The most common and most well-known measure of inflation is the change in the consumer price index - the CPI. This measure is calculated and published 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 the size of the changes in the price of the basket. 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 exclude them from the price increases.
The prices included in the basket and the significance of the different price changes depend on how much of the various goods and services households buy. A product or service that is consumed on a large scale is given a greater weight than one that is consumed on a lesser scale. This means that price changes on a product or service that is consumed on a large scale have a greater impact on the CPI than price changes on a product or service consumed on a lesser scale.
Another relatively well-known measure of inflation is the harmonised index for consumer prices, the HICP. The HICP attempts to measure approximately the same thing as the CPI, at the same time as trying to use similar (harmonised) methods in the various countries in the EU area. Another purpose of the index is that it can be used for comparisons of inflation rates between countries. The methods used to calculate the CPI differ in some cases from the methods for calculating the HICP. For instance, a significant part of the changes in costs for owner occupied housing are included in the CPI but not in the HICP.
What is underlying inflation?
Inflation means that the general price level rises. But the CPI weighs together price increases on various goods. This means that increases in the prices of individual goods, such as oil, will cause an increase in the CPI. One usually also refers to a lasting change in the rate of price increase when one talks about inflation. But the CPI rises if, for instance, VAT is raised. Consequently, in order to deal with these “problems”, it is common to exclude some price changes from the CPI. This results in what is called underlying, or core, inflation.
The CPIF and the CPIX are common measures of underlying inflation. The CPIF is the CPI with a fixed interest rate. The CPIF is thus not directly affected by a change in mortgage rates. The CPIX excludes households’ mortgage interest expenditure and the direct effects of changes in indirect taxes and subsidies from the CPI. The direct effects of changes in interest rates are excluded for pedagogical reasons. This is done because in some case it may be problematic for the Riksbank to explain why, for example, the immediate effect of a tighter monetary policy, that is a higher interest rate, is that CPI inflation rises. The CPIF and CPIX are calculated and published by Statistics Sweden on behalf of the Riksbank.
Read more
You can read more about the CPI and other inflation measures on Statistics Sweden’s website, and also download historical data. The CPI page on Statistics Sweden’s website also contains a statistics school which explains how the CPI is measured and used. You can read more in the box about the changes made to the methods for calculating the CPI and inflation in January 2005. The article below contains an interesting discussion of the difference between inflation and the cost of living.