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This manual describes the updating of the Consumer Price Index (CPI) and the procedures applied by the Central Statistics Office (CSO) to produce the CPI, the Harmonised Indices of Consumer Prices (HICP) and associated price indices. The process usually happens every 5 years, however due to the COVID-19 Pandemic, this process was delayed from mid-December 2021 to mid-December 2023.
This manual is designed for users who wish to know the concepts and statistical methods underlying the different indices and how the data are collected. While it does not attempt to go into every detail, which would require a publication many times the size of this one, it will address many of the questions that the CSO is usually asked about consumer price indices’ methodology and practice.
This manual is mostly written in terms of the CPI but most of the methods and procedures in Chapter 2 to 6 are also applicable to the HICP. The two indices are calculated from the same underlying price data, although they differ in a number of respects. These differences are described in Chapter 8.
All the goods and services that consumers purchase have a price and that price may vary over time. Consumer price indices are designed to measure such changes. A useful way to understand the nature of these indices is to imagine a very large shopping basket comprising of a fixed set of goods and services bought by a typical private household. The quantity of each item in this basket is proportional to the average amount purchased by all private households in the country as determined by the Household Budget Survey (HBS). As the prices of individual items in this basket change, the total cost of the basket will change - the consumer price index measures the change from month to month in this total cost.
No two households spend their money in exactly the same way. Each household’s or person’s experience will be different. The CPI and HICP are measures of average inflation, based on average household expenditure on the items in the shopping basket.
The CPI is technically defined as an average measure of change in the prices of goods and services bought for the purpose of consumption by all private households and residents in residential institutions such as nursing homes in the country and by foreign tourists on holiday in Ireland. There are several important points to note in this definition:
The CPI measures price change. It is specifically designed not to take into account changes made by households to their pattern of expenditure (e.g. switches from expensive meat cuts to cheaper cuts, or vice versa) in response to changes in prices, income levels, family composition, tastes, consumer preferences or market conditions. Furthermore, payments such as income tax and social insurance contributions, which determine disposable income, are not covered.
The CPI is a price index, not a cost-of-living index. However, the most important factor determining changes in the cost of living is the extent to which prices of consumer goods and services vary. It is only this particular aspect of the cost of living, which is measured by the CPI.
Despite continual changes in the consumer tastes and preferences, and in the range of goods and services available on the market, household purchasing patterns generally change slowly over time. It is this relative stability in the pattern of household purchases which permits the use of fixed weighting patterns in the compilation of the CPI.
Since 2012, the weights of the items in the basket have been updated annually using information on consumer expenditure from National Accounts. However, a more granular level update of the weights was possible at the rebase using information from the HBS.
The basket of goods and services and the index weights must be periodically updated if they are to continue to be representative of current expenditure patterns. Twelve different weighting bases have been used to date in the compilation of the index since the foundation of the State in 1922. The main features of the earlier index series are briefly described in Appendix 1. Since 1996, major updates or rebases have been undertaken on a five-year cycle, the exception being this rebase to base mid-December 2023=100, which was delayed from 2021 due to the COVID-19 pandemic.
From January 2024 onwards, the CPI will be published to base mid-December 2023 as 100 using weights derived from the results of the 2022/2023 HBS. Indices for the previous base periods continue to be calculated and made available.
The sample of goods and services surveyed by the CPI and the retail outlets and businesses where they are priced throughout the country have also been updated to ensure that they continue to be representative of current consumer tastes, purchasing practices and retailing structures.
The representative sample of goods and services to be covered by the index is updated at each rebasing to ensure that it continues to be representative of consumer tastes and purchasing practices. In the 2016 base index, there were 615 item headings covering a comprehensive range of consumer goods and services. The CSO commenced a review of the coverage of goods and services during 2023. This review process involved a significant amount of research. This research combined with results from the 2022/2023 HBS allowed a comprehensive update to be undertaken. In reviewing the coverage of goods and services, 13 new item headings were added while 12 item headings were removed. Also, some items were split into more categories while some other items were amalgamated into larger item categories. Consequently, the updated CPI basket contains 612 item headings as of December 2023.
A full list of all items added, deleted or modified is contained in Appendix 2 and the full list of 612 item headings is contained in Appendix 3.
The item heading weights were updated based on the results of the 2022/2023 HBS. This was done to ensure that the relative importance of the different divisions in the CPI is in line with current consumer spending behaviour. See Chapter 5 for more detail.
Personal visits are made to retail outlets by some 30 price collectors on a monthly basis. Approximately 10,000 price quotations are gathered in this way. Prices are collected in Dublin and all the regional cities as well as a number of provincial towns. These locations are reviewed regularly and their selection is based off the 2022 Census of Population.
This is complemented by price files received directly from large retailers each month as well as manual internet pricing. The samples collected from these sources are regularly updated based on sales figures or item popularity to ensure that the sample continues to be representative of the population and shopping behaviour trends.
The CPI is used in many ways by the Government, businesses, society at large and internationally. The uses fall under three broad headings.
There is no single definition of the word ‘inflation’. However, most consumers might think of inflation as a fall in the value of money reflecting a more or less continuous increase in the price of the goods and services that they purchase. Simplistically therefore, inflation can be thought of as the amount of extra money needed in a period y to purchase the same basket of goods and services purchased with a given sum of money in an earlier period x.
Prices may also fall. For example, overall prices, as measured by the CPI, were lower than their value 12 months earlier (i.e. negative annual inflation which was observed from April 2020 to February 2021).
The amount of money needed to purchase a fixed basket of goods and services is also known as the internal purchasing power of the currency, which can be expressed in two ways. Firstly, it is the amount of money needed in period y to purchase the same basket of goods and services that one Euro could purchase in an earlier period x. Conversely, it is the amount of money needed in an earlier period x, which could buy the same basket of goods and services that one Euro purchases in period y.
It is also generally accepted that it is desirable for any society to measure some concept of its inflation. A fall in the value of money over time affects most households and persons, through the purchasing power of their wages, the ‘real’ value of their savings and so on. Economists regard measures of inflation as vital tools for monitoring the economy.
A variant of the CPI is used to compare Irish Inflation with that of other countries. Consumer price inflation is a convergence criterion given in the Maastricht treaty as a pre-requisite for joining the proposed European Monetary Union (EMU). However, problems arise because definitions and methodology vary between countries. In particular, the treatment of housing costs varies markedly between countries, so they are often excluded for international comparison purposes. For the requirements of the convergence criteria, countries in the European Union (EU) have developed a HICP to improve inflation comparisons. However, the HICP is not intended to replace the CPI for domestic use. The HICP is described in more detail in Chapter 8 of this publication.
For many purposes, comparisons over time are more useful when the effect of price changes is eliminated. For instance, estimates are made of gross domestic product (GDP) and its main components in each period and re-valued at the average prices in a selected year (called the ‘base year’). The CPI and its components are used to adjust current levels of consumers’ expenditure and other economic series to produce a constant price series. This is typically done by deflating estimates at current prices by appropriate price indices, derived from the CPI.
Indexation of tax allowances: Some tax allowances and thresholds are revised annually in line with changes in the CPI. For progressive taxes, inflation means that Revenue takes a growing share of a person’s income as increased wages raise them from a lower to a higher tax bracket. This tendency is known as fiscal drag; to offset this, the Minister of Finance frequently raises the tax threshold to take account of changes to the CPI. Conversely, for specific taxes (i.e. taxes levied per unit of a commodity irrespective of price) such as excise duty, inflation will reduce the real tax burden. This tendency is known as fiscal boost and as a result, excise duties are often increased in line with inflation.
Indexation of incomes: The change in CPI is an important factor in wage bargaining; some pay agreement explicitly link pay rises to the CPI.
Indexation pensions and benefits: Many State benefits and some occupational pensions are revised in line with changes in the CPI.
Private contracts: Many contracts link payments due, such as rent, to the change in CPI.
Other price regulations: Many pieces of legislation refer to the CPI as a way of adjusting prices, e.g. changes in the environmental levy on plastic bags are linked to the CPI.
The scope and coverage of the CPI has been defined as follows:
Scope: All monetary transactions incurred by households, residents in institutions and foreign tourists on consumption expenditure on the economic territory of Ireland.
Coverage: Those transactions within the scope, which it is possible to identify and measure in practice. This is determined by the expenditure divisions for which weights are compiled.
The different elements of the scope and coverage are outlined below:
The whole of the State.
Since November 1975, the CPI weighting has been representative of the expenditure patterns of all private households in the State. These households include over 97 per cent of the total population. With effect from January 2002 the coverage of the CPI was extended to include the expenditure of foreign tourists within Ireland. The CPI weights do not reflect the expenditure of other non-private households such as business and commercial enterprises.
These are the goods and services bought by the reference population (private households, individuals living in institutions (such as retirement homes) and foreign tourists in Ireland) for the purposes of consumption. Thus expenditure for savings and investment purposes, direct taxes, national insurance contributions, cash gifts are excluded from the scope of the CPI. Other expenditure included in the scope but excluded from the coverage is expenditure on illegal transactions (e.g. narcotics).
House purchases could represent the acquisition of a major capital asset (investment) rather than consumption, so purchase without a mortgage and capital repayments of a mortgage are excluded. Mortgage interest payments are included, since for most homeowners they are the best measure of the shelter cost of utilising their dwelling. Major home improvements, such as building an extension, are capital investments and so are excluded but re-decoration and maintenance are included.
Most capital goods other than houses are included, such as cars, furniture and large electrical goods.
The CPI measures the price of goods and services paid for by consumers. Anything completely free at the point of consumption is outside the scope of the CPI, even if consumers have paid for it indirectly by taxes or social insurance payments. For example, State education and visits to doctors under the medical card scheme are free, and so are excluded. For some goods and services provided or partly paid for by the State, a charge is made at the point of consumption, such as the supply of prescription medicines and dental treatment under the medical card scheme. These charges are included in the CPI, but not the full economic cost of the goods or services. When deriving the weights, again only the costs paid by the consumer at point of delivery are included.
The prices used in the calculation of the CPI should reflect the cash prices typically paid by the reference population for the goods and services within the scope of the CPI.
Consumption expenditure can be measured in three ways:
Acquisition means that the total value of all goods and services delivered during a given period, whether or not they were wholly paid for during the period, is taken into account.
Use means that the total value of all goods and services consumed during a given period is taken into account.
Payment means that the total payments made for goods and services during a given period, whether or not they were delivered, is taken into account. For practical purposes, these three concepts cannot be distinguished in the case of non-durable items bought for cash and they do not need to be distinguished for many durable items bought for cash. The distinction is important for purchases financed by some form of credit, notably major durable goods, which are acquired at a certain point of time, used over a considerable number of years, and paid for, at least partly, sometime after they were acquired, possibly in a series of instalments. Housing costs paid by owner-occupiers are an obvious example.
The difference between the three concepts of consumption is not just a matter of timing. If payment follows acquisition, interest may be charged on top of the equivalent of the cash price.
When use extends over many years, the value of this use will reflect the price level of those years, not the price at the date of acquisition.
Which concept is preferred depends on the uses of the CPI. If the main use is as a general indicator of inflation, an index is required that measures the change in price level of current output. Thus one would not want a retrospective element relating to prices in previous months, so the acquisition concept is the best. For indexation of money, incomes and benefits, it may be that the payment approach is the most suitable. Alternatively, some may argue that the use approach is better, as it is closer to the cost of living, which should take account of the flow of the good or service being consumed.
Since the CPI is used for all of these and other purposes, there is no simple answer as to which definition of consumption should be used. The CPI mostly measures the acquisition of goods and services, but there are some notable exceptions where it has been decided that this is not the most appropriate, namely mortgage interest and insurance where a payment approach is adopted.