Harmonized Indexes of Consumer Prices: Their Conceptual Foundations

89 Pages Posted: 14 Jan 2003

See all articles by W. Erwin Diewert

W. Erwin Diewert

University of British Columbia (UBC) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2002

Abstract

The Harmonized Index of Consumer Prices (HICP) is the single most important indicator of inflation used by the European Central Bank. Sections 2 to 4 of the paper look at the theory of inflation indexes that could be used as target indexes of inflation. A Consumer Price Index (CPI) emerges as perhaps the most useful target index. Four different approaches to index number theory are reviewed and the "best" index number formula from each perspective is determined. Section 6 looks at the methodology of the HICP in the light of the previous sections. Section 7 looks at some of the difficult measurement problems that must be addressed in a CPI or an HICP. These problems include the treatment of quality change, substitution or representativity bias, chained versus fixed base indexes, the choice of formula at the lowest level of aggregation and the treatment of owner occupied housing and seasonal commodities.

Keywords: Consumer Price Index, Superlative Indexes, Quality Change, Substitution Bias, Representativity Bias

JEL Classification: C43, D91, E31, E52, E58

Suggested Citation

Diewert, W. Erwin, Harmonized Indexes of Consumer Prices: Their Conceptual Foundations (March 2002). Available at SSRN: https://ssrn.com/abstract=357342 or http://dx.doi.org/10.2139/ssrn.357342

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