This document describes changes to the methodology for calculating the Irish Consumer Price Index (CPI) and Harmonised Index for Consumer Prices (HICP). These changes are for Clothing, for Footwear, and for Travel Goods. It describes the methodology change and the motivation for this change.
|
Items affected |
Garments (except school uniforms) (COICOP 03.1.2)[1] |
|
Weight of items affected |
4.2% of Irish CPI |
|
Date of change |
June 2021 |
|
Description |
Adjusting quality adjustment methods for replacements. Direct Comparison to be used for most replacements. |
1 Classification of Individual Consumption According to Purpose (COICOP)
The CPI basket has forty-six items in COICOP 03.1.2 (garments), five items in COICOP 03.1.3 (other clothing), twelve items in COICOP 03.2.1 (footwear), and three items in COICOP 12.3.2.1 (travel goods). We will use one of these items, ‘Ladies’ casual jacket’, as an example.
The index for Ladies’ casual jacket is calculated by pricing the same sample of jackets each month and calculating the relative change in price using a geometric average of the individual price changes. We refer to each of the jackets and its price that month as a product-offer.
A key decision is what to do when a product-offer is no longer available. This involves picking a replacement product-offer and deciding if and how to compare the old and new product-offers. The problem of how to calculate the change of price between the old and new product-offer when we make a replacement is known as Quality Adjustment. There are different methods of quality adjustment and it is important to choose the method most suitable to the item being priced.
The method used up to May 2021 for clothing, footwear and travel goods works as follows:
When a specific jacket priced in a retail outlet is no longer available, a replacement jacket from the same retail outlet is chosen. The person choosing this replacement then decides whether the replacement is comparable or non-comparable to the jacket being replaced.
If they decide the replacement is comparable then the price change between the price of the replacement and the last price of the jacket replaced is included in the geometric average calculations. If the replacement is non-comparable then the price change between it and the jacket being replaced is excluded from the calculations. These two options correspond to the quality adjustment methods Direct Comparison and Bridged Overlap respectively.
Direct comparison has been used less than half the time for clothing, footwear and travel goods. For example, in 2019, direct comparison was used 44% of the time for replacements for these items, and bridged overlap used 56% of the time.
Clothing, footwear and travel goods (e.g. handbags) are fashion items that are often introduced to the market at their full price and leave the market at a sale price. At this point they are replaced in our sample by another item at full price. This pattern is repeated with the replacement. Using bridged overlap with products exhibiting this pattern can lead to a downward bias in the index.
1. From June 2021 onwards, we will use direct comparison for replacements in a large majority of cases (over 90%). As described above, this means that the price change between the price of the replacement and the last price of the replaced product-offer will be included in the calculations of the item’s index.
2. In less than 10% of cases, we will decide that the replacement and the replaced product-offer are non-comparable. Here, we will use a form of bridged overlap that uses the pre-sale price of the product-offer being replaced (i.e. not necessarily the last price).
Both changes address the issue with fashion items described above. If a product-offer leaves the market at a sale price, the index will compensate for this either by 1) directly comparing this price with the price of the replacement, or 2) by returning to the pre-sale price of the product-offer being replaced.
We have simulated the effect of these changes on the index over three years, from December 2016 to December 2019. This analysis estimated that if the new methodology had been used in that period, it would have resulted in the following;
The change in methodology described here will not lead to any revisions to the CPI or HICP.
Once the CPI indices are published, they are never revised.
The HICP can be revised in the case of a mistake or if there is new or improved information. Neither of these is the case with this change in methodology. See the EC Regulation number 1921/2001 for the HICP revisions policy.
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32001R1921&from=EN
Eurostat HICP Methodological Manual - https://ec.europa.eu/eurostat/documents/3859598/9479325/KS-GQ-17-015-EN-N.pdf/d5e63427-c588-479f-9b19-f4b4d698f2a2
Chapter 6 is on Replacements and quality adjustment. It explains bridged overlap, direct comparison and many other quality adjustment techniques. Annex 12.7 is on Clothing and Footwear, and explains that direct comparison is more suitable than bridged overlap for these items.
CSO Paper presented at UNECE CPI conference – Quality Adjustment in the Irish CPI
https://unece.org/fileadmin/DAM/stats/documents/ece/ces/ge.22/2018/Ireland.pdf