of the price difference may be attributed to the improved quality.

• 5. The “differences in production costs” approach relies on the information provided by the manufacturers on the production costs of new features of the replacements (new models), to which retail mark-ups and associated indirect taxes are then added. This approach is most practicable in markets with a relatively small number of producers, with infrequent and predictable model updates. However, it should be used with caution as it is possible for new production techniques to reduce costs while simultaneously improving quality.

• 6. The “quantity adjustment” method is applicable to products for which the replacement product is of a different size to the previously available one. It should only be used if the differences in quantities do not have an impact on the quality of the good.

• 7. The “option cost” method adjusts the price of the replacements for the value of the new observable characteristics. An example of this is the addition of a feature that earlier has been a priced option as standard to a new automobile model.

• 8. A “hedonic” regression method estimates the price of a product as a function of the characteristics it possesses. The relationship between the prices and all relevant and observable price-determining characteristics is first estimated and then results are used in the estimation of the index.

### Types of errors

• –“Quality change error” is the error that can occur as a result of the index’s failure to make proper allowance for changes in the quality of goods and services.

• –“New goods error” is the failure to reflect either price changes in new products not yet sampled, or given a COLI objective, the welfare gain to consumers when those products appear.

• –“Outlet substitution error” can occur when consumers shift their purchases among outlets for the same product without proper reflection of this shift in the data collection for the index.

• –“New outlets error” is conceptually identical to new goods error. It arises because of the failure to reflect either price changes in new outlets not yet sampled, or the welfare gain to consumers when the new outlets appear.

• –“Upper-level substitution error” arises when the index does not reflect consumer substitution among the basic categories of consumption owing to the use of an inappropriate method for aggregating elementary aggregates in the construction of the overall index value. Only relevant to a COLI, although an equivalent (representativity error) may be defined from the perspective of the pure price index.

• –“Elementary index error” arises from the use of an inappropriate method for aggregating price quotations at the very lowest level of aggregation. The elementary index error can take two forms: formula error and lower-level substitution error. The index suffers from formula error if, as a result of the properties of the formula, the result produced is biased relative to what would have been the result if a pure price change could have been estimated. The index suffers from lower-level substitution error if it does not reflect consumer substitution among the products contained in the elementary aggregate.

• –“Selection error” arises when the sample of price observations is not fully representative of the intended population of outlets or products. The first four types of errors listed above can be seen as special cases of this type of error.

### Classification of Individual Consumption according to Purpose (COICOP)14

(breakdown of individual consumption expenditure of households by division and group)

### 01 Food and non-alcoholic beverages

01.1 Food

01.2 Non-alcoholic beverages

### 02 Alcoholic beverages, tobacco and narcotics

02.1 Alcoholic beverages

02.2 Tobacco

02.3 Narcotics

03.1 Clothing

03.2 Footwear

### 04 Housing, water, electricity, gas and other fuels

04.1 Actual rentals for housing

04.2 Imputed rentals for housing

04.3 Maintenance and repair of the dwelling

04.4 Water supply and miscellaneous services related to the dwelling

04.5 Electricity, gas and other fuels

### 05 Furnishings, household equipment and routine household maintenance

05.1 Furniture and furnishings, carpets and other floor coverings

05.2 Household textiles

05.3 Household appliances

05.4 Glassware, tableware and household utensils

05.5 Tools and equipment for house and garden

05.6 Goods and services for routine household maintenance

### 06 Health

06.1 Medical products, appliances and equipment

06.2 Outpatient services

06.3 Hospital services

### 07 Transport

07.1 Purchase of vehicles

07.2 Operation of personal transport equipment

07.3 Transport services

### 08 Communication

08.1 Postal services

08.2 Telephone and telefax equipment

08.3 Telephone and telefax services

### 09 Recreation and culture

09.1 Audio-visual, photographic and information processing equipment

09.2 Other major durables for recreation and culture

09.3 Other recreational products and equipment, gardens and pets

09.4 Recreational and cultural services

09.5 Newspapers, books and stationery

09.6 Package holidays

### 10 Education

10.1 Pre-primary and primary education

10.2 Secondary education

10.3 Post-secondary non-tertiary education

10.4 Tertiary education

10.5 Education not definable by level

### 11 Restaurants and hotels

11.1 Catering services

11.2 Accommodation services

### 12 Miscellaneous goods and services

12.1 Personal care

12.2 Prostitution

12.3 Personal effects n.e.c.

12.4 Social protection

12.5 Insurance

12.6 Financial services n.e.c.

12.7 Other services n.e.c.

All annexes referred to in the footnotes are the annexes to the resolution.

See Annex 1.

See Annex 4.

See Annex 1.

See Annex 2.

See Annex 2.

See Annex 1.

See Annex 2.

See Annex 3.

See Annex 4.

UN Economic and Social Council, 1994.

Sixteenth International Conference of Labour Statisticians, 1998.

ILO/IMF/OECD/Eurostat/UNECE/World Bank, Geneva, 2004.

This definition differs from the one adopted by the Fourteenth ICLS (1987).

See Annex 2 on p. 465 for explanatory notes.

## Annex 4 Spatial comparisons of consumer prices, purchasing power parities and the International Comparison Program

### 1 Introduction

This annex deals with the problem of comparing price levels across different areas or regions within a country, as well as across countries. Even though international price comparisons are required to handle differences in currencies in different countries, the index number problems involved in price comparisons across countries mirror those encountered in comparisons over time. There is a large body of literature on cross-country comparisons of prices and real income undertaken under the auspices of the International Comparison Program (ICP). While not providing an exhaustive account of the related problems and relevant aggregation methods, this annex aims to achieve a degree of completeness in the coverage of the problem of consumer price comparisons in the manual by adding the spatial and international dimensions to the temporal comparisons dealt with in various chapters of the manual. The annex also attempts to identify possible avenues for a closer integration between spatial and temporal comparisons of consumer prices.

The main objectives of the annex are: (i) to provide a brief summary of the index number problems encountered in the process of international and inter-area price comparisons and to highlight the need for the development and use of specialized aggregation methods; (ii) to describe a few aggregation methods used in deriving purchasing power parities (PPPs) and spatial measures of price levels; (iii) to examine the relationship between the ICP and PPPs for cross-country comparisons with the CPI; and (iv) to explore the feasibility of integrating the ICP activities with the streamlined activities of national statistical offices for the compilation of the CPI.

The annex is also designed to provide an introduction for the statisticians in various national statistical offices who may currently be involved in consumer price index (CPI) compilation to the issues and methods involved in spatial comparisons of consumer prices. The annex outlines some of the principal differences in the approaches to spatial comparisons. Countries embarking on inter-area or regional consumer price comparisons, as well as those countries that may participate in the ICP in the near future, may find the contents of the annex useful.

### 2 Differences between temporal and spatial comparisons

There are several major qualitative differences in the nature of price comparisons involved in the standard CPI comparisons over time and price comparisons over space involving regions or countries. These differences highlight the need for specialized methods for aggregating price data in deriving summary measures of price levels, as well as specific types of data requirements associated with cross-country and inter-area comparisons.

The foremost difference is the absence of a natural ordering of price and quantity observations in the context of cross-country or inter-area comparisons. The CPI framework and methods are devised to measure changes over time. Therefore, the price observations appear in a chronological order. The presence of a natural ordering of price observations makes it possible to examine the feasibility and relative merits of the fixed and chain index numbers. For example, in the context of constructing price comparisons across countries within the OECD, or across states within the United States, it is impossible to arrive at an ordering which facilitates chained comparisons.

The multilateral nature of spatial comparisons is a distinguishing feature of price comparisons across regions and countries. When price levels of goods and services across different countries are compared, it is essential that such comparisons are undertaken for every pair of regions being considered. If the World Bank is interested in comparisons of real income in different countries, it is necessary for the Bank to be able to make comparisons between all pairs of countries involved. This multilateral nature of comparisons creates several problems. First, the number of comparisons (one for each pair) can be quite large, and presentation and use of such results may be quite unwieldy. For example, if a particular comparison exercise involves 20 countries, then it requires 190 (20 × 19/2) separate binary comparisons involving distinct pairs of countries. Second, results from such a large tableau of binary comparisons require a degree of consistency. This requirement translates into the “transitivity” condition described below.

The uses and applications of inter-area price comparisons may differ significantly from general consumer price indices. The CPI is probably the most significant economic statistic produced in any country. It is not only used as a general measure of price changes over time, but often in assessing and calibrating monetary policy. Despite the conceptual similarities in price comparisons over time and across space, spatial price comparisons are useful in comparisons of standards of living and well-being in different regions of a country or across countries. Such comparisons are essential in assessing development and in ensuring more balanced growth in different regions. There is considerable demand for measures of CPI across different cities and different states and regions (rural versus urban) within countries. However, there are very few countries where inter-area price level comparisons are readily available. Kokoski et al. (1999) demonstrate the feasibility of deriving meaningful inter-area price comparisons within the United States using the price data collected across different states.

International comparisons of prices, in the form of PPPs from the ICP, are used by international organizations and individual researchers in assessing growth and productivity performance of countries, and also in making meaningful comparisons of various national income aggregates (including government expenditure) across different countries. Currently, consensus is emerging among researchers and practitioners that price comparisons and PPPs are necessary in assessing the nature and extent of global poverty and its distribution across countries and regions of the world. Several recent research papers by Ward (2001), Prennushi (2001), Astin (2001) and Dwyer et al. (2001), presented at the joint World Bank-OECD Seminar on Purchasing Power Parities, 30 January to 2 February 2001, highlight a number of important applications of PPPs derived from international comparisons of prices under the ICP. Eurostat has recently embarked on a programme to extend the current ICP for its EU Member States to cover regional comparisons within different countries.

In recognition of the major analytical differences between the standard CPI comparisons over time and spatial and cross-country comparisons of consumer prices and PPPs, considerable research efforts have focused on the development of the data and methods necessary for spatial comparisons of prices. A brief summary of the results of this research is given below.

### 3 Data requirements for spatial comparisons

The basic data requirements for spatial comparisons are very similar to the data required for standard CPI calculation. The main components are the data on prices of a large range of products representative of the consumption baskets of households and information on weights associated with various product categories reflecting the importance attached to different products. Within the CPI, it is common practice to collect price quotations from different outlets scattered throughout the country. The selection of the outlets and areas from which prices are collected is based on complex multistage sampling designs. The expenditure weights are based on a classification of goods and services using a standard system such as the Classification of Individual Consumption according to Purpose (COICOP) or a similar national classification. The lowest level of product classification at which expenditure weights are available is used in identifying the elementary indices and higher-level indices at progressively higher levels of aggregation, leading ultimately to the total household expenditure level.

Spatial comparisons pose several problems in terms of identifying products that are to be priced from different areas, regions or countries involved in a comparison exercise. This problem is less severe when fairly similar or homogeneous areas are being compared. In cases where comparisons involve areas that are fairly heterogeneous, two problems arise. The first arises from major differences in the consumption baskets. For example, when comparisons are made between two states, say Minnesota and Florida, there may be major differences in the consumption baskets at the detailed level, even though the major expenditure categories may be identical. This problem is somewhat similar to the treatment of disappearing and new goods in the context of the

CPI, but is more serious when cross-country comparisons are being attempted. The second problem arises from major differences in the quality of items. The quality differences may be measured through several product characteristics, with allowances and adjustments being made at the appropriate stage of index number calculation. Kokoski et al. (1999) demonstrate the feasibility of making inter-area price comparisons for heterogeneous goods.

Changes in quality are likely to be more gradual in the case of temporal comparisons, but can be a serious problem when comparisons across countries are attempted. The ICP follows the principle of identity in dealing with the problem of quality differences across countries. A comprehensive list of products with detailed product specifications is developed at the planning stages of any cross-country comparison exercise. These items are priced in different countries from various outlets distributed across the country, a procedure very similar to that used in the CPI. Development of the product listing is, however, a difficult step, with the degree of difficulty depending upon the size and heterogeneity of the group of countries involved. The use of a product listing, based on the identity principle, can have serious implications for the representativeness of the product list of the consumption baskets in different countries. There are several operational procedures used by international organizations in handling these problems relating to the compilation of price data. A more detailed account of the problems and recommended solutions can be found in ICP Handbook (United Nations, 1992) and the recent publication by OECD (1999) on its international comparison work.

Once the price data are compiled, the next stage in the CPI compilation is the aggregation of item-specific price changes to measure price movements for various categories of consumption expenditure. At this stage, it is necessary to have information on consumption patterns. This information is usually drawn from household expenditure surveys. These surveys are regularly conducted in most countries by the respective national statistical organizations. For purposes of making inter-area comparisons of consumer prices, the corresponding requirement is the availability of household expenditure survey data specific to each area included in the comparisons. In many cases, for reasons relating to sampling and statistical reliability, detailed expenditure pattern data may not be available for all the regions.

Spatial comparisons of consumer prices pose specific problems because of the non-overlapping nature of the consumption baskets, major differences in the quality of items priced in different regions and countries, and the non-availability of crucial data on region-specific expenditure patterns. These problems require the development of new analytical techniques that can handle major differences in quality. National statistical offices may need additional financial resources in order to provide reliable and meaningful price comparisons between different cities, areas and regions within countries, and to compile reliable data for the more difficult task of inter-country comparisons of prices and real consumption.

### 4 Aggregation methods for spatial comparisons

This section briefly describes the types of aggregation methods that are commonly used in cross-country comparisons of prices. Since most of these methods have been developed in the context of the ICP, and are equally valid for inter-area or regional comparisons, the discussion below uses countries as spatial entities. This section is further divided into three parts. The first deals with the notation and conceptual framework necessary to deal with multilateral spatial comparisons. The second describes the construction of elementary indices for aggregation of prices when no quantity or expenditure information is available. Finally, a small selection of index number methods used in spatial price comparisons are presented.

### 4.1 Notation and conceptual framework

Consider the case involving comparisons across M countries, and price and quantity data on N commodities. These commodities refer to goods and services that are priced in all the countries. If the commodities refer to items below the elementary level at which no quantity or expenditure share data are available, we make use of only the price data. At this stage, all the problems relating to non-overlapping commodity lists and existence of quality differences are set aside so that the main focus is just on the aggregation issues. Let ${p}^{j}=\left[{p}_{1}^{j},\dots {p}_{N}^{j}\right]\phantom{\rule[-0.0ex]{0.3em}{0.0ex}}\mathrm{a}\mathrm{n}\mathrm{d}\phantom{\rule[-0.0ex]{0.3em}{0.0ex}}{q}^{j}=\left[{q}_{1}^{j},\dots {q}_{N}^{j}\right]$ represent the price and quantity vectors from country j (j = 1, 2,…, M). In the case of international comparisons, all the prices are expressed in the respective national currency units. As in the case of the CPI computation, the problem is one of decomposing the differences in the value aggregates

${V}^{j}=\sum _{i=1}^{n}{p}_{i}^{j}{q}_{i}^{j}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.1\right)$

into measures of price and real expenditure components.

Since there are M sets of price and quantity vectors and, therefore, M(M–1)/2 binary comparisons between all distinct pairs of countries, a simpler notation is used in this annex in the place of the notation generally used in the manual. Let Ijk denote the (consumer) price index number for country k with country j as the base. If j and k are, respectively, the United States and India, and if Ijk = 22.50, then the index is interpreted to mean that 22.50 Indian rupees have the same purchasing power as one US dollar for the goods and services covered in computing the index. Thus the index can also be interpreted as the PPP between the currencies of j and k. This interpretation is consistent with the meaning accorded to the CPI. Since currency denominations are involved here, a proper measure of relative price level differences can be obtained if the PPP is compared to the exchange rate prevailing at the time when comparisons are made.

Because of the multilateral nature of spatial comparisons, when M countries are involved, it is necessary to provide comparisons between all pairs of countries. Thus, it becomes necessary to compute each and every entry in the following matrix of binary comparisons:

$I=\left[\begin{array}{cccc}{I}_{11}& {I}_{12}& {I}_{1k}& {I}_{1M}\\ {I}_{21}& {I}_{22}& {I}_{2k}& {I}_{2M}\\ {I}_{j1}& {I}_{j2}& {I}_{jk}& {I}_{jM}\\ {I}_{M1}& {I}_{M2}& {I}_{Mk}& {I}_{MM}\end{array}\right]\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.2\right)$

Several points concerning the matrix, I, are worth noting. First, the matrix can be large if the number of countries (or regions) involved is large. Second, the results recorded in the matrix need to be internally consistent. All the index number issues and various approaches discussed in the manual apply directly to each binary comparison involving two countries. Diewert (1986, 1999b) provides a summary of the microeconomic theoretical and test approaches to crosscountry comparisons. Thus, it is possible to apply Fisher, Törnqvist, Walsh or other index number formulae described in the manual.

In order to ensure meaningful interpretation of the results from multilateral cross-country comparisons, the index number methods applied need to satisfy a number of basic requirements, only the most important of which are discussed below. Kravis et al. (1982), OECD (1999) and United Nations (1992) provide a complete list of these requirements.

Transitivity. An index number formula Ijk is said to satisfy the transitivity property if and only if for all choices of j, k and l (j, k, l=1, 2,…, M), the index satisfies

${I}_{jk}={I}_{jl}×{I}_{lk}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.3\right)$

Equation (A4.3) requires that the application of a formula to make a direct comparison, Ijk, should result in the same numerical measure as an indirect comparison between j and k through a link country l. Note that the transitivity property ensures internal consistency of index numbers in the matrix given in equation (A4.2). It guarantees that the PPP for two currencies, say A and B, is the same whether it is derived through a direct comparison of A and Β or through an indirect comparison that compares A with C and C with B, which are then combined to provide an indirect PPP for A and B. This requirement arises mainly from the spatial nature of the comparisons where no natural ordering of the countries involved could be imposed without a value judgement. Most of the commonly used index number procedures do not satisfy this requirement. The following result is useful in constructing transitive index numbers.

An index number formula Ijk satisfies the transitivity property in (A4.3) if and only if there exist M positive real numbers λ1, λ2,…, λM such that

${I}_{jk}=\frac{{\lambda }_{k}}{{\lambda }_{j}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.4\right)$

for all j and k.

The proof of this result is straightforward (Rao and Banerjee, 1984). The result is important since it shows that, when the transitivity property is satisfied, all that is necessary is to measure M real numbers λ1, λ2,…, λM, and then all the necessary indices in (A4.2) can be calculated using these M numbers, thus reducing the dimension of the problem involved. Two important points may be noted. First, the numbers λj in equation (A4.4) are not unique, since any scalar multiplication of a vector of λj can also lead to the same matrix of index numbers as that derived from the original λj. Therefore, these λj need to be determined (in any empirical exercise) up to a factor of proportionality. Second, these λj can be interpreted as the PPP of currencies involved. This particular result formed the basis of the work of statisticians such as Geary (1958) and Khamis (1970), who proposed aggregation methods designed to compute PPPs directly from the price and quantity data without invoking the index number literature.

Base invariance. An index number formula is said to be base invariant if a comparison between a given pair of countries (j, k) is invariant to the order in which the countries are listed. This implies that multilateral comparisons should be invariant to all possible permutations of the data set. For example, consider a set of transitive comparisons derived using a particular country (say the United States) as a star country. Under this scheme, price comparison between any pair of countries, say A and B, is effected through the United States which serves as a link country. Therefore,

${PPP}_{A,B}={PPP}_{A,USA}×{PPP}_{USA,B}$

This scheme is inadmissible under the base invariance criterion since the choice of the star country clearly affects the PPP of currencies of countries A and B. Further, the United States is accorded a special status, in the form of a link country, in deriving transitive multilateral comparisons.

Characteristicity. This is a requirement outlined in Drechsler (1973). This property requires that any set of multilateral comparisons satisfying the transitivity property should retain the essential features of the binary comparisons constructed without the transitivity requirement. Since condition (A4.3) implies that a transitive comparison between a pair of countries j and k is necessarily influenced by the price and quantity data for all the other countries, the characteristicity property requires that distortions resulting from adherence to the transitivity property should be kept at a minimum. Balk (2001) shows that a complete adherence to the characteristicity principle in its extreme (complete preservation of all binary comparisons) would imply that price indices, and hence PPPs, cannot depend upon any quantity or expenditure share weights. This is an extreme result, which is to be avoided in all index number comparisons. The Elteto–Koves–Szulc (EKS) method for multilateral comparisons, discussed below, has its origins in the characteristicity property.

### 4.2 Index number methods for spatial comparisons

Spatial price comparisons in general, and international comparisons in particular, use index number methods for aggregating price and quantity data at two different levels. The first is the basic heading level. This is normally the lowest level of aggregation at which expenditure data and weights are available. These basic headings usually consist of a fairly homogeneous group of items that are priced in different outlets in the countries. The subsequent levels of aggregation lead to indices for broad expenditure categories, and finally to the whole consumption basket.

### 4.2.1 Aggregation below the basic heading level

Two commonly used index number methods are described below. These procedures explicitly allow for the possibility that price data may not be available for all items in the product list constructed for a given international comparison exercise. Such a situation is possible in the case of temporal comparisons, but is usually limited to a small number of commodities that are either disappearing or new goods.

The Elteto-Koves-Szulc (EKS) Method. A variant of the original method proposed in Elteto and Koves (1964) and Szulc (1964) is generally used in aggregating price data below the basic heading level. The EKS method involves two stages. In the first stage, binary comparisons are constructed using price relatives of those commodities for which prices are available in both countries. If njk is the number of commodities that are priced in both countries, then the current practice within ICP constructs a binary elementary index using the following formula:

${I}_{jk}={\prod _{i=1}^{{n}_{jk}}\left[\frac{{p}_{i}^{k}}{{p}_{i}^{j}}\right]}^{1/{n}_{jk}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.5\right)$

Obviously, these indices are not transitive, since each index is based on prices of a different set of commodities. The EKS procedure is then used in deriving a transitive set of indices. The resulting formula for the construction of elementary indices for spatial comparisons is given by

${I}_{jk}^{EKS}=\prod _{l=1}^{M}{\left[{I}_{jl}{I}_{jk}\right]}^{1/M}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.6\right)$

The elementary index number formula in (A4.5) is similar to the formula used in the construction of the CPI. The principal difference results from the fact that not all commodities are priced in all countries and that there is a need for transitivity at all stages of aggregation. The properties of these indices are discussed in Chapter 20 of the manual.

The OECD (1999) uses a slightly modified variant of the binary indices shown in equation (A4.5). A formula that mimics the standard Fisher index is used, but without the use of any expenditure shares since the aggregation is below the basic heading level. This procedure tries to account for the fact that not all commodities for which prices are collected are really characteristic or important in one or both of the countries. The procedure takes explicit account of those commodities which are starred, indicating that the item is important in a given country. The modified EKS method uses the same formula as above, but the binary index on the right-hand side is replaced by:

${I}_{js}=\left\{\prod _{i\in M\left(s\right)}\left[\frac{{p}_{i}^{s}}{{p}_{i}^{j}}{\right]}^{\frac{1}{n\left(s\right)}}\prod _{i\in M\left(j\right)}\left[\frac{{p}_{i}^{s}}{{p}_{i}^{j}}{\right]}^{\frac{1}{n\left(j\right)}}{\right\}}^{\frac{1}{2}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.7\right)$

where n(s) and n(j) are, respectively, the number of starred items in countries s and j; M(s) and M(j) are, respectively, the sets of commodities that are starred (considered representative) in different countries.

Use of equations (A4.5) and (A4.6) for the construction of spatial CPI numbers at the basic heading level has its problems. The most important problem is that these formulae do not take into consideration whether or not the commodities priced in different countries are “representative” of the consumption in different countries within the basic heading. A related problem is whether or not the coverage of the commodities, priced with respect to the basic heading to which they belong, is adequate. These issues are currently being researched, and Rao (2001b)offers a modified approach that attaches weights proportional to coverage and representativeness.

While there has been much research on the properties of index number formulae for the construction of elementary indices within the CPI framework (Diewert (1995a), Dalén (1992) and Turvey (1996)), there has been very little research on the properties of elementary indices within the context of international comparisons.

The Country–Product–Dummy (CPD) Method. The CPD method was originally proposed by Summers (1973) as a tool to deal with missing price observations. The method is a simple statistical device that can be used in deriving the PPPs for a particular basic heading by simply regressing the logarithm of observed prices against a set of dummy variables, defined with respect to commodities and countries. Thus the procedure involves the model:

$\mathrm{ln}{p}_{i}^{j}={\eta }_{1}{D}_{1}+{\eta }_{2}{D}_{2}+\dots +{\eta }_{n}{D}_{n}+{\pi }_{1}{D}_{1}^{*}+{\pi }_{2}{D}_{2}^{*}+\dots +{\pi }_{M}{D}_{M}+{u}_{i}^{j\phantom{\rule{0ex}{0ex}}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.8\right)$

where Di (I=1,2,…,n) and ${D}_{j}^{*}\left(j=1,2,\dots ,M\right)$ are, respectively, dummy variables for the N commodities in the basic heading and M countries involved in the comparisons.

Once this regression equation is estimated, the PPP for currency of country k with country j as base can be obtained by

$PP{P}^{j}=\mathrm{exp}\left({\stackrel{^}{\pi }}_{j}\right)\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.9\right)$

where ${\stackrel{^}{\pi }}_{j}$ is the estimator of πj in equation (A4.8). Then the desired index at the basic heading level is given by

${I}_{jk}=\frac{{PPP}_{k}}{{PPP}_{j}}.\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.10\right)$

The exponential of the difference in the estimates of πj and πk obtained from the regression equation provides the necessary index number.

The CPD model offers a number of generalizations that can explicitly account for a number of data-related problems. The model can be easily generalized to account for differences in quality measured through a set of product characteristics. The feasibility of this approach to inter-area comparisons of consumer prices within the United States was demonstrated in Kokoski et al. (1999). Rao and Timmer (2000) examined the feasibility of using a generalized CPD model to incorporate various measures of reliability in the context of aggregating unit value ratios to provide comparisons al the manufacturing branch level. Rao (2001b) discusses a few model specifications that are appropriate for aggregation below the basic heading level within the context of the ICP.

The EKS method, described in equations (A4.6)–(A4.8), is the procedure that is currently used by all the international organizations for purposes of aggregation below the basic heading level. The CPD and EKS methods yield identical basic heading parities when all the commodities are priced in all the countries. Ferrari and Riani (1998) and Ferrari et al. (1996) present a number of analytical results relating to these methods.

While the sampling issues relating to the selection and distribution of outlets and the frequency of price quotations are considered important for the construction of the elementary indices within the CPI, issues that are crucial for the construction of PPPs below the basic heading for inter-country comparisons are quite different. Issues of quality differences and non-availability of goods and services in all the comparison countries are far more important in spatial comparisons of consumer prices.

### 4.2.2 Aggregation above the basic heading level

This section presents a small selection of the range of aggregation methods used in the context of spatial comparisons. A more comprehensive analysis of the spatial aggregation methods developed over the past three decades is presented by Balk (2001).

This level of aggregation is similar to the stage where elementary indices are aggregated to derive the overall CPI. In the case of temporal comparisons involving two time periods, all the methods and approaches described in the manual are appropriate, and in most cases the national statistical offices use the Laspeyres, Fisher or some variants of these formulae for CPI construction. However, the multilateral nature of spatial comparisons necessitates slightly different approaches to their construction.

A number of index number methods for aggregation above the basic heading level have been developed over the past three decades but, in the interest of brevity, only the principal methods are discussed below. These are the Geary–Khamis and EKS methods for international comparisons, the principal aggregation methods used in various international comparison exercises by the ICP, the OECD, Eurostat and FAO.

Several approaches to the construction of multilateral index numbers that satisfy transitivity and base invariance properties are discussed below. Four distinct approaches emerged during ICP work carried out between 1970 and the early 2000s. The first and most straightforward is the EKS approach, which uses binary results as building-blocks for multilateral comparisons. The second is the Geary–Khamis approach, which provides a methodology for computing PPPs of currencies and international average prices of commodities, using the price-quantity data at the basic heading level. The third is the stochastic approach based on the CPD method and its generalizations that can be used in econometrically estimating the PPPs using a regression framework. The fourth and the last approach discussed here is the linking approach to the construction of chained comparisons based on the concept of the minimum spanning tree. This is generating considerable interest and is explored further in the last section of this annex. These four approaches are by no means exhaustive, but they represent major strands of research and development in this area.

The EKS Method. The EKS system is a simple method of generating transitive multilateral index numbers from a system of binary index numbers, with the property that the resulting multilateral indices deviate the least (according to a specific criterion) from the binary indices. Since the seminal paper by Drechsler (1973), it has been well recognized that (transitive) multilateral systems necessarily deviate from their binary counterparts and therefore result in a loss of “characteristicity”. The EKS system is designed to minimize such loss of characteristicity. The original EKS system uses the Fisher binary indices, but the work of Caves, Christensen and Diewert (1982b) and Rao and Banerjee (1984) recognizes that other binary indices could be used in conjunction with the EKS technique. For any pair of countries j and k, if Fjk represents the Fisher binary index, then

${EKS}_{jk}=\prod _{l=1}^{M}\left[{F}_{jl}.{F}_{lk}{\right]}^{1/M}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.11\right)$

provides the EKS index.

There are several notable features of the EKS technique. First, it is based on the premise that direct binary comparisons, derived using any chosen formula, provide the best comparison between pairs of countries. Second, even though the EKS index in equation (A4.11) is defined using the Fisher index, this approach can be applied in conjunction with any other index number formula. For example, the Fisher index in equation (A4.11) may be replaced by another superlative index, such as the Törnqvist index. Caves, Christensen and Diewert (1982b) suggest the use of a Törnqvist-based EKS formula for spatial comparisons. Third, the EKS index in equation (A4.11) is the multilateral index that deviates the least from the matrix of non-transitive binary indices, when the deviations are measured using a logarithmic distance function. Finally, the EKS index can be interpreted as a simple geometric mean of all indirect comparisons between j and k through all possible link countries.

The simple unweighted nature of the EKS index has attracted attention in recent years. Since different binary comparisons have different levels of reliability, measured using various criteria, it is necessary to reflect these differences in defining weighted EKS index numbers. Rao and Timmer (2000), Rao et al. (2000) and Rao (2001b) provide illustrations of how weighted EKS indices can be generated in order to account for various data-related problems.

The Geary–Khamis (GK) Method. The GK method was originally proposed by Geary (1958) and subsequently developed by Khamis (1970, 1972 and 1984). The GK method has been the principal aggregation method in most of the ICP phases to date. Since 1996, the OECD has produced and published international comparisons based on both the EKS and GK methods.

The GK method provides a way of calculating PPPs of currencies of different countries from the observed price and quantity data (applied at the basic heading level). The concept of PPP is applicable even when the currency unit is the same in several areas of a country. The GK method simultaneously determines international average prices of different countries. Let Pi denote the international average price of ith commodity. The GK method is defined through the following system of interrelated equations, defined for each country j and each commodity i,

${P}_{i}=\frac{\sum _{j=1}^{M}{p}_{i}^{j}{q}_{i}^{j}/{PPP}_{j}}{\sum _{j=1}^{M}{q}_{i}^{j}}\phantom{\rule[-0.0ex]{0.3em}{0.0ex}}\mathrm{a}\mathrm{n}\mathrm{d}\phantom{\rule[-0.0ex]{0.3em}{0.0ex}}{PPP}_{j}=\frac{\sum _{i=1}^{N}{p}_{i}^{j}{q}_{i}^{j}}{\sum _{i=1}^{N}{P}_{i}{q}_{i}^{j}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.12\right)$

These simultaneous equations are then solved to yield numerical values of PPPs and Ps, after selecting one of the currencies as a numeraire. Once the PPPs are solved, the spatial price index numbers are simply defined as

${I}_{jk}=\frac{{PPP}_{k}}{{PPP}_{j}}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.13\right)$

One of the main reasons for the continued use of the GK method is “additivity”. Additivity requires that aggregates, such as real domestic product, derived by converting national aggregates using PPPs, should be equal to aggregates derived through valuation of quantities at international prices. Thus additivity requires

$\sum _{i=1}^{n}{p}_{i}^{j}{q}_{i}^{j}/{PPP}_{j}=\sum _{i=1}^{n}{P}_{i}{q}_{i}^{j}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.14\right)$

This requirement is satisfied automatically by the PPPs and Ps derived from the GK system defined in equation (A4.12). The GK system is also useful in analysing the structure of real GDP and shares of different components across different countries. This system provides a framework within which internationally comparable national accounts could be constructed. However, the GK system is not rooted in standard economic theory and fails several test properties (Diewert, 1986). There has been considerable debate among practitioners concerning the average prices resulting from the GK system. The system has the potential to reflect the price structure of the richer countries, and therefore has the tendency to overstate the real income of the poorer countries.

Weighted Country–Product–Dummy (CPD) Method. It is possible to generalize the CPD method discussed in the context of aggregation below the basic heading level. Rao (1995) has generalized the CPD method by incorporating quantity and value data directly into the CPD method described in equation (A4.8). The basic idea behind this generalization comes from the fact that the standard CPD regression model attempts to track the logarithm of the observed prices using an unweighted residual sum of squares. In the spirit of the standard index number approach, where price index numbers are required to track price changes of more important commodities more closely, a more appropriate procedure would be to find estimates of the parameters that are likely to track important commodities more closely. This is achieved by minimizing a weighted residual sum of squares, with each observation weighted according to the expenditure share of the commodity in a given country. Thus the generalized CPD method suggests that estimation of the equation

$\mathrm{ln}{p}_{ij}={\pi }_{1}{D}_{1}+{\pi }_{2}{D}_{2}+\dots +{\pi }_{M}{D}_{M}+{\eta }_{1}{D}_{1}^{*}+{\eta }_{2}{D}_{2}^{*}+\dots +{\eta }_{n}{D}_{n}^{*}+{u}_{ij}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.15\right)$

be conducted after weighting each observation according to its value share. This is equivalent to the application of ordinary least squares to the following transformed equation obtained by premultiplying equation (A4.15) by $\sqrt{{w}_{ij}}$. The resulting equation is:

$\sqrt{{w}_{ij}}\phantom{\rule[-0.0ex]{0.3em}{0.0ex}}\mathrm{ln}{p}_{ij}={\pi }_{1}\sqrt{{w}_{ij}}{D}_{1}+{\pi }_{2}\sqrt{{w}_{ij}}{D}_{2}+\dots +{\pi }_{M}\sqrt{{w}_{ij}}{D}_{M}+{\eta }_{1}\sqrt{{w}_{ij}}{D}_{1}^{*}+\dots +{\eta }_{n}\sqrt{{w}_{ij}}{D}_{n}^{*}+{v}_{ij}\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.16\right)$

where ${w}_{ij}={p}_{ij}{q}_{ij}/\sum _{i=1}^{N}{p}_{ij}{q}_{ij}$ is the value share of the ith basic heading in the jth country.

Rao (1995) has shown that the international prices and PPPs resulting from the estimates of parameters in equation (A4.13) are identical to those derived using the Rao method for international comparisons, described in Rao (1990). Thus the weighted CPD method may be considered as a bridge between the GK approach to international comparisons and the standard stochastic approach to index numbers.

Kokoski et al. (1999) outline a procedure which makes use of the CPD method to adjust for differences in quality characteristics of various consumer items for the construction of inter-area CPIs using United States data. Estimates derived from the CPD method are subsequently used in the application of the multilateral Törnqvist index derived after imposing the transitivity condition. Hence the approach used in Kokoski et al. (1999) may be described as a mixed stochastic and index number approach to multilateral spatial comparisons of CPI numbers.

Spatial linking and chaining approach. In recent years, a new approach to inter-area and inter-country comparisons of prices has been given serious consideration. This approach advocates spatial chaining of binary comparisons where links are identified using a procedure based on a measure of distance or reliability of binary comparisons involved. This approach is in sharp contrast to the general approach to multilateral comparisons, where either all the binary comparisons are used, as in the case of the EKS method, or all the price and quantity data are simultaneously used, as in the case of the GK and CPD approaches.

Using the graphical theoretical concept of minimum spanning trees, Hill (1999c, 1999d) proposed a method of deriving a system of transitive multilateral comparisons from a matrix of binary comparisons. The Hill approach is based on the fact that direct binary comparisons may not always be the best.

For any pair of countries j and k, Hill suggests a measure of distance (indicating the reliability of the binary comparison) using the Laspeyres–Paasche spread defined as

$D\left(j,k\right)=|\mathrm{ln}\left(\frac{L\left(j,k\right)}{P\left(j,k\right)}\right)\phantom{\rule{0ex}{0ex}}|\phantom{\rule[-0.0ex]{5em}{0.0ex}}\left(A4.17\right)$

where L(j, k) and P(j, k) are, respectively, binary Laspeyres and Paasche price index numbers. Note that the same distance function emerges if price index numbers are replaced by quantity index numbers. D(j, k) is equal to zero if the price structures or quantity structures are identical in countries, j and k. Thus, this distance function serves as an indicator of similarity of price and quantity structures in these countries.

Using a matrix of distances calculated for all pairs of countries, Hill (1999c, 1999d) suggests that a minimum spanning tree (MST) be extracted and used in constructing chained links between all pairs of countries. The MST has the property that a chained comparison between any pair of countries has the least distance, and therefore can be considered as the most reliable. It also has the property that the sum of the distances between all the links, in the MST, is the least when compared to all possible tree-configurations. For purposes of illustrating the concepts involved, Figure A4.1.1 shows the MST for Europe constructed using ICP data for Europe for the 1985 benchmark year.

It is evident from the MST presented here that a comparison between Germany and Portugal is through a chain involving Ireland, Luxembourg and Spain. This chained comparison is deemed to be better than a direct comparison between these two countries. There are a number of issues yet to be resolved regarding the use of the MST. Nonetheless, an MST provides a formalization of a somewhat intuitive notion of linking dissimilar countries using a chain of similar countries.

Once the MST is identified, a transitive comparison between a given pair of countries in a particular exercise is constructed using binary indices calculated using a chosen formula, such as the Fisher or Törnqvist index, and the links indicated in the MST. Thus, if a comparison between Sweden and Denmark is needed, then the MST approach suggests the following index for this comparison:

${I}_{\mathrm{S}\mathrm{w}\mathrm{e}\mathrm{d}\mathrm{e}\mathrm{n}\mathrm{,}\mathrm{D}\mathrm{e}\mathrm{n}\mathrm{m}\mathrm{a}\mathrm{r}\mathrm{k}}^{MST}={F}_{\mathrm{S}\mathrm{w}\mathrm{e}\mathrm{d}\mathrm{e}\mathrm{n}\mathrm{,}\mathrm{F}\mathrm{i}\mathrm{n}\mathrm{l}\mathrm{a}\mathrm{n}\mathrm{d}}×{F}_{\mathrm{S}\mathrm{w}\mathrm{e}\mathrm{d}\mathrm{e}\mathrm{n}\mathrm{,}\mathrm{F}\mathrm{i}\mathrm{n}\mathrm{l}\mathrm{a}\mathrm{n}\mathrm{d}}$

where F denotes the Fisher index.

Since the MST provides a unique chain of links between any two countries, comparisons are uniquely defined. The spanning trees are, however, sensitive to the countries included, and the types of measures used in assessing the degree of reliability or comparability of any two countries. Aten et al. (2001) examine the sensitivity of the spanning trees and the resulting comparisons based on a range of measures including some similarity indices. Rao et al. (2000) applied the spanning tree approach to the construction of multilateral, agricultural input, output and productivity indices, using United States state-level agricultural production data.

### 5 Integration of the CPI and inter-area and international comparisons

The best available inter-area and international price comparisons for consumer goods and services use data from the national statistical offices compiling CPIs. In recent critical reviews of the ICP by Ryten (1998), and of the OECD–Eurostat PPPs by Castles (1997), the accuracy and reliability of international comparisons have been assessed as being less than adequate. Castles notes the difficulties encountered in comparing like goods from country to country, and Ryten argues for the need to secure greater support from national statistical offices in compiling price data for the ICP. Both reviews recommended examination of the feasibility of integrating ICP work with that of the normal CPI work undertaken by the national statistical offices. Since this annex deals with spatial and international comparisons, it is appropriate now to examine and identify possible steps involved in a more integrated approach to the CPI and ICP activities.

This section first provides an assessment of potential benefits that could flow from the integration of CPI and ICP activities with statistical systems in general, and price statistics in particular, at both global and national levels. It is useful to note here that the ICP provides cross-country comparisons of prices of goods and services that enter private consumption, government consumption and investment. Thus ICP encompasses all components of gross domestic product (GDP). In contrast, the CPI focuses mainly on movements in prices of consumer goods and services. The nature and scope of the CPI and ICP activities and the limits on the extent of an integrated approach are discussed briefly. The final subsection identifies a number of useful initiatives that could provide a framework for a practical, more integrated approach to these important activities involving inter-temporal, inter-area and international comparisons of consumer prices and the ICP.

### 5.1 Benefits from CPI and ICP integration

Globalization and the resulting expansion in international trade and financial flows have led to an ever-increasing demand for internationally comparable statistics that can be used in assessing the economic performance of nations. The ICP plays a major role in meeting this demand by providing internationally comparable national income aggregates, such as private and government consumption and capital formation. The ICP has also provided valuable information on relative international prices of goods and services, at a reasonably disaggregated level, which is used by researchers around the world. The most popular by-products of the international comparisons are the Penn World Tables and the World Development Indicators, which are considered invaluable sources of data for research on global inequality, poverty and econometric analysis of productivity growth, and the study of catch-up and convergence among nations.

The potential benefits of the ICP are somewhat diminished by the long lags in making international comparisons available to potential users. The coverage of the ICP is not extensive and the number of countries covered varies across regions. The limited coverage of ICP in some regions reflects the resource needs associated with the compilation of price data specifically for the purpose of the ICP. It is in this area where significant benefits can be derived if the ICP activities can be integrated with the CPI work of the national statistical offices.

At the global level, the potential benefits are many and varied. A few are listed below:

• increased country coverage, leading to a better framework for extrapolations;

• improved quality of the estimates resulting from the use of extensive price data collected for CPI purposes, rather than basing comparisons on products with specifications that may not be representative of the consumption baskets of the countries involved;

• benefits from research on methods for quality adjustment. Such methods are necessary to make adjustments for differences in product quality across countries;

• the development of regional PPPs, which are likely to make ICP results more consistent with domestic price movements and more acceptable to national governments;

• construction of internationally comparable national accounts, in a common currency unit, complementing the existing national accounts in national currency units. Such accounts will be a useful addition to the international statistical data bases that will enable global-level research on country and regional economic performance, and long-term catch-up, and convergence among countries;

• reliable estimates of PPPs along with domestic rates of inflation, providing a complete matrix of temporal–spatial price differences that can be used to better understand the factors influencing national price levels and exchange rate movements.

Several benefits may also be derived by the national statistical offices from an integrated approach to the compilation of CPI and PPPs. The nature of benefits derived will, however, vary depending on the stage of development of the countries involved. For more developed countries with well-established statistical agencies and programmes, the benefits derived are through the synergies arising out of a joint approach to spatial and temporal comparisons. These are as follows:

• Recent work on CPI and ICP manuals addresses the important issue of quality change over time and quality differences across countries. Efforts are being channelled into finding suitable statistical methods that can be used in the measurement of price-level changes leading to reductions in potential biases.

• The treatment of new and disappearing products within the CPI is also an important problem associated with increased globalization, the expansion of free trade and the removal of tariff barriers. Thus national statistical offices, especially in developed countries, are often confronted with the problem of accounting for new goods, and goods subject to rapid quality changes.

• The regular compilation of the national accounts statistics and the measurement of price change through the CPI, and extending to inter-area and international comparisons, can provide information needed to assess the levels of, and movements in, real income.

In the case of developing countries with inadequate statistical infrastructure, benefits from an integrated approach could be significant and aid statistical capacity building in such countries. These benefits include:

• strengthening statistical infrastructure and institution building. Efforts to implement the CPI manual and its recommendations, along with participation in the ICP activity, are likely to identify deficiencies in a country’s infrastructure and the lack of institutional capacity. In some countries, it may be necessary to strengthen management and planning functions, recruit new staff, and provide training to conduct household expenditure and other general price surveys;

• strengthening of data collection, processing systems and dissemination. Designing and conducting sample surveys to international standards is a lengthy and demanding exercise. It may be necessary to develop a systematic plan to improve survey designs to coordinate surveys of economic and business entities, and to conduct periodic censuses of economic activity. Computerization of data-processing activities may also be required;

• improvement in the measurement of income inequality and poverty. Improved price and expenditure data can be used to improve national and international estimates of poverty;

• improved regional comparisons. PPPs compiled for regions and for neighbouring countries can provide useful insights into the dynamics of regional development, and help identify the regions with special needs and required assistance. Comparisons with neighbouring countries, in terms of relative price differences and real income changes, can provide powerful incentives to pursue policies for growth and low inflation.

There are many potential applications of the PPPs from the ICP. Several papers (by Astin (2001), Ward (2001) and Prennushi (2001), in particular) at the recent OECD–World Bank (2001) seminar dealt with some important applications of PPPs at Eurostat and the OECD, and at the global level in the assessment of poverty and inequality.

### 5.2 Salient features of CPI and ICP integration

In order to identify strategies for closer integration of temporal CPI compilation with wider inter-area and cross-country comparisons of consumer prices and PPPs at the level of GDP, it is necessary to examine the main features and the context in which such an integration will occur. The important issues are the scope and coverage of these two endeavours from the perspective of national statistical offices, and a general framework of price comparisons within which both these activities are placed. This section deals with these two aspects.

The scope and coverage of the CPI and ICP are vastly different. The CPI is a measure of changes, over time, in prices of goods and services that belong to the consumption baskets of households in a given country. In contrast, the ICP provides a measure of price-level differences across countries, covering all components of the expenditure side of the national accounts. The main components of GDP used in ICP comparisons are household consumption, government consumption, capital formation and net exports. In line with the SNA 1993, the ICP merges the portion of government expenditure that provides goods and services to households with private consumption to form household consumption. Thus, the scope and coverage of goods and services in the ICP is much wider than that of the CPI. The household consumption concept used is, however, almost identical to that used in constructing the CPI. Any integration of CPI and ICP work will necessarily be confined to the household consumption aggregate of the national accounts.

Within the ICP, price quotations from different countries are obtained for a large number of goods and services with very well-defined product specifications. This approach, described as the “tight specification” approach, is used in the ICP. The tight specification approach requires a sufficient description of the product so that it is uniquely defined in the “law of one price” sense, and so that it can be recognized in a range of localities and time periods wherever and whenever it is available. The product listing is determined on the basis of the group of countries included in an international comparison exercise. While this approach provides a solution to the problem of quality variations across countries, the commodities priced for ICP purposes may not be representative of the consumption baskets in respective countries. Thus, commodities priced may not be representative of the items consumed in the countries, which usually make up the bundle of goods and services for the construction of the CPI.

The degree of success of integrating ICP activity with the CPI compilation depends upon the extent to which these two activities can draw on a common pool of data and information available at the national level. The intersection of data sets for the CPI and the ICP is represented in figure A4.2.

The following marked areas are of particular significance:

Figure A4.2 shows that if the integration between the ICP and the CPI is to be successful, the ICP comparisons should necessarily be restricted to country groupings where the basket of goods and services representing household consumption within the ICP has a significant overlap with the country-specific CPI baskets. Such an overlap can be achieved only when country groupings within the ICP comparisons exhibit similarities in their CPI consumption baskets. This has implications for the ICP and its regionalization programme.

In examining the CPI and ICP activities, it is also necessary to consider a range of temporal and spatial price comparisons of interest to national statistical offices in the course of providing a comprehensive set of economic statistics for policy-makers and other analysts. It is possible to consider these activities in a sequence indicating the progression involved in these price comparison activities (figure A4.3).

The schematic diagram uses the standard CPI activity of estimating annual or quarterly price changes for the nation as a whole. In most countries, national CPI figures are supplemented by area-specific CPI estimates for either capital cities or regions within the country. A natural progression, where data permit, is to undertake spatial comparisons of prices. At present, very few countries appear to produce such indices on a regular basis. A fairly significant jump from this level is to undertake price comparisons, on a bilateral or multilateral basis, with geographically contiguous countries or countries within a political or economic grouping. The last element in this chain is the participation of the national statistical offices in a global price comparison exercise such as the ICP. At present, national statistical offices are mostly involved at the two extreme ends of this spectrum. The general level of involvement of national statistical offices in the ICP is likely to be more enthusiastic, however, when they gain experience from their participation in inter-area comparisons within the country and intra-regional comparisons involving countries in geographical proximity.

### 5.3 Two core strategies for CPI and ICP integration

Based on the brief discussion of the CPI and ICP activities undertaken by participating national statistical offices, it is possible to identify two major strategies that will result in a level of integration between these two activities that can benefit both programmes and the systems of economic statistics in the participating countries. Both of these strategies emerge from the need to maximize the flow of data from the CPI and ICP, and at the same time provide a framework for improving temporal and inter-area consumer price comparisons within a country.

Use of characteristics approach. This approach was proposed in Zieschang et al. (2001) and alluded to in Rao (2001a). The characteristics approach begins with a market study by a national statistical office analyst to determine a set of price-determining characteristics. These product characteristics, such as size, features, nature of the sale transaction, type of outlet, and so on, are determined according to the available information about the impact of the detailed characteristic on price at a point in time or over a specified reference period, such as a year. Under this approach, product prices are collected and at the same time the product characteristics are also recorded.

In the standard CPI context, the product listing remains fairly constant, except in cases where an old variety or product is replaced by a new one. When spatial comparisons are undertaken, however, the overlap in products may be limited. In such cases, the characteristics approach becomes useful. This approach is in direct contrast with pricing very specific products in all the countries, or in areas within a country, thus limiting the overlap and the usefulness of the resulting CPIs.

The characteristics approach requires price and characteristics data for a sufficiently wide variety of detailed commodities or specifications in the item group to estimate a regression model of price on characteristics. Such models are known as hedonic regression models, where the logarithm of price is regressed on various characteristics. For spatial comparisons, this approach is very similar to the country–product–dummy (CPD) method discussed above in this annex. Kokoski et al. (1999) describe a method of producing “exact”, characteristics-adjusted, economic index number comparisons between areas that allow for hedonic equation parameters to differ from one area to another. This method can be classified as a variant of the weighted CPD method along with a multilateral Törnqvist index number.

The main advantages of the characteristics approach is that it is not critically based on the overlap in commodity bundles for different areas or countries, but on the sample size and number of commodities for which prices and quality characteristics are collected. The sample size needs to be large enough to enable efficient estimation of the parameters involved.

In order to facilitate cooperation with the ICP, in addition to having a well-structured database for the CPI that is extended to cover characteristics, the interests of national statistical offices are ultimately best served by implementing product and characteristic classification schemes consistent with internationally agreed standards. In order to make this approach operational, it is necessary that such classification schemes are established by making use of some of the existing classifications, for example the Central Product Classification (CPC) or the Classification of Individual Consumption according to Purpose (COICOP). These product classifications need to be extended to include a core set of standard characteristics for each category within the classification.

Notwithstanding the benefits of the characteristics approach, implementing a scheme of product characteristics classification requires all the countries or parties involved to agree to a specific standard and to allocate the necessary resources for such an endeavour. Until comprehensive data sets with price and characteristics of products become available, it may be necessary to explore other possible approaches that can be used in conjunction with the present “tight specification” approach used in ICP exercises.

Linking approach to international comparisons. If maximizing the overlap with the CPI is one of the principal objectives of the ICP, then multilateral cross-country comparisons need to be built up from bilateral comparisons, where pairs of countries are identified on the basis of the maximum overlap in their national CPI baskets. Once such pairs of countries are identified, then multilateral comparisons can be built using chains constructed on the basis of links. This approach is somewhat similar to the MST approach proposed by Hill. While the basic criterion in Hill’s approach uses variability in price relatives, measured using the Laspeyres-Paasche spread, the approach suggested here requires measures of overlap of price data as the principal criterion.

The linking approach needs a multi-stage framework. In the first stage, it is necessary to identify groups of countries to form regions or clusters. The principal criteria that should be used are, first, the extent of overlap that can be achieved between pairs of countries within the group and some measures of similarity in the expenditure patterns. In the second stage, an MST approach should be used to identify the exact links within a regional cluster of countries. Once multilateral regional PPPs are constructed, and PPPs for the GDP and its major components are derived, then the next stage will involve linking various regional comparisons to derive a set of global comparisons and PPPs.

Application of the chaining procedure represents a major shift from the present approach to ICP work. Currently, comparisons within the ICP are based essentially on a top-down approach, where a commodity listing based on the “tight specification” approach is determined in the first instance, and then price data from different countries are collected. Where the ICP work is regionalized, regions are essentially determined on geographical considerations and not on any data-based considerations. If cross-country comparisons are to be based on nationally available CPI data, it is necessary to use a bottom-up approach, where all the operational procedures, including the determination of clusters and links, need to be built with the data available from the national sources provided by the national statistical offices. The application of spatial linking procedures will minimize the need for quality adjustments of the type described under the characteristics approach to price data collection.

The integration of spatial and temporal comparisons has the potential to provide a consistent set of temporal, inter-area and inter-country comparisons, and at the same time improve the quality of the underlying comparisons. It is an exciting prospect, but several challenges need to be met before a truly integrated approach to spatial and temporal consumer price comparisons can be achieved.

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