What is the CPI?

Date 19/05/2015

How is the CPI measured?

"The CPI reflects the average development in the prices of goods and services consumed by households. Every month Statistics Sweden collects hundreds of thousands of prices from thousands of sales points, both directly in retail outlets and via the internet or telephone. Then Statistics Sweden calculates indexes and weighs them together according to how households spread their consumption. If, for instance, households spend a large share of their money on travel, then these prices will be given a greater weight in the CPI. Finally, one attains a consumer price index."

An increasing number of people are buying music on-line instead of buying CDs, can the CPI capture this?

"Yes, so-called streaming services for music are included in the CPI. Price developments on streamed music are measured as a service of their own in addition to price developments on CDs. The actual changeover in music consumption from CDs to streaming will thus not have a direct effect on the CPI. On the other hand, prices of CDs may be indirectly affected as more people use streaming and the weight of CDs declines."

Computers are becoming cheaper and cheaper, how does this affect the CPI?

"The fact that computers are becoming cheaper is holding back the CPI. Moreover, they are becoming better and better, which also contributes to a lower rate of CPI inflation. One quite simply gets more for one's money."

Is it things like cheaper computers and music that have made inflation so low now?

"One must remember that inflation is a change in the general price level, some prices rise more slowly and others more quickly than average. I would say that it is partly falling prices on home electronics that is holding back the rate of increase in the CPI. But technical products have been falling in price for many years now and in recent years they have fallen less than before. It is actually groups not directly affected by so-called digitalisation and by globalisation that have fallen more than usual, for instance, rents and car repairs."

Are house prices included in the CPI?

"Property prices are not included as a sub-group of their own in the CPI. But Statistics Sweden measures various costs that households incur for their accommodation, such as interest expenditure and rents. Property prices are partly included in the housing item in the CPI in that households' interest costs for their accommodation are based on the purchase price of their houses. When house prices rise, the CPI captures this through the increase in households' interest expenditure."

Is the CPI a good measure of inflation?

"Yes, I think so. It captures a very large share of households' consumption, it is transparent and the most well-known measure for the general public. However, one weakness is that it does contain interest expenditure. When the Riksbank cuts the repo rate to ensure that inflation will rise, this instead as a counteracting effect on CPI inflation, as it is brought down by the fall in interest expenditure. We therefore also need to look at other measures of inflation, such as the CPI with a fixed interest rate (CPIF). It is not always easy to explain. This large direct impact from changes in mortgage rate is somewhat unique to Swedish CPI and also makes it difficult to directly compare CPI inflation in Sweden with that in other countries.