Post-Laspeyres: The Case for a New Formula for Compiling Consumer Price Indexes
- Note: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. Paul Armknecht was formerly the Price Statistics Advisor for the IMF Caribbean Regional Technical Assistance Centre and Deputy Division Chief of the Real Sector Division of the IMF Statistics Department and Mick Silver is a Senior Economist in the IMF Statistics Department. The authors thank Walter Lane (U.S. Bureau of Labor Statistics) for his comments on an earlier draft and his assistance with the provision of data for the empirical section. Acknowledgements for helpful comments are also due to Bert Balk (Erasmus University Rotterdam), Erwin Diewert (University of British Columbia), John Greenlees (U.S. Bureau of Labor Statistics), Jens Mehrhoff (Deutsche Bundesbank), and two anonymous referees. The usual disclaimers apply.
- The International Monetary Fund retains copyright and all other rights in the manuscript of this Post–Laspeyres: The Case for a New Formula for Compiling Consumer Price Indexes as submitted for publication
Consumer price indexes (CPIs) are commonly compiled at the higher (weighted) level using Laspeyres-type arithmetic averages. This paper questions the suitability of such formulas and considers two counterpart alternatives that use geometric averaging, the Geometric Young and the (price-updated) Geometric Lowe. The paper provides a formal decomposition and understanding of the differences between the two. Empirical results are provided using United States CPI data. The findings lead to an advocacy of quite simple variants of a hybrid formula suggested by Lent and Dorfman that use the same data as Laspeyres-type indexes but substantially reduce their bias.