The Israeli Consumer Price Index: Alternative computing methods for an “Item Price Index”

Abstract

This article deals with a central issue that has not been addressed systematically in the literature, namely, computation of the price index at the most fundamental level. At this level of computation, several alternative methods are available, each with its own particular advantages and disadvantages. The Israeli CPI is calculated using the average of price indices of goods belonging to a certain item category; this method is consistent with the formula used for computing the index at aggregate levels (the Laspeyres index), and barring certain exceptions, does not assign unreasonable weights to the price observations comprising the given item.

Another issue addressed in this paper is the computation of an item using the “chain” method rather than comparing current prices with those in a given base period. These two methods are shown, on actual price series in the Israeli CPI. The index computed as a chain (as compiled in the Israeli CPI) does not usually have any bias in comparison to the index computed as “base period index”.