CSO publication, , 11am
The prices used in calculating the CPI are those actually paid by households. This may appear simple, but in practice it is difficult to implement in a completely consistent way, and there are several special treatments. The following guidelines (or principles) are applied to the CPI:
The Consumer Price Index does not factor in the cost of the Re-turn Scheme on the cost of cans and plastics drinking bottles. In the situation where an item has the 15c or 25c deposit added due to the Re-turn scheme, the deposit value is removed from the overall price of the item.
One of the more difficult issues in producing the CPI is the accurate measurement and treatment of quality change due to changing product specifications. As a measure of price change alone, the CPI should reflect the cost of buying a fixed basket of goods and services of constant quality. However, products often disappear or are replaced with new versions of a different quality or specification, and brand-new products also become available. When such a situation arises, one of the following methods is adopted:
a. direct comparison;
b. direct quality adjustment
If there is another product which is directly comparable (that is, it is so similar to the old one that it can be assumed to have the same price in the previous month). For example, an identical garment except that it is a different colour, then the new one directly replaces the old one and its base price remains the same. This is described as “obtaining a replacement which may be treated as essentially identical” and is equivalent to saying that any difference in price level between the new and the old product is entirely due to price change and not quality differences.
This is the preferred method of dealing with the situation where a replacement product is of a different quality or specification. An attempt is made to place a value on the quality, or specification, difference and the previous month’s price is adjusted accordingly. This section discusses the bridged overlap method. Another method of direct quality adjustment, option costing, can be used when a product changes in specification and it is possible to value separately the components that have changed.
Quality Adjustment – Computers and Printers
Up until August 2019, the index for personal computers was calculated using bridged overlap, it worked as follows:
When a specific computer priced in a retail outlet is no longer available, a replacement must be found to continue the measure of price change. Using the bridged overlap technique, no price comparison is made between the two computers when the replacement is brought into the index. The price change between the two observations is imputed as the average change for the other matched price observations for computers. For a price observation to be brought into the index, it must be available for two consecutive periods. The same method was used for printers. Bridged overlap is still the most commonly used quality adjustment method in the CPI where it is more suitable for use.
In September 2019, the methodology was changed to a hedonic regression method of calculating the index. This change was made as bridged overlap was exhibiting a downward bias in the index as the items were leaving the market at sale price and being replaced by something at full price. It also didn’t consider the quality changes that exist between the replaced computer/printer and the replacement.
From September 2019, the quality adjustment technique of Hedonic Regression is used when there is a need to have replacement computers and printers in the sample. The benefit of this method is that it allows comparison to take place between the old and new products and it also allows for an estimate to be made for quality change.
Under this method, a regression model is used to estimate the contributing effect of a variety of characteristics associated with the computer or printer. Examples of such characteristics for computers are CPU and memory. Examples of such characteristics for printers are pages per minute and resolution width. These characteristics serve as the independent variables in the model, while the natural logarithm of the price of the computer or printer acts as the dependent variable. We have three models, one for laptops, one for desktops and one for printers. Using these models, it is possible to quantify the quality change through the difference of these characteristics between the original product and it’s chosen replacement. Once we have quantified the quality change between the old and new products, we can then estimate how much of the difference in price is a pure price increase or decrease.
This method of quality adjustment is designed to address the two issues mentioned in the previous section.
The models relating the prices of computers and printers to their characteristics will only be valid for a limited amount of time because this is a rapidly changing market. We anticipate that we will update each of our models regularly, based on the most recent data for prices and characteristics of computers and printers. In this way we ensure that our quality adjustments for replacements are based on the current market.
Mortgage interest was first included in the CPI at the November 1975 updating in order to estimate the cost of owner-occupied housing. For a particular mortgage, the interest payment at any given time depends on the rate of interest, which may be fixed, variable or tracker, and on the amount of the mortgage debt still outstanding. The debt outstanding, in turn, depends on the original size of the mortgage, which is linked to the price of the house when the mortgage was taken out and, in most cases, (i.e. non-endowment) on the age of the mortgage. The fixed expenditure pattern covered by the index reflects the average mortgage interest costs of the full set of mortgages of varying ages which existed in the base period.
As time progresses new mortgages are initiated at current house price levels and old mortgages are terminated early (e.g. house is sold) or paid off. The original loans in these latter instances were quite small because they were entered into when house prices were far lower 20-25 years ago. Because of this, the estimation of changes in mortgage interest costs needs a special type of price indicator adhering as close as possible to the Laspeyres concept of a fixed basket as used elsewhere in the index. This is done by estimating, from month to month, the mortgage interest paid by a standard set of households with mortgages of varying ages (i.e. fixed age pattern).
The interest cost for this standard set of mortgages in any month is estimated on the basis of the aggregate debt outstanding for the mortgages of varying ages. This will depend on the house price ruling when the mortgage was taken out, on the percentage advance (assumed constant) and on the amount of interest to be paid for a mortgage of that age (i.e. the amount of interest payable declines over time). In this approach, the monthly change in interest costs reflects both the change in interest rates and the change in estimated house price levels over time. Non interest cost effects are excluded by controlling (i.e. keeping constant) the factors giving rise to them.
Building Society/Bank and Local Authority mortgages are covered in the current index. The mortgage cost indicator is the product of:
The indicator of mortgage debt outstanding is estimated as the change in the weighted average of house price levels in successive monthly periods, where the relative weights decline with age of mortgage reflecting the reduction in interest payable over time. In compiling these indicators, the house price levels are estimated using the monthly Residential Property Price Index (RPPI) published by the CSO. The approach described above is known as a payments approach and is described in section 10.20 of the International Labour Organisation’s Consumer Price Index Manual (2004).
Until January 2023, the CSO used a “Seasonal Baskets” approach for International Package Holidays. In this method, the prices of holidays in consecutive months are never compared with each other. Instead, the prices of (e.g.) April holidays are compared with the prices of the same April holidays from one year before. This results in an annual change in price being calculated each month. The monthly change in price is then derived by linking these annual changes. This approach is referred to as pricing “Seasonal Baskets”.
In January 2023, a new method was introduced. The reason for this was that the prices of package holidays are highly seasonal, but the previous methodology produced an index without any seasonal pattern and with small changes from month to month. The new method will see the actual seasonal pattern of package holidays better reflected in the index.
International Package Holidays are the only item in the CPI basket that used this methodology of comparing prices with prices 1 year before. The new method makes the methodology of International Package Holidays consistent with other items in the basket by comparing prices of holidays with prices of the same holidays in the previous month. It brings the International Package Holidays index into compliance with the HICP Regulation (EC) No 1749/96 Articles 5 and 6, because the same holidays will be priced in consecutive months. A quality adjustment technique will be used whenever a replacement holiday has to be chosen.
This new method means that the same holidays will be priced each month and each month’s prices compared with the corresponding prices of the previous month. This makes the methodology of International Package Holidays consistent with the other items in the CPI basket. Some types of holidays are only sold for some months of the year. Examples are skiing holidays and sun holidays to destinations in Southern Europe. These seasonal holidays will be assigned imputed prices for the months where they are not sold, allowing us to compare prices with previous month’s prices all year for these types of holidays also.
In 2017 a new methodology was introduced for the price collection of Second Hand Cars. The old method, Prices of second-hand cars are collected in “The Car Sales Guide” (TCSG) monthly book. TCSG does not give examples of real transactions but prices an average car for sub-models of a given plate category. An indicative mileage is assumed, which is increasing every month for every sub-model. To get the monthly relative, the adjusted price is compared with the actual price of the same sub-model one month before. The new method that was introduced also uses the TCSG. However, the new methodology uses a natural depreciation method to get the monthly relative.
Example;
Let 𝑝 𝐴𝑝𝑟 2018 be the price of the 2018 model in April 2023.
Let 𝑝 𝐴𝑝𝑟 2017 be the price of the 2017 model in March 2023.
𝑟 = (𝑝 𝐴𝑝𝑟 2018 − 𝑝 𝐴𝑝𝑟 2017) / 12
is the monthly depreciation rate for the 2018 car in April 2023.
Adjusted price 𝑝′ 𝐴𝑝𝑟 2018 = 𝑝 𝐴𝑝𝑟 2018 + 𝑟
The adjusted price is compared with the actual price of the same sub-model one month before