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CPI measurement issues with a special focus on owner-occupied housing

Alexandra HeathBank for International Settlements

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Problems in measuring inflationNational Bank of the Republic of Macedonia22 May 2007

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Outline

Why has there been more interest in CPI measurement issues?

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Outline

Why has there been more interest in CPI measurement issues?

Biases in CPI measurement:• Substituion bias• New product bias• Outlet bias• Quality bias

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Outline

Why has there been more interest in CPI measurement issues?

Biases in CPI measurement Individual price measurement

• Owner-occupied housing• (Services)

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Outline

Why has there been more interest in CPI measurement issues?

Biases in CPI measurement Individual price measurement CPI measurement for policy

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Why is there more interest in CPI measurement?

Inflation is lower

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Why is there more interest in CPI measurement?

Inflation is lower There has been a trend towards inflation targeting

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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

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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

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Biases in CPI measurement

Substitution bias

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Biases in CPI measurement

Substitution bias New product bias

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Biases in CPI measurement

Substitution bias New product bias Outlet bias

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Biases in CPI measurement

Substitution bias New product bias Outlet bias Quality bias

• Expert judegement• Implicit methods• Option cost approach• Hedonic pricing methods

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Owner-occupied housing

Rental equivalence method

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Owner-occupied housing

Rental equivalence method User cost approach

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Owner-occupied housing

Rental equivalence method User cost approach Payment approach

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Owner-occupied housing

Rental equivalence method User cost approach Payment approach Net acquisitions approach

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CPI measurement for policy

Understanding the way the CPI is compiled is key

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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

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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

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