Introduction

What does the Consumer Price Index measure ?

The Consumer Price Index (CPI)

	provides a measure to reflect changes in the price level of consumer goods and services generally purchased by households. (Set to be 100 for the base period, the index may take a value higher or lower than 100 for a subsequent period, depending on the price level.)
	tells us what changes are taking place in the purchasing power of the currency we spend.
	provides measures of the relative change over time in the total cost of a specified basket of consumer goods and services, therefore reflecting only price movements as the basket is fixed in terms of quantity and quality of the items it contains.

To whom does the CPI relate ?

The Census and Statistics Department compiles separate CPI series relating to households in different expenditure ranges.

	CPI(A) relates to about 50% of households in Hong Kong, which are in the relatively low expenditure range;
	CPI(B) relates to the next 30% of households, which are in the medium expenditure range;
	CPI(C) relates to the next 10% of households, which are in the relatively high expenditure range; and
	Composite CPI relates to all of the above households taken together. It is compiled based on the aggregate expenditure pattern for reflecting overall consumer price inflation.

The remaining households which are not covered in the CPIs are those in the lowest or highest expenditure ranges. Also excluded are those households receiving Comprehensive Social Security Assistance.

Currently, the delineation of the CPIs is based on the expenditure patterns derived from the 1999/2000 Household Expenditure Survey (HES) conducted during the 12-month period from October 1999 to September 2000.

Why are different series of CPI compiled ?

The expenditure patterns of households in different expenditure ranges vary. For example, households in the lower expenditure range spend relatively more on food and electricity, gas and water, while those in the higher expenditure range spend relatively more on housing, clothing and footwear, transport and services. Hence, it is useful to compile different CPI series for analysis purpose.

Compilation of the CPI

What types of data are required for compiling the CPI ?

Two types of data are required for compiling the CPI :

	expenditure weights of consumer goods and services; and
	price movements of consumer goods and services.

Why is a weighting system needed ?

The CPI is compiled primarily to provide an indicator of overall price movements affecting households. As households spend more on some items and less on the others, similar price movements in different items may have different effects on the overall price change. Therefore, a weighting system which shows the relative importance, in terms of expenditure, of individual items in the basket of consumer goods and services bought by households is required for the compilation of the CPI. The weight of each item is the share of the item in the total expenditure of households.

How is the weighting system derived ?

The set of expenditure weights used in the CPI
	is derived from the results of the HES.
	is updated once every five years to ensure that up-to-date expenditure patterns of households in different expenditure ranges are used in the compilation of the CPI. This practice conforms to international practices and is considered adequate for maintaining accuracy of the CPI.
Whenever a new round of HES is completed, the weighting systems for the various CPI series are updated. The survey period is usually taken as the new base period for the CPI series.

The weights for the nine commodity or service sections of the 1999/2000-based Composite CPI, CPI(A), CPI(B) and CPI(C) are shown below :

Expenditure weight (%) of the 1999/2000 based CPIs

(Text version)

How are price data collected ?

The Census and Statistics Department continuously collects the prices of 984 items of consumer goods and services. These items are categorized into 237 sub-groups, then 97 groups and finally nine sections.

A Monthly Retail Price Survey is conducted by the Census and Statistics Department to gather information on prices of pre-selected items from different types of retail outlets (e.g. supermarkets, market stalls, department stores, fashion shops, etc.) and service providers (e.g. cinemas, hospitals, tour companies, beauty salons, etc.) throughout the territory. Price data are collected mainly by field visits, supplemented by telephone and postal enquiries. On average, about 10 000 visits and 1 300 telephone calls are made to some 4 000 retail outlets and service providers each month to collect about 45 000 price quotations.

As regards such principal services as public transport, electricity and postal services, price data are either collected from the companies concerned directly or obtained from administrative records. For private housing, rental data pertaining to new, renewed and existing lettings are collected monthly through a sample survey of renter households. Data on public housing rental movements are regularly provided by the Hong Kong Housing Authority and Hong Kong Housing Society.

How is the CPI compiled ?

The price index for each individual commodity or service item for the month concerned, which reflects the price change of the item since the base period, is first obtained. This is done by comparing its price in that month to the price in the base period.

The CPI for the month is then obtained by aggregating the products of the price index of each item for that month with the respective weight. A simple example illustrating the basic method used in the compilation of the CPI is given below :

Item Expenditure weight Item index (1) 30% 110 (2) 60% 105 (3) 10% 130

CPI	= 30% x 110 + 60% x 105 + 10% x 130
	= 109

By similar computation, the values of the CPI for different months can be obtained. Price levels in different months can thus be compared.

Uses and Interpretation of the CPI

What are the uses of the CPI ?

The change in the CPI is an important indicator of inflation affecting households.

The CPI is also used in the private sector as a reference in adjusting salaries, wages or charges so as to maintain the purchasing power of the currency in the face of changing prices.

The prices of some consumer goods and services may be subject to seasonal variations causing the CPI to rise or fall. Therefore, when studying changes in the CPI, it is common to refer to year-on-year changes (e.g. comparing the CPI of a month with that of the same month in the preceding year) so as to eliminate the effects of seasonal factors. Another alternative is to use the deseasonalized CPI. The latter is obtained by using statistical methods that estimate and remove the seasonal variations from the original index.

Is the CPI the only measure of inflation ?

"Inflation" relates to the general increase in prices. Apart from the CPI, there are other measures of inflation, such as the GDP (Gross Domestic Product) deflator and domestic demand deflator. The CPI relates to inflation of consumer goods and services affecting households whereas the other two quoted above are economy-wide measures of inflation.

Would changes in the expenditure level of households affect the reliability of the CPI ?

Although the expenditure level of households generally changes over time in response to various factors such as changes in income levels and prices, the household expenditure patterns (i.e. the relative expenditure among various items of consumer goods and services) are not expected to undergo drastic changes. As long as the expenditure patterns remain relatively stable, changes in the expenditure level would not affect the reliability of the CPI. Hence, even if the average expenditure of households changes over time, the CPI(A), CPI(B) and CPI(C) will continue to reflect the impact of price changes on households in the relatively low, medium and relatively high expenditure range respectively.

Would changes in expenditure patterns affect the reliability of the CPI ?

Changes in expenditure patterns over time may arise due to two factors :

	changes in prices (e.g. a larger increase in the price level of a particular item relative to those of other items will result in a larger share of household expenditure spent on that item even if there is no change in the quantity of purchase); and
	changes in consumption volumes (e.g. a larger increase in the consumption volume of a particular item relative to those of other items will result in a larger share of household expenditure spent on that item).

The former (i.e. the price factor) does not affect the reliability of the CPI compiled based on fixed expenditure weights in the intervening years in between the updating of expenditure weights because the effects of price changes are continuously taken into account in the compilation of the CPIs.

As for the other factor (i.e. the quantity factor), changes in consumption volumes in the intervening years may theoretically affect the reliability of the CPI. However, the effects would not be very significant because such changes take place very gradually. Nevertheless, it is necessary to update the expenditure weights after a lapse of several years.

Why does the price change reflected by the change in the CPI deviate from personal experience ?

The CPI reflects the collective experience of inflation for all households that may not necessarily tie in with the experience of an individual household. As each household has its own expenditure pattern and prices of different consumer goods and services increase or decrease at varying rates, inflation does not affect all households to the same extent. For instance, if a household spends a lot on goods and services with rapid price increases, the household will feel greater impact of inflation.

Besides, people tend to be psychologically more aware of drastic price changes which affect them directly and pay little notice to moderate or small price changes. Even individual members of the same household may feel different impacts of price changes. Therefore, while personal experience may be subjective or biased, the CPI provides an objective assessment of price changes affecting households generally.

Is the CPI a cost-of-living index ?

The CPI is sometimes loosely taken as a cost-of-living index. Strictly speaking, this is not correct. It is very difficult to produce a valid cost-of-living index. Such an index would need to take account of, among other things, changes in standard of living and the substitutions that consumers make in their purchases in endeavouring to maintain their standard of living. For example, people may buy frozen meat rather than fresh meat when prices of the latter go up. The CPI, on the other hand, relates to the price changes of a fixed basket of consumer goods and services. Nevertheless, the CPI basket of consumer goods and services is updated periodically to ensure that it continues to reflect the expenditure patterns of households to which the CPI relates.

What is the difference between index point changes and percentage changes ?

Confusion between the two measures of changes is a fairly common fault in using the CPI or other statistical series in index form. They are in fact different. For instance, an increase of 10 index points in the CPI from 105 to 115 represents a 9.5% rise in prices (i.e.(115 - 105) / 105 x 100%), whereas an increase of 10 index points from 180 to 190 represents only a 5.6% rise in prices (i.e.(190 - 180) / 180 x 100%)

For most practical purposes, movements of an index from one period to another are usually expressed in terms of percentages, which are easier to understand and are not affected by the absolute values of the index for the periods.

Does a rise (or fall) in the rate of change in the CPI mean a rise (or fall) in consumer prices ?

The answer is no. For example, the 1999/2000-based CPI(A) for August 2000 was 99.1. Compared with the same month a year ago, the index had gone down by 1.8%. A month later, in September 2000, the index was 99.2, with a decrease of 2.1% over September 1999.

The rate of decrease in the CPI(A), on a year-on-year basis, widened from 1.8% in August 2000 to 2.1% in September 2000. This meant that the rate of decrease in consumer prices enlarged for households in the relevant expenditure group. However, for those households, the price level in September 2000 (represented by the index 99.2) was higher than that in August 2000 (represented by the index 99.1).

In using the CPI, it is essential not to confuse changes in the rate of increase or decrease of the index with changes in the index itself.

How to link up CPI series with different base periods ?

The base period for the CPI changes after the completion of a new round of HES. Two indices with different base periods, for example, the Composite CPI for December 1998 (1994/95-based) and that for December 2002 (1999/2000-based), cannot be directly compared. To enable comparison to be made, it is necessary to re-scale the 1994/95-based index to a 1999/2000-based index using a conversion factor derived from the average values of the two index series in an overlapping period.

The 1994/95-based and 1999/2000-based series of the Composite CPI have an average value of 109.7 and 100 respectively for the overlapping period October 1999 to September 2000. Thus, 100 points in the 1999/2000-based Composite CPI is equivalent to 109.7 points in the 1994/95-based Composite CPI.

In the above example, the 1994/95-based Composite CPI for December 1998, which is 115.3, can be re-scaled to a 1999/2000-based index by applying the following formula : 115.3/109.7x100=105.1. This figure can be compared to the Composite CPI for December 2002 (1999/2000-based) since both indices now have a common base period.

Conversion factors for the other CPIs can be similarly derived. Using this method, CPI series with different base periods can be converted to a common base period to facilitate comparison.

When should the seasonally adjusted CPI be used?

The prices of some consumer goods and services may be subject to seasonal variations, thus causing the CPI to rise or fall. Seasonal variations are basically originated from changes in weather conditions and impacts of holidays. For instance, higher prices for certain food items are generally observed a few days before the Chinese New Year; and remarkable increases in the prices of fresh vegetables are recorded during the rainy or typhoon season due to the drop in supply. Therefore, when analyzing general price movements, it is common to refer to year-on-year changes in the CPI on the ground that both periods under comparison are subject to the effects of similar seasonal factors. This rate of change, however, relates the present situation to that of a year ago.

If the recent price trend has to be analyzed, it is more relevant to refer to the month-to-month rates of change. Yet, the month-to-month rates of change in the original CPI may be affected by seasonal variations. Hence, it is useful to make reference to the movements of the seasonally adjusted CPI. This is obtained by using statistical methods to estimate and remove the seasonal variations from the original index.

In general, the original CPI is of greater interest to consumers because it reflects the movements of the prices that consumers actually pay for. The seasonally adjusted CPI provides another useful indicator since it reveals more clearly the underlying price trend. Moreover, the month-to-month comparison of the seasonally adjusted indices facilitates early detection of turning points in price movements.

How to Obtain Information on the CPI

Useful references

Each month, the Census and Statistics Department issues a press release to disseminate the latest index figures and their movements. The following publications are also useful for reference :

	Monthly Report on the Consumer Price Index - More comprehensive than the press release with detailed breakdown and analysis of the CPIs
	Annual Report on the Consumer Price Index - Statistics and analysis of major price movements of consumer goods and services during the year
	Hong Kong Monthly Digest of Statistics - CPI movements of various consumer goods and services at section level for recent years and prices of selected food items
	Hong Kong Economic Trends (half-monthly) - Year-on-year rates of change of the Composite CPI and movements of the seasonally adjusted Composite CPI

The above publications can be purchased at :

Publications Unit, Census and Statistics Department 19th Floor, Wanchai Tower, 12 Harbour Road, Wan Chai, Hong Kong

Regular subscription can also be arranged with the Publications Sales Section of the Information Services Department ( Tel.: 2842 8844 or 2842 8845).

Moreover, starting from end 2001, Internet users can order the publications or purchase their download versions at the on-line "Statistical Bookstore, Hong Kong" on the ESD portal (address: http://www.statisticalbookstore.gov.hk).

Information on the CPIs can also be obtained from the website of the Census and Statistics Department.

Where to direct enquiries

For any enquiries, please contact the Consumer Price Index Section of the Census and Statistics Department :

	Address:	22/F., Chuang's Hung Hom Plaza, 83 Wuhu Street, Hung Hom, Kowloon, Hong Kong, China
	Tel. no.:	(852) 2805 6403
	Fax. no.:	(852) 2577 6253
	E-mail:	cpi@censtatd.gov.hk

October 2001