Measuring inflation : the stakes and the state of play

The major overhaul of the national consumer prices index (NCPI), upon which the health index is based, is an opportunity to adjust the methodology to make inflation measurement more accurate and ensure that the index is representative. The new index will enter into force in January 2014. In addition to the changes made in January 2013 at the government’s behest relating to the effect of seasonal sales and to heating oil prices, certain other changes are to be recommended. They include switching to a chain index, which allows for weightings to be adjusted more frequently (annually), taking better account of quality changes and substitution effects, switching to scanner data for products sold in supermarkets, and more accurately reflecting trends in the telecoms market. Lastly, pending a decision on whether or not to include owner-occupied housing costs in the harmonised index of consumer prices (HICP), some improvements can already be made to the current index of real rents in order to more accurately reflect rental market swings. Some of the changes being considered for the NCPI were made in 2013 to the HICP, which means that in certain cases it is possible to estimate their impact on NCPI inflation, were they to be adopted in 2014. However, the overall effect will also depend on how the new index is introduced. As in 2006, the Index Commission will have to set the conversion coefficient enabling the transition from the old to the new index.