New Evidence on Elementary Index Bias

40 Pages Posted: 19 Dec 2014

See all articles by Eniko Gábor-Tóth

Eniko Gábor-Tóth

Deutsche Bundesbank; Central European University (CEU) - Department of Economics

Philip Vermeulen

European Central Bank (ECB)

Date Written: December 9, 2014

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.

Keywords: HICP, inflation measurement bias, elementary index, lower level substitution bias

JEL Classification: E31, C43

Suggested Citation

Gábor-Tóth, Eniko and Vermeulen, Philip, New Evidence on Elementary Index Bias (December 9, 2014). ECB Working Paper No. 1754. Available at SSRN: https://ssrn.com/abstract=2535757

Eniko Gábor-Tóth

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

Philip Vermeulen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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