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Quality Adjustment of Price Indexes*1

Wholesale Price Index and Corporate Service Price Index: The Current Situation and Future Implications

July 2001
Price Statistics Division

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Introduction

As low levels of inflation continue to spread globally, further attention has been paid to the accuracy of price statistics in the process of discussing price stability.1 In Japan, prices have been stable since the 1990s, although some declining phases have also been observed. Under these conditions, lively discussions are emerging regarding the "actual trend"of prices while focusing on the accuracy of price indexes.

Hayakawa and Yoshida (2001) present the idea that the problems surrounding price indexes are not limited to how statisticians confront technical problems of price indexes. Moreover, they insist that the problems are how they grasp the prices of a good or service, and furthermore they are connected to more fundamental issues of how price stability should be defined. In fact, from the viewpoint of the statistics section compiling the Wholesale Price Index (WPI) and Corporate Service Price Index (CSPI), we regularly face such problems as how to grasp the prices of goods and services and thus more or less agree with this opinion. Even if we limit the topic to price indexes compiled by the Bank of Japan, concerns still abound. These include the extent to which the WPI incorporates productivity growth represented by Information Technology (IT) as the Japanese economy undergoes rapid change through IT, and the question of whether the CSPI accurately reflects the progress in services and permeating effects of IT on nonmanufacturing. Furthermore, by taking these discussions into account, there is the issue of how effectively the price indexes reflect the balance between supply and demand. To provide price indexes that reflect the actual conditions of the economy as accurately as possible in response to such discussions, quality adjustment of price indexes has become the most essential issue among the many difficulties of price indexes.2

This paper will discuss in detail some ideas from the viewpoint of statistics compilers on how important quality adjustment is for price indexes when grasping prices. It will also attempt to clarify some issues concerning the use of price indexes obtained from previous studies. In line with this, the paper will highlight problems that cannot be solved even by using various quality adjustment methods and will, we hope, provide some insights for future domestic and international research.

Hereafter in this paper we briefly present ideas on quality adjustment and add views on unsolved conceptual and technical problems regarding quality adjustment. We then simply discuss quality adjustment methods currently used for various price indexes statistics and introduce the actual application of the methods on the WPI and CSPI, along with a discussion of quality adjustment methods overseas. Finally, we indicate how price indexes are actually affected by quality adjustment and what implications can be obtained on using price indexes from such examination results.

  • 1 See Research and Statistics Department (2000a) for further details on this discussion. As for the bias problem regarding the Consumer Price Index, see the Boskin Report (Advisory Commission to Study the Consumer Price Index; 1996) and Shiratsuka (1998).
  • 2 For basic discussions on the idea of quality adjustment, see Ohta (1980).
  • *1 This is a revised paper of a report submitted to the Bank of Japan Workshop on Price Stability, held at the Bank of Japan on April 19, 2001. We would like to thank Professor Kiyohiko Nishimura of Tokyo University, a discussant of this workshop, and the other participants of the Discussion Group for their contribution to the preparation of this paper. The views expressed in this paper are those of the Price Statistics Division, Research and Statistics Department, and do not necessarily reflect those of the Bank of Japan unless noted. For further inquiries on this paper, contact Mr. Hiroshi Ugai (Chief Manager of the Price Statistics Division; e-mail: hiroshi.ugai@boj.or.jp).