The uses of individual price data for analysis, communication, monitoring and research*

Prepared for the Eurostat ConferenceReviewing the business architecture of consumer price statisticsSession 2 Users’ needs at National Level - both established and emergingLuxembourg 15-16 October 2009

Johannes HoffmannDeutsche BundesbankEconomics DepartmentMacroeconomic Analysis and Projections Division Prices, Labour Markets and Wages Unit

*This presentation reflects the author‘s personal opinions and not necessarily those of the Deutsche Bundesbank or its staff.

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Outline

1 Motivation

2 Uses of individual price data

3 Data requirements

4 Summing up

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Motivation

❙Large amounts of data gathered for the compilation of HICPs

❙In Germany 300,000 price quotes per month.

❙Making full use of the information content of the data

❙Two main purposes with differing data requirements

❙Intertemporal price comparison (inflation rate)

❙Comparison of price levels across countries (PPP, indicative price levels)

❙Implying that multipurpose price surveys would have to meet differing needs.

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Motivation

❙Here: Focus on intertemporal comparisons.

❙What can be learned from the data beyond the overall rate of inflation?

❙Which data requirements are to be met for a more detailed analysis of price developments?

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Uses of individual price data

2.1 Analysis

2.2 Communication

2.3 Monitoring

2.4 Research

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Inflation analysis

❙Usually starts with headline HICP rate

❙Proceeds with sub aggregates (and the corresponding information on weights)

❙main HICP components (as provided by ECB)

❙4-digit COICOP sub indices as provided by Eurostat and national statistical institutes.

❙Makes use of product-specific inflation rates (and the corresponding information on weights)

❙national CPI data; not fully consistent with HICP data.

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Inflation analysis

❙Looks at summary statistics of price developments (beyond the rate of inflation)

❙Moments of the distribution on price (index) changes

❙Core inflation rates

❙depend on the degree of aggregation of the price (change) data(for the HICP presently limited to the 4-digit COICOP breakdown)

❙Alternative summary statistics

❙Frequency of price changes (extensive margin of price adjustment)

❙Average size of price changes (intensive margin of price adjustment)

❙require access to individual price data.

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Communication

❙Sometimes headline year-on-year HICP inflation rate difficult to communicate.

❙Euro cash changeover: consumers perception of inflation versus moderate pace of HICP.

❙Statistisches Bundesamt and Deutsche Bundesbank actually started individual price data analyses and gained some important information which also fed into our communication strategy.

❙However, as we did not have any experience with such analyses, we did not manage to make full use of the data …

❙… but we learned at lot about the data and were better prepared for forthcoming events.

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Communication

❙Detailed information about the frequency and the direction of individual price changes might have eased the communication problems significantly.

❙Later analyses (in the context of the IPN) showed that in January 2002 indeed a much larger number of prices was changed than in any other month in the period under review.

❙However, even within narrowly defined product categories price increase and decreases occurred simultaneously …

❙… which cancelled out in the inflation rate to a large extent

❙… but probably not in the perception of many consumers.

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Communication

❙When the January 2007 VAT increase of 3 PP was announced, we were well prepared for analyses at the level of

❙the overall rate of inflation,

❙the main components,

❙the product-specific price indices,

❙individual price data.

❙Analyses at the various levels of aggregation indicated consistently that VAT increase was passed on fully to consumer prices (with leads and lags),

❙VAT effect was brought about by a larger number of price increases

❙which were, however, in January 2007 less frequent than in January 2002.

❙But in January 2002 much higher number of price reductions.

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Monitoring

❙Evidence-based consumer markets monitoring

❙Indicative (average) (detailed) price levels for consumer products

❙Complement international price level comparisons (PPP; restricted to data from capital cities)

❙Adequately measured price level differences – if not related to economic fundamentals – might hint at inefficiencies

❙Prices do, however, vary also within a country.

❙Only information on the distribution of prices within countries will tell us whether prices across countries differ in a statistically significant manner.

❙Hence, PPP and indicative (average) prices to be complemented by micro data.

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Monitoring

❙Probably diversity in response to shocks even more relevant than differences in price levels

❙Requires information on the behaviour of prices over time.

❙Much can already be achieved with product-specific price index data.

❙But individual price data would allow important additional insights.

❙Links between price level and price response comparisons

❙Mode of price adjustment within an industry (staggered versus synchronised) determines spread of prices.

❙Staggered price setting itself an indication of insufficient competition?

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Monitoring

❙Recent complaints about the dairy market (Dairy market situation 2009, Communication from the Commission to the Council):

❙Retail prices followed surge in agricultural producer prices rather quickly, but response downwards was much more sluggish.

❙4-digit HICP data seem to confirm this hypothesis.

❙More disaggregate CPI data reveal, however, a high degree of heterogeneity (see Bundesbank Monthly Report August 2009)

❙Prices of simple dairy products (milk or butter) responded rather rapidly to rise and fall of raw milk prices,

❙whereas prices of more sophisticated products (such as cheese) responded more slowly (and probably in an asymmetric manner).

2 Fresh whole milk, long-life milk, condensed milk, farm cheese, cream, butter. 3 Yoghurt with or without added fruit, ready-made desserts (not yoghurt), fresh, soft, hard and semi-hard cheese.

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Monitoring

❙Compared to other euro area countries, German retail prices seem to have responded not only rather quickly, but also more strongly

❙Caveat: comparison based on the 4-digit COICOP data.

❙Swift response probably related to market structures

❙High and increasing importance of hard discount retailers in Germany (GfK).

❙According to GfK (and supported by anecdotal evidence), hard discount retailers changed prices not only more swiftly but also, in percentage terms, more strongly than traditional supermarkets.

❙According to Statistics in Focus 90/2007, dairy product prices in Germany considerably lower than in other euro area countries which fits into the overall picture.

❙With access to HICP micro data, these hypotheses could have been checked more thoroughly.

HICP data, milk, cheese and eggs sub-index plusoils and fats sub-index.

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Research

❙Increasing importance of micro data for economic research

❙Linking macroeconomic outcomes to individual behaviour and vice versa

❙well established in labour market economics

❙as well as in industrial economics

❙reflected in provision of micro data by Eurostat and national statistical institutes (eg LFS).

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Research

❙In recent years also sharply rising number of papers on price setting behaviour

❙Questions addressed

❙How do firms adjust prices? How much heterogeneity is in price adjustment?

❙Which model of price setting fits best (at the economy-wide level, at the sectoral level)?

❙Answers to these questions relevant for inflation analysis, forecasting, the identification of nominal rigidities and – to some extent – for the conduct of monetary policy.

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Research

❙Most studies on individual price data relate to US data

❙in contrast to statistical offices in the EU the US BLS offers research full access to the CPI database.

❙However, the Inflation Persistence Network of the Eurosystem (2003 to 2005) gained a restricted access to national CPI databases, which resulted in numerous studies on price setting behaviour in the euro area (most prominetely Journal of Economic Perspectives Spring 2006) and individual euro area countries

❙And we are very grateful for that.

❙A more liberal data access would foster research in these areas with European data.

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Data requirements

❙Analysis of individual price data far from straightforward.

❙The same holds for calculation of indicators of the extensive and the intensive margin of price adjustment.

❙Major nuisances:

❙Item replacements (eg due to seasons in fashion)

❙Among apparels regular changes mostly price reductions.

❙Item replacements usually coupled with price increases.

❙Implying that leaving item replacements out would result in distorted measures.

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Data requirements

❙Allowing for item replacements requires carefully edited meta-information …

❙… and reliable quality adjustment procedures.

❙The ongoing process of raising the standards for the compilation of national HICPs should – as a by product – also raise the quality of the underlying micro data.

❙And the other way round, opening the archives to research might result in important impulses to further improvements in HICP methodology and practice.

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Summing up

❙Individual price data offer important insights into the working of markets and may help with communication.

❙National statistical institutes may want to make fuller use of the information contained in the huge amount of price data collected each month.

❙Liberalised access to CPI (HICP) micro data for user analyses and research would be helpful.

❙To be useful, the micro consumer price data must be of high quality and well-documented.

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Thank you for your attention!