Quality Adjustment of Price Indexes -- Wholesale Price Index and Corporate Service Price Index: The Current Situation and Future Implications

Price Statistics Division
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Price Statistics Division: Bank of Japan

Bank of Japan Working Paper Series from Bank of Japan

Abstract: As low levels of inflation continue to spread globally, further attention has been paid to the accuracy of price statistics in the process of discussing price stability. In Japan, prices have been stable since the 1990s, although some declining phases have also been observed. Under these conditions, lively discussions are emerging regarding the "actual trend"of prices while focusing on the accuracy of price indexes. Hayakawa and Yoshida (2001) present the idea that the problems surrounding price indexes are not limited to how statisticians confront technical problems of price indexes. Moreover, they insist that the problems are how they grasp the prices of a good or service, and furthermore they are connected to more fundamental issues of how price stability should be defined. In fact, from the viewpoint of the statistics section compiling the Wholesale Price Index (WPI) and Corporate Service Price Index (CSPI), we regularly face such problems as how to grasp the prices of goods and services and thus more or less agree with this opinion. Even if we limit the topic to price indexes compiled by the Bank of Japan, concerns still abound. These include the extent to which the WPI incorporates productivity growth represented by Information Technology (IT) as the Japanese economy undergoes rapid change through IT, and the question of whether the CSPI accurately reflects the progress in services and permeating effects of IT on nonmanufacturing. Furthermore, by taking these discussions into account, there is the issue of how effectively the price indexes reflect the balance between supply and demand. To provide price indexes that reflect the actual conditions of the economy as accurately as possible in response to such discussions, quality adjustment of price indexes has become the most essential issue among the many difficulties of price indexes. This paper will discuss in detail some ideas from the viewpoint of statistics compilers on how important quality adjustment is for price indexes when grasping prices. It will also attempt to clarify some issues concerning the use of price indexes obtained from previous studies. In line with this, the paper will highlight problems that cannot be solved even by using various quality adjustment methods and will, we hope, provide some insights for future domestic and international research.

Date: 2001-07
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