The consumer price index (CPI) covers price changes in consumption expenditures by households, and should be representative of all types of goods and services households purchase for day-to-day living. The coverage is, in some countries, limited to a few urban areas assumed to be representative of the general/total population. In most countries, however, rural areas are explicitly covered.
The Retail Price Index (RPI) is calculated either in addition or as an alternative to the CPI. The primary difference between the CPI and the RPI is that the RPI reflects retail sales of primary, intermediate and finished goods and services sold to households as well as businesses, and excludes rent on dwellings – which has rater large weight in most CPI’s. The RPI might, in some instances, be calculated as a unit value index for specific commodity groups rather than for individual varieties of goods and services.
The CPI is an instrument designed to measure changes over time in the prices paid by households for the goods and services in which they customarily purchase for consumption.
Coverage
Households are taken to mean private households including single person households, excluding institutional populations, e.g., persons permanently living in convents or old people’s homes. It should be noted that some countries use a different definition of households.
Because households spending habits vary according to several factors e.g., number of children, place of residence, and household income, the distinguished features of the households to which the index applies must be specified. Typically, some countries limit their coverage to urban areas. Thus users should be aware of the population for which the index is representative.
The scope of the CPI is goods and services intended for household consumption. This naturally includes durable goods such as furniture and cars, luxury goods such as perfumes and travel for pleasure, in addition to food, clothes, rent, books etc. Among expenditures that are excluded is the purchase of dwellings, life assurance premiums, social security contributions and income taxes. Furthermore, services provided by government for free, such as public schools and police services are not covered. (Note; the cost of housing is covered even if the purchase of dwellings is out. In countries where the majority of the households owe their own houses, data are based on special surveys.)
Obviously, it is not possible to monitor regularly the price movements of all items consumed by households. Rather, these are represented by a limited sample – a basked of goods and services. The sample, or basket, is chosen to reflect the spending pattern of the reference population at a given time. However, the consumption habits, in which the basket is intended to represent, changes over time. Thus, the weighting pattern as well as the sample should be revised regularly so as to reflect new spending patterns.
The most important source of information for the structure of the basket and the weights are the household survey. For budgetary reasons, the household expenditure surveys tends to be conducted infrequently in developing countries. Because consumption habits change over time, this leads to poorer comparability over time.
Making up the basket includes two major operations;
(i) the choice of representative items, and
(ii) the determination of the quantities (weights) to be taken into account.
(i) Representative items should be; regularly consumed by households, the change in their prices typical of that of similar products, reasonable stable (not appearing on / disappearing from market), and their prices easily observable.
(ii) The structure of the expenditure on the contents of the basket should correspond exactly to that of total household consumption expenditure in the period chosen as the base of the index.
Just as it is not possible to observe all goods and services consumed, the prices of the representative items can not be observed every day in every location. Once again a sample is used, both for the locations and for the dates of observations.
Index formula
Most countries have adopted the basic concept of the Laspeyres index for the computation of the consumer price index. Thus, the CPI and any sub-indices, like the food price index, are weighted arithmetic averages of fixed base item indices. The weighting pattern is constant and represents the household consumption expenditure structure, at the base period. Most developing countries update the base period annually, while the practice differs among developing countries. Because the Laspeyres index formula assumes that purchases are made in fixed quantities based on optimal decisions from some previous period’s experience – no substitution, the CPI will represent the upper bound of inflation faced by the household. However, the difference between the upper bound and the true inflation will be relatively small if the weights are regularly updated.
Although a useful indicator for measuring consumer price inflation within a country, the CPI is of less value in making comparisons across countries, since the definition of a household, , the basket of goods and services chosen, and the geographic (rural/urban) as well as income group coverage of consumer price surveys can vary widely across countries. |
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