Is HICP really harmonized? Problems with quality adjustments and new products

Jakub Rybacki, Tamara Bińczak and Filip Kaczmarek
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Tamara Bińczak: Warsaw School of Economics, Collegium of Economic Analysis
Filip Kaczmarek: Warsaw School of Economics, Collegium of Economic Analysis

Collegium of Economic Analysis Annals, 2018, issue 53, 97-116

Abstract: The problem of accurate inflation measurement is far more frequently raised in the USA than in the European Union (EU). In 1996 the Boskin Commission identified four sources of the potential biases in the Consumer prices index (CPI) calculation related to the substitution of products and outlets, treatment of new products (entering the consumer basket some lag) and the quality adjustment. Similar problems are visible in the EU with even greater magnitude, especially when it comes to the latter factor. Currently, the Harmonized Index of Consumer Prices (HICP) methodology does not ensure standardization of quality adjustment process, new products entry or the analysis of missing prices. As a result, significant cross-country differences are observed. Based on the principal component analysis (PCA) we have identified major idiosyncratic deviations in the prices of most volatile categories. We found that Poland’s and Ireland’s annual HICP dynamics is downward biased by respectively 0.3 pp and 0.2 pp due to the inaccurate calculation of clothing prices. On the other hand, Austrian and Norwegian figures are upward biased by 0.1 pp on the telecommunication equipment. Finally, we have observed strong dispersions in dynamics of consumer electronics prices. Such differences account for 0.08 pp (information processing equipment) and 0.06 pp (sound recording and processing equipment) of unjustified disparity in the annual HICP inflation between countries with the highest and the lowest dynamics.

Keywords: HICP; quality adjustment; hedonic regression; new goods bias; seasonal products treatment (search for similar items in EconPapers)
JEL-codes: C5 E31 (search for similar items in EconPapers)
Date: 2018
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