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Analytical CPI Series with Smooth Rebasing to Avoid Discontinuities

This paper discusses a solution for avoiding discontinuities in rebased CPI series by applying benchmarking methods used in quarterly national accounts estimation. The solution aims to provide a linked index that respects the base constraint, maintains continuity, and recognizes the new trend estimate. The paper explores the benefits and challenges of using this approach and suggests ways to address user needs for accurate long-term trends and short-term continuity.

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Analytical CPI Series with Smooth Rebasing to Avoid Discontinuities

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  1. A Note on Long Run Analytical CPI Series that Avoid Discontinuities on Rebasing Maria Mantcheva Mick Silver Kim Zieschang Ottawa Group on Price Statistics 10-12 October 2007 Prepared by Kim Zieschang, IMF Statistics Department (STA). The views expressed in this paper are those of the author and do not necessarily represent those of the IMF or IMF policy.

  2. The problem • Substantial changes in weights can produce a significant difference between old and updated price monthly indexes’ inflation estimates during a link year • Conventional linking ignores the update in trend inflation of the reweighted index that this difference represents • Policy users want a linked index that is unbroken, but recognizes the new trend estimate.

  3. A solution • Apply benchmarking methods used in quarterly national accounts estimation to adjust the monthly series during the base year • Respecting the base constraint that the monthly indexes average to 100, • While equaling the old index the month prior to the link period, and the new index the month after the link period

  4. But ... • This implies revision of data already published during the base year • More on this later

  5. An example on artificial data • A monthly price index with 1990 (weight reference) base to be linked in 2004 • The index is updated with new weights whose reference period is 2004. • The new index lies 6 percent above the old index in January 2005 • “Trend” inflation 6 percent higher according to rebased index

  6. Denton benchmaking for linking price indexes Subject to

  7. Denton benchmaking for linking price indexes

  8. Denton benchmaking for linking price indexes

  9. How benchmarking works on an artificial dataset

  10. Observations • Users of price indexes value both accuracy in long-term trend as well as short-term continuity • These twin objectives will be very difficult to achieve simultaneously without an explicit revision policy, analogous to the practice in national accounts.

  11. Observations • Opposition to revisions strongest with users who need price indexes for contract escalation • Publish revisable and nonrevisable series alongside one another • Engage these users in use of revisable indexes for escalation • Example: US C-CPI-U alongside CPI-U

  12. Observations • Users also will need contribution to change breakdowns • Check quarterly national accounts literature

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