Notes on Producing an Annual Superlative Index Using Monthly Price Data

The main purpose of the presentation is to outline some alternative approaches on how a superlative annual consumer price index could be constructed using the monthly price information that is presently collected by statistical agencies. The first issue that must be addressed is: how should the monthly price information at the lowest level of aggregation be aggregated up (over months) to form an annual price level or price relative at this lowest level of commodity aggregation? Having constructed appropriate annual elementary indexes, the presentation discusses how to complete the process to construct an annual (calendar year) superlative index. Considering the problem of seasonal commodities, it is noted that the construction of year over year (superlative) indexes for each month of the year should be free of seasonal influences. Moreover, the business community is typically quite interested in this class of index numbers so the paper recommends that statistical agencies produce them. This approach leads to another two stage aggregation of the micro price information into an overall annual index: first aggregate across commodities holding the month constant and then aggregate across months. It is noted that the alternative two stage annual indexes can be quite close to each other. The two annual indexes are on a calendar year basis; i.e., the price and quantity data pertaining to all 12 months in 1999 are compared to the corresponding prices and quantities for the base year, say 1995. However, we can also construct a moving year or rolling year annual index, using price and quantity information collected each month. Thus the statistical agency could produce a new rolling year index every month, which of course would lag behind its present very timely CPI index due to the lags involved in collecting the relevant quantity (or expenditure) information. The real advantage of these moving year superlative indexes is that they are both timely and do not require any seasonal adjustment. A problem with the indexes discussed so far is that they do not give us any information on short term price movements; i.e., all of these indexes discussed above compare prices in a month in the current year with the same month in the base year. The paper also discusses some of the problems involved in constructing superlative month to month price indexes. Finally, some of the problems that are associated with the aggregation over households or regions are discussed.