The most common and most well-known measure of inflation is the change in the consumer price index - the CPI. This measure is calculated every month by Statistics Sweden (SCB). Each month, SCB ”buys” a basket of goods and services. By purchasing the same goods and services, it becomes possible to study how much the price of the basket changes – inflation. Since the quality of the goods can change over time, such as when a computer’s performance improves over time, SCB attempts to estimate the value of these improvements and separate them from the price changes.
The goods and services that are included in the basket represent a large proportion of households’ private consumption. Directly imported goods are not included in the CPI, however, such as when a book is ordered from abroad via the Internet. In order to weight together prices of different goods and services, SCB uses weights that are based on calculations of household consumption. A good that is consumed on a large scale is given a greater weight than a good that is consumed to a small extent. Thus, increases in the prices of goods that are consumed a lot have a larger impact on the CPI than price increases on goods that are consumed on a small scale.
The CPI is a so-called cost-of-living index or compensation index. This means that the CPI measures how consumers’ cost of living changes over time. If consumers’ incomes increase at the same rate as their cost of living, their utility will be unchanged over time. The CPI is often used for exactly this purpose - as a basis for adjusting pensions or determining how compensation clauses in different agreements should be interpreted.
One limitation of the CPI is that it only takes account of how the prices of those goods that are consumed change over time. So an increase in the CPI does not necessarily imply a rise in all prices (income and expenses). Changes in the CPI are an important determinant of wage outcomes, however. Moreover, pensions are usually revalued at the same rate as the rise in the CPI, so in the end the CPI can be a rather good measure of how the majority of prices change over time.
Another ”problem” with the CPI is that prices of different goods are expressed as a weighted average. This means that increases in the prices of individual goods, so-called relative price rises, will cause an increase in the CPI. Consequently, in order to deal with this problem, it is common to filter out some price changes from the CPI. This results in what is called underlying, or core, inflation.
A common measure of underlying inflation is UND1X. UND1X is derived by excluding from the CPI households’ mortgage interest expenditure and the direct effects of changes in indirect taxes and subsidies. Underlying domestic inflation, UNDINHX, measures changes in the prices of goods and services that are mainly produced in Sweden.
Correspondingly, underlying imported inflation, UNDIMPX, measures changes in the prices of goods and services that are chiefly imported. As with UND1X, households’ mortgage interest expenditure and the direct effects of changes in indirect taxes and subsidies are excluded from UNDINHX and UNDIMPX. Since 1998, SCB has been charged with the task of calculating UND1X and UNDINHX on behalf of the Riksbank.
In somewhat simplified terms, it can be said that some price increases have been removed from these measures of underlying inflation by simply excluding certain goods and services from the basket. It is also common to calculate underlying inflation through the use of various statistical methods. One example of such a measure is UND24, which was introduced in the Inflation Report 2000:3. This measure also produces a weighted average of changes in the prices of different goods. UND24 differs from the CPI in the sense that its weights are adjusted for fluctuations in the prices of different goods. As a result of this adjustment, changes in prices that have fluctuated to a relatively high degree have a smaller impact on UND24 than equivalent changes in prices that have been stable.
Finally, there is the harmonised index of consumer prices, HICP. This index was developed to measure inflation in the EU and to enable comparisons between EU countries. A significant part of the changes in housing costs that are included in the CPI are not included in the HICP. However, the HICP includes certain components that are currently excluded from the CPI, such as charges for childcare and care of the elderly.
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Different measures of inflation
Consumer price index (CPI): The change in the CPI measures how the prices of goods and services for private consumption develop over time.
Underlying inflation (UND1X): CPI inflation excluding household mortgage interest expenditure and the direct effects of changes in indirect taxes and subsidies.
Domestic underlying inflation (UNDINHX): UND1X excluding mainly imported goods and services.
Imported underlying inflation (UNDIMPX): UND1X excluding mainly domestically produced goods and services.
Harmonised index of consumer prices (HICP): An EU-harmonised index that was developed to measure inflation in the EU and that enables comparisons between EU countries. A significant part of the changes in housing costs that are included in the CPI are not included in the HICP. However, the HICP includes certain components that are currently excluded from the CPI, such as charges for childcare and care of the elderly.
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More information about how the Riksbank uses different measures of inflation in its analysis of monetary policy can be found in the boxed text below. Information about the CPI and the other measures of inflation can be read or downloaded from Statistics Sweden’s website. The article below contains an interesting discussion of the difference between inflation and the cost of living.