The Strengths and Weaknesses of the Consumer Price Index: Estimates of the Measurement Bias for Poland
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Publication date: 2011-09-30
GNPJE 2011;250(9):51-75
The article deals with the problem of a measurement bias related to the consumer price index (CPI) for Poland. According to the authors, the bias is due to two basic factors: a substitution effect and the use of plutocratic weights for calculating the price index. The research was conducted comparing the CPI index published in Poland with superlative indices and a democratic index. The calculations were made on the basis of data from the 2005-2009 period. The research did not confirm the occurrence of an upward bias for the CPI index, the authors say, and the results point to a slight underestimation of the CPI as a result of the substitution effect and the use of plutocratic weights: by 0.1 and 0.3 percentage points respectively. The negative bias resulting from the substitution effect is an atypical result in the context of research for other countries. A deeper analysis revealed that this situation may be explained in two ways, the authors say. On the one hand, the lack of overestimation may be due to frequent changes in the structure of weights used to calculate the CPI, which leads to better adaptation of the indicator to changes taking place in the structure of consumption. On the other hand, the prices of consumer goods and services—which are subject to relatively stable demand—grew at a faster rate than the CPI index in the analyzed period, and a positive rate of growth has been observed in real household incomes over the past decade. In turn, the examination of the “plutocratic gap” revealed that the CPI (plutocratic) index for Poland is lower than the democratic index, the authors say. They conclude that the result of the examination of the “plutocratic gap” is compatible with research for other countries.
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