The Re-design of the Dutch CPI

1
The Re-design of the Dutch CPI

• Jan de Haan
• Statistics Netherlands
• Geneva, 10-12 May 2006

2
Contents

• Background
• Aim and foundations of the future CPI
• Introduction of the annually chained CPI
• Implementation of the matrix of transaction
  categories
• Extending the scope with health care
• Possible future improvements

3
Background

• Research Boskin report new CPI Manual
• Early 2004 expert group report
• End of 2004 start project Re-design
• first phase pilot studies
• second phase (late 2005) implementation of new
  methods and process innovations

4
Aim and foundations of the future CPI (1)

• CPI guided by cost of living index theory
• framework of a conditional cost of living index
  (COL)
• COL-theory is grounded in mainstream economic
  theory (no measurement without theory)
• CPI differs from HICP (concepts, target
  population, scope)

5
Aim and foundations of the future CPI (2)

• Target population
• all private households
• (every five years a study into CPIs for
  sub-groups)
• Scope
• out-of-pocket payments, including casualty
  insurance,
• owner-occupied housing (rental equivalence
  approach), and consumption-related taxes. Soft
  drugs etc. in the future?
• prices should be known to the buyer at the time
  the transaction takes place retrospectively
  adjusted tariffs are excluded

6
Aim and foundations of the future CPI (3)

• Population model
• CPI will no longer rest on a single model
• describing the all-items index in terms of the
  prices and quantities of individual products
  (hybrid approach)
• Matrix of transaction categories
• Elementary aggregates or transaction categories
  COICP x type of outlet. Adjustments (updating
  samples etc.) and index number formulas depend on
  market circumstances
• Upper level adjustment of the number of
  transaction categories when necessary
• annual updating of weights National Accounts as
  primary source

7
Aim and foundations of the future CPI (4)

• Data collection
• aimed at acquiring transaction data, preferably
  in electronic format, e.g. scanner data
• optimal mix between electronic data and field
  collection
• Outlet sample
• re-design necessary (rotating sampling scheme?)
• Loose product specifications
• first selection of outlets and next selection of
  specific varieties within sampled outlets

8
Aim and foundations of the future CPI (5)

• Quality adjustment
• select replacement models that are
  representative for current market circumstances
  (instead of models that resemble the old
  models)
• collect product characteristics to asses how
  models differ and to employ explicit quality
  adjustment methods (e.g. hedonic regression)
• loose specifications increase the need for
  explicit adjustments at the level of model-outlet
  combinations

9
Introduction of the annually chained CPI (1)

• Requirements
• a continuous CPI series with a fixed index
  reference period
• no revisions
• no difference between CPI and HICP in this
  respect
• Future CPI (January 2007) will be a Lowe-type
  index, which is chained annually. Weights
  (preliminary figures from National Accounts)
  refer to t-2.
• Re-sampling of products and outlets in a
  continuous way

10
Introduction of the annually chained CPI (2)

• Properties of the chain index
• not consistent in aggregation
• chain CPI and annual inflation rate depend on
  two sets of quantities or weights (t-2 and t-3)
• chain CPI and inflation rate are path dependent
• inflation rate fails the identity test (not
  necessarily equal to 1 if prices in month m of
  year t and t-1 were identical)
• However, latter effect seems negligible in
  practice

11
Matrix of transaction categories (1)

• Rows detailed COICOP categories
• Columns types of outlets
• Aim detailed weighting scheme and sampling frame
  for outlets
• General Business Register can serve as the basic
  sampling frame for most types of outlets
  (reasonably complete and up-to-date
  comparability with related statistics)

12
Matrix of transaction categories (2)

• Preliminary version (January 2007) only
  weighting scheme
• Possible problems
• lack of accurate data
• cells with few observations
• In any case use of explicit cell weights is an
  important step forward
• increases homogeneity at the elementary
  aggregation level
• may help improve outlet sample per cell

13
Extending the scope with health care (1)

• Health care reform January 2006
• compulsory basic scheme for the total population
• additional packages (freedom of choice)
• Reasons to include additional health care
  insurance in the CPI
• out-of-pocket expenditures
• comparability with HICP and National Accounts
• prices (premiums) can easily be obtained no
  retrospective tariff changes

14
Extending the scope with health care (2)

• Concept of output for casualty insurance industry
• HICP and NA pooling risks (net premium
  approach)
• CPI assumption of risk (gross premium approach)
• Balk (1993) For example, a right is acquired
  when one is entitled to reimbursement of (all or
  part of) the cost due to fire, theft, car damage
  etc. Whether and when such rights are to be
  executed differs between the households.
• Health care (additional insurance) in the CPI
• it is the right to receive a certain treatment in
  case of illness, disease etc. that matters

15
Extending the scope with health care (3)

• Dealing with changes in coverage,
• for example increase in coverage of additional
  health care insurance
• CPI new goods introduced during next base
  year revision (next year in chain CPI)
• HICP prices of new goods are raised from zero
  to some positive value measured inflation will
  increase
• In practice (CPI) asking insurers to provide
  estimated premiums for a sample of policies of
  which the premium characteristics are held
  constant

16
Extending the scope with health care (4)

• Quality adjustment
• Premium change should in principle be adjusted
  for changes in the quality of the goods and
  services, or treatments, policy holders may or
  may not receive (and for changes in risk)
• In practice, however, no explicit quality
  adjustments
• Introduction of insured medical care in CPI at
  the same time as introduction of chain CPI

17
Possible future improvements

• Re-design of outlet sample and construction
  sampling frames
• Further work on matrix of transaction categories
• Introduction of loose specifications and
  geometric index at elementary (cell) level
• Extending the use of explicit quality
  adjustments (e.g. hedonic regression)
• Extending the use of scanner data (more
  supermarkets, chains selling household appliances
  etc.)
• Building a new, flexible automated system