[Music] hello and welcome to this preview for imf summer school's online course consumer price index or cpix cpis are considered one of the most important economic and social indicators produced by national statistical organizations they're widely used as a macroeconomic measure of inflation for the indexation of wages salaries and government payments a tool by governments and central banks for monetary policy and as a metric to monitor price stability that's why the quality and accuracy of national cpis and their international comparability are critical this online course will walk you through important uses of cpis the concepts and definitions surrounding them and address key issues with compiling cpis you'll also learn the various formulas compilers use to calculate a cpi and define the recommended elementary and upper level calculation formulas we'll discuss the different levels of cpi sampling and the methods used to select each sample we'll explain and demonstrate the different methods recommended for the treatment of missing prices and you'll get a demonstration of how to update cpi weights and link the old and new indexes to form a continuous time series of data the cpix course is based on the recommendations and best practices detailed in the consumer price index manual concepts and methods if you're a cpi compiler or a data user there's a lot for you in this course register for the full cpix course for free at the link below i hope you decide to join us cpis have multiple uses including a macroeconomic measure of inflation key input into monetary and economic policy decisions index salaries and wages and poverty analysis to name a few each of these different uses require different concepts and methods essentially each different use for the cpi requires a distinct cpi that reflects the concepts and methods appropriate for that use is this feasible let's investigate these practicalities it is not practical to compile separate cpis for each use first nsos are constrained by staff and budgetary resources nsos do not have the resources to collect the expenditure data needed to compile different cpis nor do they have the resources to collect compile and disseminate multiple indexes second the dissemination of multiple cpi's would create confusion among users users would be confused over what is the headline measure of inflation users may be inclined to use an index that is not appropriate for their use but has a more favorable rate of change this does not mean that nsos cannot produce alternative aggregations of cpi data to meet user needs if alternative aggregations are compiled and disseminated it is important that the headline index is clearly identified and defined any alternative aggregation should be clearly explained for users including the purpose and uses of these data alternative aggregations should be identified as analytical series to avoid confusing users to conclude nsos are faced with having to compile a single multi-purpose cpi that meets a broad range of uses let's now unpack the aggregation structure of a cpi using a classification of consumers expenditure such as the classification of individual consumption according to purpose or coicop the entire set of consumption goods and services covered by the overall cpi can be divided into divisions such as food and non-alcoholic beverages each division is further divided into groups such as food groups are divided into classes such as cereals and cereal products classes are further divided into subclasses such as cereals many countries use an even finer classification by further disaggregating below the level of the subclass for cpi purposes each subclass can then be divided into more homogeneous microclasses such as basmati rice the microclass may be further subdivided according to region or type of outlet in some cases a particular microclass does not need to be further subdivided in which case the microclass becomes the elementary aggregate within each elementary aggregate one or more products are selected to represent all the products in the elementary aggregate for example the elementary aggregate consisting of bread sold in supermarkets in the northern region covers all types of bread from which wheat bread and whole grain bread are selected as representative products of course additional representative products might be selected in practice finally for each representative product several specific varieties should be selected for price collection such as particular brands of wheat bread the number of sampled varieties selected depends on the nature of the representative product and the relative changes in price across outlets by price updating the weights are aligned to the same reference period as the prices if the nso decides to price update the weights the resulting index will be a low index the low index is a fixed basket index which from period to period measures the value of the same annual basket of goods and services not price updating the weights results in the calculation of a young index the young index keeps the expenditure shares fixed in the expenditure survey period the young index is a fixed weight index where the weights should be as representative as possible for the average value shares of the period covered by the index by keeping the expenditure shares constant from the weight reference period to the price reference period the underlying quantities are assumed to vary in response to changes in relative prices if households tend to keep constant expenditure shares by substituting away from goods or services with relative price increases to those goods and services with relative price decreases the weight reference period expenditure shares will be good estimates of the price reference period shares when the weights are introduced in the index if expenditure shares stay unchanged the young index will be a good estimate of a target superlative index if quantities tend to remain constant for example the households do not substitute between goods and services in response to relative price changes the young index will be biased downwards compared to a superlative target index whether a young or low index is the better estimate of a superlative target index depends on whether the original or the price updated weights are the better estimate of the average expenditure shares from the price reference to the current period normal consumer behavior suggests that some substitutions should be expected so that the low index will tend to be biased upward compared to a superlative target index as the young index allows for some substitution from the weight reference period to the price reference period while the low does not it may be argued that the traditional lespair's bias is reduced in the young index as compared to the low index to omit price updating may be one way to reduce the substitution bias systematic random sampling is a sampling technique in which systematic random sampling is conducted independently within each of the predefined strata stratification can be applied to each of the different samples relevant for the consumer price index or cpi in practice the cpi is typically stratified by geography such as region city rural or urban by type of outlet or by outlet and by item samples are then set up within each geographic area for each of the different outlet types and for each item within the outlets for example suppose that the cpi classification contains the item refrigerators that can be stratified by region in a given region refrigerators are primarily sold in larger specialized chain stores and in several small independent shops refrigerators also can be classified according to their capacity a sample stratification structure for this example is illustrated in the table here within each cell prices can be sampled using a two-stage approach in the first step specialized chains and independent shops that sell refrigerators are selected within the different regions in the second step specific refrigerator models that meet the product type specifications are then identified for continuous pricing within the selected outlets the stratification should be designed in a way that the sampling error is minimized the idea is to construct the strata so that the variance of the price changes within a stratum is low whereas the variance between the strata can remain large within the stratum price a low change variance also has the advantage that results of different price indices are likely to be similar consequently the choice of the elementary aggregate price index matters less [Music] let's take a look at what should be included in a specification an item is comprised of a bundle of characteristics for example a bottle of water is defined by the brand of water type of water any flavorings or sweeteners packaging and the logo or label of these characteristics some are what we call price determining characteristics price determining characteristics refer to those characteristics that if changed affect the price for the bottle of water the price determining characteristics would be the brand type of water and size at a minimum the detailed specification should include all price determining characteristics and include characteristics that can be useful the price determining characteristics are most important and vary from item to item any characteristic that affects the price should be considered a price determining characteristic examples of price determining characteristics include brand size such as 400 grams 1 liter 5 kilograms quantity such as single unit case of 12 pack of six 100 tablets or one dozen material such as cotton linen wool silk type of clothing such as men's dress shirt women's skirt boys school uniform screen size such as a 15 inch laptop screen 75 inch tv screen type of hard drive such as solid state or standard memory such as 8 gigabytes or 16 gigabytes and storage such as 512 gigabytes or one terabyte the measurement of changes in consumer price levels using matched models method is appropriate when variety prices are not missing however the use of matched models method is complicated by temporarily unavailable prices for example for one or two months because a variety is out of stock and unreplenished a matched price is unavailable in these months that the price is missing the treatment of prices of temporarily missing varieties typically requires the price to be imputed for the month or months in which it is missing using the price changes of similar goods or services or price changes drawn from a higher level of aggregation actual prices are compared with the imputed prices for the cpi if varieties become permanently unavailable a replacement variety is required ideally one that is comparable in terms of the price determining characteristics of the missing variety if the replacement is of a comparable quality that is it possesses the same price determining characteristics its price can be directly compared with the last actual or imputed price for the missing variety if the replacement is non-comparable that is it is of a different quality the change in quality has to be explicitly quantified with regard to its worth or its contribution to the price using this value compilers make a price adjustment to reflect the difference in quality allowing the price of like to be compared with like if a reliable explicit quality adjustment to the price is not possible implicit methods of quality adjustment are available that are discussed in a later unit products that are strongly seasonal missing in out of season months but expected to return in the next season could also be treated as temporarily missing and imputed strongly seasonal products include fresh fruits vegetables and some clothing weekly seasonal products are available throughout the year but prices sales and quality fluctuate the prices of weekly seasonal products are not missing and are treated differently from strongly seasonal ones the matching of models facilitates the measurement of constant quality price change when the matching breaks down because of missing prices temporary imputations are necessary until the variety's temporary missing price becomes available or a replacement can be introduced these imputations maintain or update the sample however there are product markets where the matching breaks down on a regular basis because of high turnover of models with new models of different quality compared to the old ones for example laptops a failure to match and replace models leads to a depleted and unrepresentative sample a continual process of linking in new replacement varieties has been found to lead to bias in cpi measurement price collectors have a critical role to play in the treatment of missing price observations they observe and record that a price is missing whether temporary or permanent if permanent whether a comparable or non-comparable replacement is available and the price and details of the replacement variety when selecting a sample of prices the outlets are visited in a process referred to as initiation initiation activities occur only when it is necessary to select a new variety for pricing during the initiation phase of price collection collectors identify the detailed specifications of representative varieties sold for example for the general class of large white bread and sliced the more detailed large loaf white unsliced brand a 800 grams may be selected and its details entered along with its price for subsequent periodic repricing the detailed specifications serve many purposes including to help identify the variety to be priced to review and verify the variety specification to ensure that there have been no changes in the price determining characteristics and if the variety is non-comparable use the specifications to identify a replacement variety to be priced and record any changes in the price determining specifications the price collector plays an important role in determining whether the missing price should be treated as temporarily or permanently missing on finding that the specified variety is not available for immediate sale the price collector should check with the manager or informed staff whether it is temporarily or permanently missing a price is considered temporarily missing if the variety is to return to the market within a reasonable time period if temporarily missing the price collector should record the expected duration one or more periods should be noted along with the reason for it being unavailable and the likelihood of its return permanent unavailability occurs when the variety is withdrawn from the market with no prospect of returning it might be absent the next month and confirmed by the outlet manager or inform staff that it is not going to be replaced the price collector should immediately look to collect the price and specifications of a replacement variety if a variety continues to be out of stock for an extended period of time for example for three consecutive months the price collector should be instructed to choose a replacement [Music] you