Price Indices: Part 3

Transcription

1 Price Indices: Part 3 MEASUREMENT ECONOMICS ECON 4700 Today Inflation Rates of Change Price Indexes The CPI Problems with inflation measures Prices Division 2 Great inflations of the 20th Century Price (in Dm) of a bread loaf in Berlin, 98 to 923 December December December August , October 923, 743, 000, November , 000, 000,

2 Germany s Inflation Rate, per week in Money supply and prices: German Price level and money supply index (93 = ) Price level Money supply Inflation rate in 923:,000,000% 5 2

3 Other Great Inflations (994) Hungary, after WWII,000,000,000,000,000,000,000,000,000,000 %!!! Kazakhstan: 875% Ukraine: 4 962% 994 Belarus: 2 22% Azerbaijan: 663% 7 History of inflation in Canada World War I World War II Post War Boom Oil Crisis I Korean War Sustained Growth Oil Crisis II GST Tobacco Tax Depression Depression 8 Calculating the inflation rate Inflation rates are calculated from price indexes 9 3

4 Common theme for these price indexes: Purchasing power or value of money 0 $ Purchasing power of Canadian dollar since = $ Source: CANSIM, table / CPI Example of indexes... TSX 300 Price Deflators of the National Income Aggregates: GDP, C, I, G, NX PPPs of currencies Productivity 2 4

5 Canada, January Month to month change (CPI.Jan 2006 CPI Dec.2005 ) X 00 CPI Dec.2005 = ( ) 22.3 X 00 = 0.5% 3 Today (Jan. 992 to Jan. 2006) Monthto-month change 4 Canada, January month change = (CPI Jan CPI Jan ) X 00 CPI Jan.2005 ( ) 25.3 X 00 = 2.8% 5 5

6 Today (Jan. 992 to Jan. 2006) 2 month change 6 Annual inflation rates, Canada vs. developing countries, 2007 Source: 7 Annual inflation rates, Canada vs. industrialized countries, 2007 Source: 8 6

7 What is the consumer price index? The Consumer Price Index (CPI) is an indicator of the changes in consumer prices that are experienced by a target population. It measures price changes by comparing, through time, the cost of a fixed basket of commodities. 9 Target population Since 995, the CPI has measured the price changes experienced by Canadian families and individuals living in urban and rural private households. Persons living full time in collective households are excluded from the Survey of Household Spending. 20 What time period are we going to compare to? The CPI compares the price changes of commodities to a fixed period in time that is called the time base or base period. The CPI is using a period of one year as its reference point. It is currently published using 2002 as the base year. This is indicated using the notation (2002 = 00). 2 7

8 Fixed Basket Basket is fixed in terms of underlying quantities at the expenditure class Basket is fixed in terms of quality Fixed weights are reviewed frequently, usually 4 years. 22 CPI weights The weights reflect the relative expenditures of the CPI population group as a whole and not of any particular type and size of household. As such, the weights are said to reflect expenditures of households on average and not the expenditure of an average household. 23 CPI Weights basket Major Components as Percentage of Total Spending Recreation, Education & Reading: 0% Health & Personal Care: 4% Food: 8% Alcoholic Beverage & Tobacco Products: 6% Transportation 7% Shelter: 28% Clothing & Footwear: 7% Household Operation & Furnishing: 0% 24 8

9 CPI Weights basket Major Components as Percentage of Total Spending Recreation, Education & Reading: 2% Health & Personal Care: 5% Food: 6% Alcoholic Beverage & Tobacco Products: 4 % Transportation 9% Shelter: 28% Clothing & Footwear: 5% Household Operation & Furnishing: % 25 CPI: Classification All-items Food Shelter Household operations and furnishings Transportation Clothing and footwear Health and personal care Recreation, education, and reading Tobacco products and alcoholic beverages 8 Major component Major component Intermediate class Intermediate class 69 Intermediate class Intermediate class Basic Class Basic Class Basic Class Basic Class Price ratio Price ratio Price ratio Price ratio Price ratio Price ratio Price ratio Price ratio Price in June Price in July Price in June Price in July Price in June Price in July Price in June Price in July 26 Commodity Classification (Cont d) At the bottom level of the structure there are 69 basic classes. Basic classes are groupings of commodities that are considered to be similar and homogeneous in terms of their price movement. 27 9

10 Commodity Classification (Cont d) The classification is the framework around which much of the practical work relating to the weights, the price collection, the production of indexes and the analysis and presentation of information is organized. The 69 basic classes can also be regrouped to form special aggregates. 28 Annual inflation rate, principal components Inflation rate, Jan.06/Jan.05 Inflation rate, Jan.06/Dec Contents of the basket In theory, all goods and services purchased by consumers belong in the CPI basket. Two restrictions apply: The price of the product must be associated with a specific quantity and quality of that product The expenditure on the product must be sufficiently important to appear as a weight. 30 0

11 Contents of the basket Some goods and services are excluded from the basket: Public goods and services Life and disability insurance premiums Used goods Interest paid on consumer loans Charitable donations Lotteries and games of chance Income taxes 3 How often are we going to collect prices? The CPI is published every month but the frequency of price collection depends on the nature of the commodity: Commodities that are subject to frequent price changes are priced monthly Commodities characterized by less-frequent price changes are collected at intervals longer than one month. In these cases, the last recorded price is carried over until the next price collection. Seasonal commodities are only available through part of the year. They are priced when available but their price movement is imputed between price surveys. 32 Consumer Price Index Purpose and Structure 33

12 How is the CPI used? A macroeconomic indicator of inflation To track the purchasing power of money. To deflate money values and obtain constant dollar figures. To index, escalate or adjust money values (i.e. maintaining dollar values.) 34 % of workers with COLA s % COLA % CPI CPI COLA 35 % The CPI and the Bank of Canada Target midpoint Target range Total CPI Core CPI 36 2

13 % The CPI and Interest Rates Source: Cansim, , B4020 % Prime business rate CPI 37 Other Products produced by the CPI section All-items CPI for Canada seasonally adjusted Spatial or inter-city indexes for cities Average retail prices for Canada (59 goods mostly food, some household products and toiletries, and cigarettes) Average retail prices for gasoline and fuel oil for 6 cities 38 Main sources of published information on the CPI The Daily (Statistics Canada daily bulletin) Monthly publication: The consumer price index (cat. No XPB) Infomat - A weekly Review (cat. No XPF or XPE) Reference documentation: Your Guide to the Consumer Price Index (cat. no XPB) The consumer price index reference paper. Update based on 992 expenditures (cat. no Occasional) Electronic databank: CANSIM Internet site:

14 The Practical Aspects of Compiling Index Numbers One last formula: The practical index: It / b = Pt Qb Pb Qb It/b = Pt Pb PbQb PbQb It / b = Pt wi Pb 40 I t / b = A weighted average of price relatives Pt Pb w P2t + w P2b Pnt Pnb wn W bi = p q + q b b pbi qbi p p b 2 b bn bn... q w bi = Expenditures for product i Total expenditures 4 An Example... Two Products Breakfast Cereals Milk 42 4

15 Breakfast Cereal Prices Kellogg's Corn Flakes $3.25 No Brand Corn Flakes $2.75 President's Choice Corn Flakes $3.00 Froot Loops $3.75 Captain Crunch $3.66 Muslix $4.0 Regular Cheerio's $3.25 Honey Nut Cheerio's $ Probability sampling 44 Or judgmental sampling 3 Stores with market shares: Cereal Fair: 50% Cereal House: 25% House of Cereal: 25% 5 brands of cereal and 75 varieties Kellogg's Corn Flakes $3.25 No Brand Corn Flakes $2.75 President's Choice Corn Flakes $

16 To compile the index... Pn P0 n n 46 To construct the index Cereal Kellogg's Corn Flakes No Brand Corn Flakes President's Choice Corn Flakes Total Index Number /9.00 x 9.50/ = 0.25/ x 00 = 05.6 x 00 = More money is available Let s build a better index

17 Milk prices Skim Milk $.25 % Milk $.50 2% Milk $.60 Homo Milk $.75 Butter Milk $2.00 Goat s Milk $2.50 Super Calcium Fortified Milk $ Milk prices trough the years... Milk Skim % 2% P 0 P P Total Index Number Aggregating It / b = Pt wi Pb I = Pcereal - 99 Pcereal - 98 PMilk - 99 wcereal + wmilk X 00 PMilk - 98 I 99/98 = X X 0.0 X 00 =

18 The result Index (Laspeyres) The Imperfection of the CPI : Boskin Report Product substitution bias New goods Quality change bias Outlet substitution bias Formula bias 53 Bias, what is it? Systematic difference between a theoretically ideal index and the index calculated by a statistical agency, i.e. COLI vs. CPI!!! 54 8

19 Economists agree, a st! ) Substitution Bias Results as consumers substitute in response to relative price changes, i.e, consumers buy more of certain goods when they become relatively cheaper, and fewer when they become relatively more expensive. 55 Example Price in period Quantity in period Price in period 2 Quantity in period 2 Beef Chicken.4 56 Laspeyres (864) P Q 0 P Q 0 0 Paasche (874) P Q P Q

20 Aggregation L /0 PAQ0A = + PBQ0B P0AQ0A P0BQ0B + PCQ0C P0CQ0C + + PNQ0N P0NQ0N P /0 PAQA = + PBQB P0AQA P0BQB + PCQC P0CQC + + PNQN P0NQN 58 What is a COLI? COL0 = e (p, u) e (p0, u) Theory of the true COL: Minimum level of expenditures necessary to maintain a constant level of satisfaction. 59 The Results Laspeyres index (CPI) =.25 Paasche index =. COLI =

21 Biases 2) Outlet Substitution Bias Refers to the failure of the CPI to captures changes in local characteristics of the basket of goods and services bought by consumers. For instance, the growing popularity of large discount stores may not be included in the sample of outlets in a timely fashion. 6 3) Quality Bias Biases Is rooted in the difficulties faced when constructing the consumption bundle underlying the CPI. The use of a fixed consumption bundle assumes that the nature of the goods bought does not change over time. In practice, goods change over time which and thus some quality adjustment is necessary. 62 4) New Goods Bias Biases Refers to failure to introduce new goods in the consumer price index. Typically, the prices of new goods fall after their introduction to the market. The natural fall in the prices of new goods often goes unrecorded because new goods are usually taken into account only after considerable lag. 63 2

22 Biases 5) Total Bias Boskin =,% Canada = 0,6-0,56% (Crawford - Bank of Canada) 64 Other Sources of Bias Elementary price index formula Pt P0 65 Elementary price index formula L = PtQ0 P0Q0 Pt Q0 P0Q0 = Pt P0 P0Q0 P0Q0 Pt where Micro-index!!!!!!! P0 P i = average of prices 66 22

23 P P CA P DU Possible Formulas 0 ( p, p ) JE 0 ( p, p ) 0 ( p, p ) N n= N N n = ( N)( p n= ( p n ( N) p n n p ) 0 N n N n = p ) 0 n ( N) p 0 n 67 Example... Carli Periods Price-A Price-B Chained Index *.563 =.25 X.25 Jevons (geo) Periods Price-A Price-B Chained Index *.00 = (((20/0) X (0/20)) / At Statistique Canada... Geometric average since

24 The cost Over 2 years the cumulative effect = $ trillion Rise of 3% in real average hourly wages (973 to 995) Real family income increases 36% vs 4% 70 Recommendations of Boskin Objective off BLS: Compile COLI; Geometric average for micro; Use more data sources: scanner data Economists and Statisticians, more courses data collection data analysis data interpretation sampling Improve relationship between academics and professionals 7 24