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Working to Improve Price Indices Development in Pakistan

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  • Mahmood Khalid

    (Pakistan Institute of Development Economics)

  • Zahid Asghar

Abstract

Given the importance of Consumer Price Index (CPI), there has been long debate on its measurement issues. It is the best and most well-known indicator of inflation, which is further used for evaluating the monetary and fiscal policy of a country. Other uses of CPI for indexation are social security benefits, rents, contractual payments, taxation, deflating national income accounts, purchasing power parity index, inflation incidence for different income groups of population, impact of inflation on demographic composition of the population. Any measurement error in CPI may overstate or understate inflation that will have serious repercussions for monetary, fiscal and other economic policies. The report of the Boskin Commission [Boskin, et al. (1996)] has identified possible sources of bias in the CPI like substitution bias, outlet bias, quality bias, new product bias. In this paper we have tried to evaluate these biases and to start a debate on improving Consumer Price Index (CPI) construction in Pakistan. We found that there are biases of Commodity Substitution Bias, Outlet Substitution Bias, Quality Adjustment Bias, Index Calculation Bias and New Product Bias. Other limitations for the CPI index including; Issue of selecting a representative product (or good), Defining issue of average quality, Data collection, weights determination and Base year change were also found.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22831.

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Date of creation: Jan 2010
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Handle: RePEc:eab:macroe:22831

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Keywords: Consumer Price Index; Biases in CPI; CPI Formulae;

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  1. Shigenori Shiratsuka, 1999. "Measurement errors in Japanese Consumer Price Index," Working Paper Series, Federal Reserve Bank of Chicago WP-99-2, Federal Reserve Bank of Chicago.
  2. Angus Deaton, 1998. "Getting Prices Right: What Should Be Done?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 37-46, Winter.
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