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New evidence on elementary index bias

Author

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  • Vermeulen, Philip
  • Gábor, Enikö

Abstract

We provide evidence on the effect of elementary index choice on inflation measurement. Using scanner data for 15844 individual items from 42 product categories and 10 euro area countries, we compute product category level elementary price indexes using nine different elementary index formulas. Measured inflation outcomes of the different index formulas are compared with the Fisher Ideal index to quantify elementary index bias. Across product categories, mean levels of annual elementary index bias vary between -0.53 percentage points and 0.55 percentage points depending on the index, while the standard deviation is larger than 1 percentage point. National indexes based on aggregation of the elementary indexes remain biased. The average effect of elementary index bias on national inflation ranges from -0.45 to 0.45 percentage points depending on the index. The results show that elementary index bias is quantitatively more important than upper level substitution bias. JEL Classification: E31, C43

Suggested Citation

  • Vermeulen, Philip & Gábor, Enikö, 2014. "New evidence on elementary index bias," Working Paper Series 1754, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20141754
    Note: 327651
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1754.en.pdf
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    References listed on IDEAS

    as
    1. Mick Silver, 1995. "Elementary Aggregates, Micro‐Indices And Scanner Data: Some Issues In The Compilation Of Consumer Price Indices," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 41(4), pages 427-438, December.
    2. W. Erwin Diewert, 1995. "Axiomatic and Economic Approaches to Elementary Price Indexes," NBER Working Papers 5104, National Bureau of Economic Research, Inc.
    3. Reinsdorf, Marshall B, 1999. "Using Scanner Data to Construct CPI Basic Component Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 152-160, April.
    4. Silver, Mick, 1995. "Elementary Aggregates, Micro-indices and Scanner Data: Some Issues in the Compilation of Consumer Price Indices," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 41(4), pages 427-438, December.
    5. W. Erwin Diewert, 1998. "Index Number Issues in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 47-58, Winter.
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    Cited by:

    1. Hans Wolfgang Brachinger & Michael Beer & Olivier Schöni, 2018. "A formal framework for hedonic elementary price indices," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 102(1), pages 67-93, January.

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    More about this item

    Keywords

    elementary index; HICP; inflation measurement bias; lower level substitution bias;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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