Statistics and perception
Destatis, 02 October 2007
Official rate of inflation as a mean value
The official consumer price index for Germany indicates changes in the general level of prices over time. The index is based on about 350,000 prices noted by price collectors each month. As a first step, municipalities, then a variety of stores and finally the stores’ product variants which sell best are selected. Thorough sampling ensures that the German consumption patterns are reflected in a realistic manner.
Month after month, the price trend is thus observed for approximately 750 major types of goods that are bought by households in Germany. The general rise in prices is indicated in the form of an average value.
Perception does not necessarily match the calculated averages
Often, however, the considerations of consumers who are affected by price changes differ from the results of the above calculations. On the one hand, each household has its own typical distribution of expenditure. And on the other, the extent to which an individual consumer is affected by inflation depends on his/her daily shopping patterns. A household does usually not determine a “perceived rate of inflation” in the context of a detailed balance at the end of a month. A consumer rather feels the level of price increase when doing his/her daily shopping. If, for instance, the prices of rolls go up, consumers will nevertheless continue to have their breakfast instead of buying another TV set, even though the prices of TV sets might have declined at the same time.
Scientific research has shown that, in the process of cognition, individuals attach more importance to losses than to gains. To measure the “perceived rises in prices”, losses of purchasing power due to price increases could hence not be directly offset against increases in purchasing power due to price cuts in other areas.
Another aspect is the frequency with which certain products are bought. Consumers often come across increases in the prices of convenience goods as they buy these goods every day. Increases in the prices of consumer durables which are bought at larger intervals become the focus of attention only during the relevant purchasing period. However, the slow-down effect of moderate price increases for durables as compared with stronger rises in the prices of non-durable consumer goods is not really perceived by the consumers.
Certainly, many people perceive inflation to be higher than indicated by the inflation rate which is calculated by official statistics. The main reason is probably the fact that the computation of the official inflation rate is based on a concept aimed at calculating a general average value. In its context, stronger price increases in one area are balanced by moderate price trends in other areas. The average value does however not correspond to the subjective impressions of the individual consumers – and it does not have to …
The official rate of inflation has important functions
The inflation rate calculated by official statistics is a generally recognised figure. Instead of relating to individual cases, it is rather an objective and verifiable average value. This concept has proved useful for many purposes. The main user of the inflation rate figures is the European Central Bank which bases its monetary policy on the consumer price indices of the euro area countries.
Furthermore, the price indices of official statistics are very often used as reference values for what are called stable-value clauses in contracts. Thus, for instance, rental agreements frequently provide for rent adjustments in accordance with the development of the consumer price index. In other contracts (like agreements on subsistence payments after a divorce), too, such provisions may be included. When using stable value clauses, it is very important that the parties to an agreement can rely on a generally recognised measure of inflation. The consumer price index as a representative average value is hence well suited as a reference in agreements of the above kind.
Other main users of the consumer price statistics are both trade unions and employers who base their wage negotiations, among other things, on the general price trend.
And finally, the results of the consumer prices statistics are used as an input for a number of other statistics that are compiled by the Federal Statistical Office. An example is the calculation of the change rate of the real gross domestic product, that is of economic growth.
Project on measuring “perceived inflation”
The Federal Statistical Office made use of the knowledge and time of its experts of price statistics in conducting a project on "perceived inflation". The goal of the project was to understand in a better way the reasons for deviations between the subjective perception of inflation and the officially calculated rate of price increase. The index of perceived inflation which was developed by Prof. Brachinger of the University of Fribourg (Switzerland) and calculated in co-operation with the Federal Statistical Office was presented for the first time in September 2005.
Author:
Dr. Stefan Linz - Federal Statistical Office
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