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Do UK Price Indexes Overstate Inflation?

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  • Nicholas Oulton

Abstract

Official price indexes may overstate (or understate) inflation for a number of reasons. These include substitution bias, outlet bias, failure to allow properly for quality change, and failure to allow for new goods. This note finds that substitution and outlet bias are probably not significant sources of error in the UK. The other two sources most probably do lead to significant overstatement, but the size of the upward bias cannot at the moment be quantified. 'Since, with technological advance, the quality of products tends to improve, the estimates of consumers' expenditure tend to understate the true growth in standards of consumption'. (CSO a 985, p. 72). 'The Producer Price Indices ... make some allowance for changes in models and specifications when these can be identified in terms of changes of cost or in technical performance.... [Allowances for quality change] are necessarily somewhat rough and seldom fully satisfactory'. (CSO 1985, p. 40, emphasis added).

Suggested Citation

  • Nicholas Oulton, 1995. "Do UK Price Indexes Overstate Inflation?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 152(1), pages 60-75, May.
    • Handle: RePEc:sae:niesru:v:152:y:1995:i:1:p:60-75
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    Cited by:

    1. Valerie Jarvis & S. J. Prais, 1997. "The Quality of Manufactured Products in Britain and Germany," International Review of Applied Economics, Taylor & Francis Journals, vol. 11(3), pages 421-438.
    2. Simon Hall & Anthony Yates, 1998. "Are there downward nominal rigidities in product markets?," Bank of England working papers 80, Bank of England.
    3. Mark A. Wynne & Diego Rodriguez‐Palenzuela, 2004. "Measurement Bias in the HICP: What do we know and What do we need to know?," Journal of Economic Surveys, Wiley Blackwell, vol. 18(1), pages 79-112, February.
    4. Akçomak, İ. Semih & ter Weel, Bas, 2012. "The impact of social capital on crime: Evidence from the Netherlands," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 323-340.
    5. Jan Hanousek & Randall K. Filer, 2003. "Substitution Biases in Price Indexes during Transition," Development and Comp Systems 0306002, University Library of Munich, Germany.
    6. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    7. Henk Kox, 2006. "Intra-EU differences in regulation-caused administrative burden for companies," CPB Memorandum 136.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Harold Creusen & Bert Minne & Henry van der Wiel, 2006. "Competition in the Netherlands; an analysis of the period 1993-2001," CPB Document 136.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Jan Hanousek & Randall K. Filer, 2001. "Evaluating Imperfections and Biases in Price Indexes during Transition," CERGE-EI Working Papers wp186, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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