Consumer Price Index: simple about complex things

When we talk about economics, sooner or later we have to deal with concepts such as the consumer price index (CPI) and inflation. What is the CPI, how does it differ from inflation, where can it be found and how to calculate it - you will find answers to these important questions in the article.

What is the consumer price index and why is it needed?

The change in the consumer price index compared to the previous month or previous year is called the inflation rate. The higher it is, the fewer goods you can buy with the same amount of money.

The Consumer Price Index is the central indicator for assessing the dynamics of monetary value in a country. It is used as a guide, for example, in salary negotiations or in contractual agreements on the amount of recurring payments. It is also used for deflation—increasing the real value of money and lowering the prices of goods—in national accounts, such as when calculating real economic growth.

Based on the CPI, adjustments are used to calculate internationally comparable inflation rates. In particular, it is used by the Central Bank to assess inflation.

All official CPI values for Russia can be easily found on the website of the Federal State Statistics Service. The basis for the analysis is either December of the previous year or the previous month.

What's wrong with inflation

A shortcoming of the CPI that many economists often point out is its measurement of the “average hospital temperature.” The main subject of controversy is the composition of the consumer basket. For the poor it will be one thing, and for the wealthy it will be another. For low-income citizens, the share of the food component inevitably increases, which can reach ¾ of the basket. Wealthier people spend less than half of their expenses on food.

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This affects the public's perception of official statistics. It is no coincidence that the concept of “personal inflation” appeared. It just so happens that in Russia it usually exceeds the official one. For example, the CPI December 2022 to December 2016 was published with a value of 102.51%. It is unlikely that any of the readers felt that their consumer basket grew by 2.51% over the year. Of course, one can object to this that citizens give only everyday assessments based on sensations. But I think that in such cases a personal calculator works more accurately than an official one.

The second point is related to the cost of living, which, according to Rosstat’s methodology, actually reflects the threshold of human survival. Let's look at the latest data from Rosstat:

In developed countries, this indicator is measured to determine a “decent standard of living.” From this point of view, the index should include, in addition to the basic set, visits to restaurants, beauty salons, keeping pets, spending on taxis, tutors, etc. That is, factors without which it is impossible to imagine the life of a modern person.

There is another flaw in the CPI index: it does not take into account asset prices. And this doesn't just apply to investors who will buy more or less shares with spare cash. The cost of real estate, securities, and credit resources make significant adjustments to the consumer behavior of the entire population. Thus, increasing loan rates reduces consumer demand, and rising housing prices make rent more expensive. Therefore, the CPI should not be looked at in isolation from other important indicators - stock market indices, the key rate, the level of housing prices (the American analogue is HPI, Housing Price Index).

How is the Consumer Price Index calculated?

The calculation of the consumer price index is based on the “consumer basket”, which represents goods and services purchased and used by individuals in Russia.

In Russia, the consumer basket consists of 156 items. It is this minimum of goods and services that allows a person to maintain a standard of living. The products included in the consumer basket can be divided into two categories.

The first includes those that do not change from year to year.

. This could be, for example, baked goods.

The second category is more variable.

These specific individual products represent the second level of the product basket. At this level of individual price representatives, the basket of goods is constantly adjusted, as goods that are no longer relevant or have lost their market importance are replaced or new goods appear, options are added - this is done by Rosstat.

The number of items selected is usually based on the share of expenditure on one item relative to total personal consumption expenditure. Products for smaller areas should also be included to cover the full range of private consumption.

Moreover, it is important to understand that with this approach, the “hospital average” needs are taken as a basis. And these purchases for an individual and a family can differ significantly. Most likely, even if your family most often eats bulgur as a side dish, it will not be included in the consumer basket, and plain white rice will be in the first positions.

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Benefits of Price Stability

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Price stability is the Central Bank maintaining stable and low inflation. At the same time, there is a slight increase in prices, which does not affect the consumer’s refusal to purchase the product. This is the goal of states linked by trade and political relations.

Low growth makes it possible to plan large-scale development programs, and banks can provide loans to production for long periods at reduced rates. It becomes possible to develop capital-intensive areas and increase social spending. Experts consider the most optimal growth of the Russian CPI to be about 4% per year, this is justified by the calculations of the Central Bank and is supported by the state. A reduction to 2% will increase economic costs, reduce enterprise profits, and lead to job losses.

Getting prices

To measure the price dynamics of individual items in a shopping cart, hundreds of thousands of prices are collected every month. This survey includes a decentralized survey of prices in stores throughout the country.

The additional use of digital data sources will allow the statistical enterprise to significantly increase the number of monthly price observations. For example, for product areas with particularly complex pricing—such as package tours or insurance premiums—additional data sources with more observations could be used.

In addition, it is possible to introduce modern methods - automatic reading of Internet data. For online trading and for individual services such as car rental or long-distance bus travel, the number of monthly price observations will be significantly increased by such procedures to take into account dynamic price changes.

Changes in quantity when calculating the CPI

Changes in quantity

Quantity changes are also included in the price comparison. For example, if a supplier reduces the packaging size of a product while keeping the price constant, this is considered a price increase in price statistics.

Remember, the period when instead of a liter of milk in bags they began to sell only 900 milliliters. To maintain statistical significance, calculations must consider a single volume—a liter of milk. Accordingly, the price must be recalculated.

Model changes, as well as changes in contract terms, may be accompanied by changes in quality, which may be reflected in the price, but should not completely determine the price difference between the old and new product. In these cases, the price difference caused by quality differences is quantified and subtracted from the index definition. Without such quality adjustment, improvements or deteriorations in the quality of goods would be reflected entirely in price indices.

This would all make it difficult to meaningfully interpret the measured price changes.

Scheme for calculating the consumer price index

To calculate the consumer price index, the items in the basket are initially divided into types (for example, milk and yogurt are not counted separately - they are one category). The average year-over-year price movement for a particular type of product is then weighted by the share of spending that private households in Russia spend on that type of product.

Expenditure shares for individual types of goods are based on the expenditures of all households. For example, if a particular household did not purchase consumer durables this year, its expenses are still counted. This takes into account the fact that you usually do not buy a washing machine, TV, car, etc. Every year.

The overall result is a weighted average of price movements.

The basic information thus obtained is supplemented and updated by data from current economic calculations, which provide information on the exact distribution of household expenditures for individual types of goods. These results are then checked using additional information and adjusted if necessary.

Why do we need inflation and CPI?

How to calculate personal inflation for the year?

Official inflation in Russia for 2022 was 3%. Do you know what your real inflation rate is?

So what did we do.

1️.

We made our regular shopping list - what we buy when we go to the store. These are mainly food + non-food items (napkins, toilet paper, etc.). These goods will last us on average 1-2 weeks. Baby food was not included (this is a temporary option). This is how we got our consumer basket (simplified, of course).

2️.

For the purity of the experiment, we looked at the cost of this basket in 3 different stores where we most often shop: Azbuka Vkusa, Perekrestok and Metro. Everywhere we took current prices from the online store. Where there was a promotion, prices were set taking into account the discount. If there was no exactly the same name/manufacturer, a similar product was chosen as a replacement.

3️.

We also separately recorded current prices for other mandatory and regular expenses. Tariffs for Internet, television, housing and communal services, fuel (diesel). We have corporate cellular communications, so it’s not on the list. All this was packed into an Excel spreadsheet and saved on the computer.

Now all that remains is to wait until the end of the year and check current and future prices. And then we will see how our consumer basket has changed, how much certain prices have increased over the year.

Source: https://zen.yandex.com/media/id/5e20c069aad43600ad444acf/kak-poschitat-lichnuiu-infliaciu-za-god-5e4270265217d53be7c21b13?feed_exp=ordinary_feed&from=channel&rid=1459469385.456.15853 24130550.76381&integration=publishers_platform_yandex&secdata=CJjdyvGMLiABMAJQDw%3D%3D

How can you use the consumer price index?

The Consumer Price Index is used, in particular, to measure monetary stability. If the price level rises over a long period of time, it is called inflation; if, on the contrary, it decreases, it is called deflation.

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