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Harmonized Indexes of Consumer Prices: Their Conceptual Foundations

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  • W. Erwin Diewert

Abstract

The Harmonized Index of Consumer Prices (HICP) is the single most important indicator of inflation used by the European Central Bank. Sections 2 to 4 of the paper look at the theory of inflation indexes that could be used as target indexes of inflation. A Consumer Price Index (CPI) emerges as perhaps the most useful target index. Four different approaches to index number theory are reviewed and the "best" index number formula from each perspective is determined. Section 6 looks at the methodology of the HICP in the light of the previous sections. Section 7 looks at some of the difficult measurement problems that must be addressed in a CPI or an HICP. These problems include the treatment of quality change, substitution or representativity bias, chained versus fixed base indexes, the choice of formula at the lowest level of aggregation and the treatment of owner occupied housing and seasonal commodities.

Suggested Citation

  • W. Erwin Diewert, 2002. "Harmonized Indexes of Consumer Prices: Their Conceptual Foundations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 547-637, December.
    • Handle: RePEc:ses:arsjes:2002-iv-13
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    References listed on IDEAS

    as
    1. Alchian, Armen A & Klein, Benjamin, 1973. "On a Correct Measure of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 173-191, Part I Fe.
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    3. Robert B. Archibald, 1977. "On the Theory of Industrial Price Measurement Output Price Indexes," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 57-72, National Bureau of Economic Research, Inc.
    4. Mr. Paul A Armknecht Jr. & Fenella Maitland-Smith, 1999. "Price Imputation and Other Techniques for Dealing with Missing Observations, Seasonality and Quality Change in Price Indices," IMF Working Papers 1999/078, International Monetary Fund.
    5. Olympia Bover & Pilar Velilla, 2001. "Hedonic house prices without characteristics: the case of new multiunit housing," Estudios Económicos, Banco de España, number 73.
    6. repec:ubc:bricol:00-16 is not listed on IDEAS
    7. Bert Balk, 2003. "The Residual: On Monitoring and Benchmarking Firms, Industries, and Economies with Respect to Productivity," Journal of Productivity Analysis, Springer, vol. 20(1), pages 5-47, July.
    8. Ernst R. Berndt & Neal J. Rappaport, 2001. "Price and Quality of Desktop and Mobile Personal Computers: A Quarter-Century Historical Overview," American Economic Review, American Economic Association, vol. 91(2), pages 268-273, May.
    9. Bert M. Balk, 2005. "Divisia price and quantity indices: 80 years after," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(2), pages 119-158, May.
    10. Bert M. Balk, 1996. "Consistency‐In‐Aggregation And Stuvel Indices," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 42(3), pages 353-363, September.
    11. Olympia Bover & Pilar Velilla, 2001. "Hedonic house prices without characteristics: the case of new multiunit housing," Estudios Económicos, Banco de España, number 73.
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    More about this item

    Keywords

    Inflation target; Consumer Price Index; Harmonized Index of Consumer Prices; the System of National Accounts; superlative indexes; fixed basket indexes; stochastic indexes; index number tests; cost of living indexes; tourist expenditures; elementary indexes; quality change; substitution bias; representativity bias; chained indexes; fixed base indexes; owner occupied housing; seasonal commodities; user cost; rental equivalence; acquisitions approach; unit values; intertemporal cost of living indexes; the temporary equilibrium; asset prices.;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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