Restricted 1 CPI measurement issues with a special focus on owner-occupied housing Alexandra Heath Bank for International Settlements 1 Problems in measuring inflation National Bank of the Republic of Macedonia 22 May 2007

2 Outline Why has there been more interest in CPI measurement issues? 2

3 Outline Why has there been more interest in CPI measurement issues? Biases in CPI measurement: Substituion bias New product bias Outlet bias Quality bias 3

4 Outline Why has there been more interest in CPI measurement issues? Biases in CPI measurement Individual price measurement Owner-occupied housing (Services) 4

5 Outline Why has there been more interest in CPI measurement issues? Biases in CPI measurement Individual price measurement CPI measurement for policy 5

6 Why is there more interest in CPI measurement? Inflation is lower 6

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8 Why is there more interest in CPI measurement? Inflation is lower There has been a trend towards inflation targeting 8

9 Why is there more interest in CPI measurement? Inflation is lower There has been a trend towards inflation targeting The pace of structural change and product innovation has risen 9

10 Why is there more interest in CPI measurement? Inflation is lower There has been a trend towards inflation targeting The pace of structural change and product innovation has risen There are quantitative estimates Boskin Report (1996) Irving Fisher Committee workshop: CPI measures: central bank views and concerns 10

11 Biases in CPI measurement Substitution bias 11

12 Biases in CPI measurement Substitution bias New product bias 12

13 Biases in CPI measurement Substitution bias New product bias Outlet bias 13

14 Biases in CPI measurement Substitution bias New product bias Outlet bias Quality bias Expert judegement Implicit methods Option cost approach Hedonic pricing methods 14

15 Owner-occupied housing Rental equivalence method 15

16 Owner-occupied housing Rental equivalence method User cost approach 16

17 Owner-occupied housing Rental equivalence method User cost approach Payment approach 17

18 Owner-occupied housing Rental equivalence method User cost approach Payment approach Net acquisitions approach 18

19 CPI measurement for policy Understanding the way the CPI is compiled is key 19

20 CPI measurement for policy Understanding the way the CPI is compiled is key Measures of underlying inflation can be helpful additions for analysis and communication 20

21 CPI measurement for policy Understanding the way the CPI is compiled is key Measures of underlying inflation can be helpful additions for analysis and communication No such thing as an optimal measure of underlying inflation, but we understand what properties a measure of underlying inflation should have to be good 21