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Q&A about the Consumer Price Index (Answers)

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[A. About the consumer price index (CPI)]

A-1 What is CPI all about?

The CPI is meant to indicate average fluctuations in prices of commodities (goods and services) purchased by households nationwide. In other words, using the consumption by households at a given time as the reference period, the index shows changes in the total amount of expenditure required to purchase the equivalent goods and services purchased by households in the reference period, setting the consumption structure.
Thus, the CPI is intended to measure changes in prices themselves. We should note, therefore, that the index does not take into consideration fluctuations in living expenses caused by changes in the kind, quality, and/or quantity of commodities purchased by a household as its lifestyle, tastes, etc. change.

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A-2 Since when has the CPI been calculated?

The CPI was launched in 1946 right after the World War II to be used for measuring the postwar rampant inflation. Since 1952, it has been calculated based on retail prices obtained from the Retail Price Survey (RPS).
As for the extent to which time-series comparison can be made in each index series, please refer to “Chapter 6 Linking of new and old indices (PDF: 448 KB)” of the “Outline of the 2010-Base Consumer Price Index”.

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A-3 What is the index reference period? And what is the weight reference period?

The CPI is calculated by comparing prices of observation period from those of reference period in which the index is given a value of 100. The period for which the index is set to 100 is called the “index reference period”.
The CPI is calculated as the weighted arithmetic means with the consumption structure in the reference period (a rate of consumption expenditure by item) (See B-1). The year referenced for the weighted arithmetic mean is called the “weight reference period”.
With regard to the official series of Japan's CPI data published monthly, both the “index reference period” and the “weight reference period” are the calendar year 2010 at present.
Both the index reference period and the weight reference period are the year whose last digit are 0 or 5, and they are revised every 5 years (“base revision”). The items adopted for index calculation and other matters are also reconsidered at every base revision (See D-1).

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A-4 How is the CPI used?

Prices tend to inflate as the economy becomes more active and the demand expands, while we usually come down as the economy grows sluggish and the demand diminishes. The CPI, which shows price fluctuations, is often called “a thermometer of the economy”, and a crucial index as the government tries to make effective and appropriate economic policies. In addition, the index is used as a “deflator” for some other important economic indices, such as household consumption expenditure calculated from Family Income and Expenditure Survey (FIES), GDP statistics, and the like. Furthermore, the relevant laws require that the actual standards of the National (“Kokumin Nenkin”) and Employee (“Kosei Nenkin”) Pension payments should be adjusted in accordance with price fluctuations. Such fluctuations are measured in terms of CPI.Furthermore, Bank of Japan considers this index as valuable information for making financial policies. People look to the index when we determine wages, house rents, utility charges, etc. As you see, the index is broadly used both in the public and private sectors.

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A-5 What are the meaning of "Core index" and "Core-core index"?

Recently, what are commonly called “core” and “core-core” indices have been growing popular, as indices to some factors in price fluctuations. These are, however, only “popular names” of indices either published or processed and calculated by some users, and not official names.
Now, sometimes “Fresh foods”, whose prices often fluctuate considerably depending on the weather, are excluded from the “All items” index, in order to figure the basic trend in the prices of goods and services. The result of this deduction is often called “Core index”.
A similar price index treated as important in the USA and some other nations is known as “USA-type core index” or “Core-core index”. This is calculated by deducting the “Food (less alcoholic beverages) and energy” from the “All items” index.

(For your reference)

Type of indexAll items, less fresh foodAll items, less food (less alcoholic beverages) and energy
(Core indices)(USA-type, core-core indices)
Calculated byMinistry of Internal Affairs
and Communications
Ministry of Internal Affairs
and Communications
Items excludedFresh foodFood (less alcoholic beverages)*
Gas, manufactured & piped
Liquefied propane
Coverage, where the “All items” is 1000096046828

* The food items excluded from the “All items” are all foods (less alcoholic beverages) including cakes & candies, rice, fresh foods and hen eggs, and so on.

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[B. Calculation of the CPI]

B-1 How do you calculate the CPI?

To calculate the CPI, we first choose items (goods and services) that occupy relative importance in household consumption expenditure and whose importance for household consumption expenditure has increased. Next, based on the rate in the household consumption expenditure of these respective selected items, we determine the weights of each of these items. These shares are based on the results from the FIES and other surveys.
The prices of the selected items are mainly taken from the monthly RPS.
Now, to calculate the CPI, we calculate the price index of each of the selected items, using its average price for each surveyed municipality, with the index in the reference period set at 100. Next, averaging each item's index with the weights (its share in the whole household consumption expenditure) determined above, we calculate several different price indices, such as those of Subgroups, of Ten Major Groups, the General (All items) price index, and so on.
At present, the reference period in CPI calculation is 2010. This reference period is updated every 5 years (“base revision”) (See D-1).
At every base revision, the items and their respective weights are reconsidered. In 2010-Base CPI, the number of items totals 588 (including 5 items surveyed only in Okinawa Prefecture). In case that new goods and services spread rapidly in our life, we consider a revision of items before the next base revision (See E-1).

*With CPI calculations, 74 items, namely airplane fares, electricity, mobile telephone charges, etc., the fare/rate systems are complicated and diverse, and it is hard to select a single specification to represent each item. Also, the fares/rates themselves are also diverse. To make the CPI correctly reflect changes in these rates and fares, therefore, we calculate the monthly indices for these items using the special calculation methods which employ prices from the RPS as well as the result of other statistics.
For how to calculate CPI with these special calculation methods, consult "2010-Base Explanation of the Consumer Price Index", p.46 -48: "Appendix 2 Calculation method of model items (PDF: 448KB)".

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B-2 Is the CPI calculation method of Japan as same as that of major countries?

For CPI, the International Labour Organization (ILO) has set up an international standard. The 17th International Conference of Labour Statistics convened in Geneva in December 2003, reconsidered the older international standard for CPI and adopted a resolution that set up a new standard. Concurrently, a revised international manual for CPI, entitled “Consumer Price Index Manual: Theory and Practice”, was completed and published on the ILO's websiteexternal sites as well.
As with other major countries, Japan's relevant authorities basically follow the existing international standard as we calculate the CPI.

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B-3 How do you select items used in calculation of the CPI?

The number of items selected for the calculation of CPI is 588. Items are selected in consideration of the relative importance of each item to the total household consumption expenditures. The numerous kinds of commodities (goods and services) purchased by households are sort out by the similarities in their function, price trends and so on. Then they are classified into each item.
Every single item contains several commodities of which the specifications such as qualities, standards, volumes, etc. are different. To calculate the CPI, we specify the characteristics of items as “basic specifications”, and its monthly prices are collected. (In conducting the RPS, a price collector picks up one of nominated products which sell the best at each store surveyed, and its price surveyed continuously.)
We reconsider the survey items in every-five-year revision based on the latest results from the FIES. The revision held in 2010 added some new ones such as Electronic dictionaries and Electronic Toll Collection system tool to the survey items (See D-1).
Furthermore, reconsideration of the survey items are to be made as appropriate during the period between the revision of the base and the next revision as well, as we expect some new goods and services will emerge and enter the market in the future (See E-1).

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B-4 How do you calculate the CPI for clothes and other commodities whose distribution and sales differ considerably from one season to another? You seem to survey the prices of summer and winter clothes when they comes on the market seasonally. Yet how do you calculate the CPIs for those months not directly covered by the survey?

With these commodities that do not appear at all in the market during some period of time in the year or appear only for a strictly limited period of time, the RPS surveys their prices only during those months when each of them is distributed and sold. This naturally means that such commodities are not covered by the survey in some months (uncovered months). Now, in such months, the weights of those uncovered seasonal commodities are proportionately distributed to the other commodities covered by the survey. Yet this results in the average weight of the same item in some months differing from its annual average weight. To avoid this problem, for seasonal items, the average index in the last survey period is applied in the months not covered by the survey.

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B-5 What is imputed rent of an owner-occupied house?

Needless to say, buying a house or a piece of land is a form of property acquisition and not consumption expenditure. Such a purchase, therefore, is not counted in the CPI. Still, it is an undeniable fact that a household living in a house it owns receives some service from the house. This service originally comes from the household's purchase of the house and/or the premises. Also, many households are paying a mortgage. Here, it leads to an issue that, one way or another, the housing expense of an owner-occupied house should be counted in the CPI calculation.
So, let us suppose a case where a house-owning household is renting the same house from someone else. Then, the household has to pay some rent, needless to say. Then, we can estimate the value of the service from an owned house which is equivalent to the worth of the service from a rent house and treat the value as housing expense. An “imputed rent of an owner-occupied house” refers to the rent paid to owner-occupied houses assuming that owned house were rented. Such imputed rents are taken into the CPI calculation.
To include imputed rents, we determine the calculation weight of each and every type (size and structure) of house, depending on the imputed rent estimated by the Ministry of Internal Affairs and Communications in its “National Survey of Family Income and Expenditure.” Then, we use the fluctuations in rents of ‘house rent, private’ by RPS, to estimate changes in the imputed rents of owner-occupied houses of all the various types.
Note that this method of calculating imputed rents is employed by many major countries in their consumer price indices as well as in the System of National Accounts (SNA).

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[C. Uses of the results]

C-1 When are results published?

Basically, the CPI is published at 8:30am, on Friday of the week including the 26th of each month. The preliminary CPI of the current month for the Ku-area of Tokyo and the CPI for the preceding month for Japan (the whole country) are published. In addition, in December and March of each year, the average CPIs for the preceding calendar and fiscal years(*) are also published, respectively.
(*) In Japan, the fiscal year starts in April and ends in March of the next year.

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C-2 Do you publish a seasonally-adjusted CPI?

With the CPI and other monthly statistics, some commodity prices rise and fall after a similar pattern every year. For instance, many seasonal clothes' prices hike early in their season and fall later, around the end of the season, at sales. Price fluctuations of this kind are known as “seasonal variations.”.
We publish seasonally adjusted indices, less these seasonal changes for the following eight series: “All items”, “All items, less fresh food”, “All items, less imputed rent”, “All items, less imputed rent and fresh food”, “All items, less food (less alcoholic beverages) and energy”, “Goods”, “Goods, less fresh food”, and “Semi-durable goods”.
Since the seasonally adjusted index is adjusted based on average seasonal changes calculated by past indices, price changes in particular months may affect other months (e.g., school fees, medical treatment). Thus, the seasonally adjusted index may change even in the months when no price changes actually occurs.
At the same time, change over the year, comparison of the current index with that of the same month in the previous year is also useful to eliminate the seasonality. The rate of change over the year does not change for one year as long as prices do not change. Thus, in the CPI, change over the year is often used to see the price trends.
As for fresh food for which prices fluctuate greatly, and electricity and gas for which prices change only in the price revision month, change from the previous month, comparison of the current index with that of the previous month, seems to be close to the real feeling of consumers. Thus, change from the previous month without seasonal adjustment is also published.

[For your reference]
For information on seasonal adjustments to CPI, consult “Chapter 7: Seasonal Adjustment” (PDF:448KB)” of “Outline of the 2010-Base Consumer Price Index” as well.
The seasonal factors from January to December of the current year are obtained from data from January of the beginning year of 2005 to December of the previous year. After that, when the data in this year are available, seasonal factors including these new data are recalculated. At the yearly recalculation in December 2014, the specification file for a seasonal adjustment program “X-12-ARIMA (including Part X-11)” (PDF:28KB) was adjusted for consumer tax increase in April 2014 (See I-1).
Also, you can download the seasonal adjustment program, “X-12-ARIMA (including Part X-11)”external sites, from the website of the Census Bureau, the US Department of Commerce.

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C-3 Where are the results of Quarterly and Half-yearly average indices are published?

The results of the Quarterly and half-yearly average indices are placed in “Table 7 Consumer Price Index (Quarterly and Half-yearly) for Japan” of the monthly report on the Consumer Price Index. Quarterly and half-yearly average indices are calculated as the simple arithmetic means of monthly indices (published figures after rounding of fractions). Average indices for calendar year and fiscal year are also calculated in the same manner.

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[D. Revisions to the bases]

D-1 Why is the CPI revised?

The CPI shows how much the average prices of commodities (goods and services) have changed since the reference period. The consumption structure changes over time along with appearance of new commodities (goods and services) on the market or changes in consumers' tastes. For this reason, if the reference period were fixed for an extended period, the index would not reflect actual conditions. Therefore, we revise the reference period (base revision) regularly, reconsidering the items employed in calculating CPI and their weights, etc. In the case of the Japanese CPI, the reference period is changed every 5 years, in years that end in “0” or “5”. From a global perspective, many nations revise their CPI every 5 years or so. In Japan, the Statistical Committee said in its report in 2010 that revisions every 5 years were appropriate for the CPI as well as other economic indices, and the standards of most economic indices are updated every 5 years, including price indices such as the Corporate Goods Price Index (CGPI), as well as quantity indices like the Index of Industrial Production and the Transportation Index.

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D-2 Isn't the CPI's base revision interval of five years too long to cope with rapid changes in the consumption pattern?

Actually, two types of the CPI are published. One is the “official” one, whose calculation weights are based on the shares of the FIES and updated every 5 years. The other is Laspeyres' chain index, whose weights are updated every year. This chain index, in order to measure effects of changes in the consumption structure more frequently, has been published as a supplementary index each year since 1975. Since 2005-base, the chain index has been published every month as well (See H-1).
In addition to these, we also publish a “midpoint-year basket index” as a supplementary index, calculated with weights that reflect the consumption structure of the middle year between the reference period and the observation period. This is yet another way to reflect actual changes in the household consumption structure.

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D-3 At the base revision of the CPI, how do you link old indices and new indices?

Since we change the items and update the calculation weights at the base revisions, the CPI before and after the revision are two different things, to be exact. In order to facilitate time-series analysis of price trends and changes over a long period of time, however, we do some processing to link old and new CPI, at every revision.
To do so, we calculate new-base linked indices by converting old-base CPI into new-base CPI; i.e. by dividing an old-base index by the ratio of the old-base yearly average index of the new reference period to the new-base yearly average index of the new reference period (See the example below). This adjustment is applied to each and every article of calculation independently and the upper level indices by the linked indices are not recalculated. Also, the rates of change (from the previous month, over the year, from the previous year and from the previous fiscal year) are not recalculated by linked indices and figures calculated with each base are used as they are. In each reference period, also the figures calculated with the old-base are used as they are, for the change from the previous month in January, the change over the year from January to December, the change from the previous year, and the change from the previous fiscal year.

[Example] The case when 2005-base indices are linked to 2010-base indices.

calculation of contribution1

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D-4 Why does the revised 2010-base CPI show a decrease in change from the same month of the previous year, compared with the 2005-base CPI?

Looking at the difference of “All items” index, which resulted from base revision, in terms of the contribution to the total change (impact) based on the national results in June 2011, the contribution of “Culture & recreation” decreased by 0.44 points, comprising a large portion of the difference between the change over the year in the old base and that over the year in the new base, which was a 0.6-point decrease.
As for the causes of the difference between the change over the year in the old base and that over the year in the new base, please refer to “Major Items that Affect the Difference between the change over the year in 2005-base and that over the year in 2010-base (Change over the Year of All-items index for Japan in June 2011) (PDF: 31 KB)” (available only in Japanese).

[For your reference] Comparison of weights between 2005-base and 2010-base CPI (PDF: 351 KB) (available only in Japanese).
* As for the results of the Paasche check to confirm the differences according to weight, please refer to the “Paasche Check Results (PDF: 14 KB) ”(available only in Japanese).

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D-5 What impact does an index reset due to a base revision have?

An “impact caused by a reset” of the index means a change of the contribution (impact) of each item which contributes to the rate of change, including change over the year of the all items index, when the index for each item returns (is reset) to 100 due to a base revision. It is sometimes called the “effect of reset”.
For example, assuming that the price of Item A has been decreasing by 20% every year, the index for Item A can be calculated as shown below:

example of reset impact

Although the price of Item A has been decreasing by 20% every year, the difference in index from the previous year has been decreasing with the time elapsed since the reference period. The smaller the difference becomes, the lower the degree of contribution becomes year by year. However, the index value will be reset to 100 with the base revision, and the degree of contribution will become higher.
As for durable goods, such as personal computers, cameras, and TV sets, which may see a very rapid improvement in quality due to technological innovation, the index value becomes smaller after quality adjustment (See F-1) as the time elapsed since the reference period. Thus, items whose index value becomes smaller mainly due to quality adjustment may be more greatly influenced by a reset of the index.

[For your reference] Calculation formula for contribution to the total change

The contribution is calculated using actual number weights as shown in the following formula:

calculation of contribution1

The above formula can be converted as follows:

calculation of contribution2

calculation of contribution3

calculation of contribution4

Impact of an index reset: Impact caused when each index in the numerator and the denominator shown in ① is reset to 100 due to the base revision
Impact of a weight revision: Impact caused when each weight in the numerator and the denominator shown in ② is shifted from the 2005-base weight to the 2010-base weight due to the base revision

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D-6 How much impact did the index reset due to the 2010-base revision have?

To assess the impact of the index reset due to the 2010-base revision, we compare the contribution to the total change calculated by using the index of the 2005-base and that of the 2010-base. For example, when comparing household durable goods and recreational durable goods, which show a greater difference between the contribution in the 2005-base and that in the 2010-base, the results will be as shown below.
Please note that the degree of the impact of an index reset varies according to the month for comparison.

Difference between the contribution

*1 To examine only the impact of an index reset, the contribution listed above are calculated equally using the change over the year as of June 2011 based on the 2010-base and the weights based on the 2005-base. Therefore, they do not correspond with the published values.

*2 The items consist of only those adopted in common between the 2005-base and the 2010-base.

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[E. Midpoint-year review]

E-1 What is a midpoint-year review?

CPI items and their respective weights shall be revised every 5 years (base revision) in order to reflect the changes of consumption structure. However, when there is a rapid influx of new products or a radical change in consumption pattern, the items are reviewed in a midpoint year during the 5-year period before the next revision year (midpoint-year review).
As a result of examination of the need for addition of new items during the 2010-base, it was decided that an index for the combination of conventional-type cellular phones and smartphones should be calculated since January 2013 by incorporating the prices of smartphones in the existing items, “cellular phones” and “mobile telephone charges”. And it was decided that an index for the combination of laptop computers and tablet computers should be calculated since January 2014 by incorporating the prices of tablet computers in the existing items, “personal computers (notes)“.
Midpoint-year reviews have been conducted since the 2000-base. The following are the reviews conducted in the past.

  • Midpoint-year review of the 2000-base (effective in January 2003)
Added itemsAbolished items
PC printers
Internet connection charges
Word processors

* For the item "Cameras", the prices of digital cameras were also incorporated in the index.

  • Midpoint-year review of the 2005-base (effective in January 2008)
Added itemsConsolidated items
Beer-flavored alcoholic beverages
Washing & Drying machines
TV games (portable)
TV sets (CRT)
Media for audio recording

* For the item "Telephone charges", the prices of charges for IP phones were also incorporated in the index.

* [Reference]Midpoint-year Review of the 2005-Base Consumer Price Index (available only in Japanese)

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[F. Quality adjustment]

F-1 What is quality adjustment with CPI for, and how do you make it?

The CPI, since it is meant to purely measure changes in prices, should basically continue to track down the prices of the same products (goods and services). Production of some products can be replaced by new products of which quality are improved. In this case, we need to replace the products to survey. In such a replacement, the differences in functions, qualities such as characteristics, etc., and volume between the old and the new can alter the price index. Now, the “quality adjustment” is applied to eliminate the influence of such differences. Thus, quality improvement from old products to new products is measured quantitatively by the quality adjustment during calculation of the CPI.
With the CPI, whenever products to survey are updated, we have quality adjustment, choosing the best method from several such as the overlap method, adjustment by the ratio of quantity, adjustment by the regression equation, the option cost method, the class mean imputation method, the direct comparison method, and others. For PCs and cameras, whose quality improvement is very rapid and product cycles are quite short, the hedonic method with some information from POS systems is employed to directly calculate price changes after quality adjustment (See F-2).
For details of the quality adjustment, consult “2010-Base Explanation of the Consumer Price Index”, p.15-20: “Chapter2 Quality adjustment during calculation of the prices in the observation period (PDF: 448KB)”.

(POS information) This information contains each product's sale price(s) and volume, as well as its characteristics, and is collected from retailers' POS (Point Of Sales) systems. The CPI calculation employs POS information on product-by-product sales prices, volumes and characteristics for all the PCs and cameras sold in major mass retailers, PC specialist stores and other outlets in our country.

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F-2 What is the hedonic method?

The hedonic method, one of the methods used in quality adjustment, stands on the supposition that the quality of a product can be reduced to several characteristics (performance) that make up the quality, and that the product's price is determined by the performance. The method uses multiple regression analysis to identify the relationship between each product’s price and its characteristics (for instance, in the case of a PC, its HDD memory capacity, the CPU memory capacity, the existence of bundled software, etc.) This way, the method quantitatively determines to what degree the product quality accounts for price differences among different products.
The CPI calculation employs this hedonic method to directly calculate price changes after quality adjustment of PCs and cameras, whose technological improvement is very rapid and product cycles are quite short. Since this method requires a huge amount of data on prices, volumes, and characteristics of numerous products in order to provide a reliable and objective multiple regression analysis, we use POS information with the hedonic method.
Also note that, in applying the hedonic method, we compare an index calculated with the method to one calculated with matched-model method, in addition to verifying how well the regression model fits the raw data, the significance and consistency of explanatory variables, etc. The matched-model method uses the Fisher formula to calculate the price change ratio of a single product that sold well both in the current month and the previous month, using its price and sales volume in the two months. In fact, as far as PCs are concerned, there has not been much difference between the index computed with the matched-model method and that with the hedonic method, which shows that the latter method has not resulted in excessive quality adjustment.

[For your reference]
About the Hedonic Method(PDF: 643KB)” by Shimizu, Makoto & Nagai, Keiko(available only in Japanese), Published in the monthly magazine Statistics - November 2006, Japan Statistical Association.

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F-3 I heard that, with the hedonic method, the price of an item is considered to be gone half off if its performance has doubled. Is this true?

The hedonic method calculates the relationship between the price and the characteristics (performance) of a product statistically, using a huge volume of sales data (POS information) collected from major electric appliance stores. Therefore, in light of the results of calculation to examine how each element of the performance of a product affects its price, the price of a product cannot be considered to be gone half off even if its performance has doubled.
For example, suppose that a relationship where “the price of personal computers rises by 5.0% when the HDD memory capacity increases by 1,000 GB” has been estimated. Based on this, “when a new PC model whose HDD memory capacity has increased by 1,000 GB is released, the price of the new PC model is reduced by 5.0% for comparison of the new and old PCs” (see the illustration below). Thus, the term ‘performance’ itself requires careful definition, and there is no simple way of determining quality adjustment for performance improvement.

[An example of the quality adjustment with the hedonic method (personal computers)]

example of hedonic quality adjustment

⇒ The correlation between the characteristics and the prices of personal computers is analyzed based on huge volume of sales data for personal computers.

⇒ The correlation whereby “a 1,000 GB increase in HDD memory capacity will result in a 5.0% rise in the prices of personal computers”, is estimated.

⇒ When new personal computers with 1,000 GB larger HDD memory capacity appear, their prices are reduced by 5.0% for price comparison.

[For your reference]

The actual calculation employs a statistical regression formula:

Quality adjustment with the hedonic approach

Quality adjustment with the hedonic approach

For specific methods of calculation, please refer to "Appendix 1: Calculation of the price index for PCs and cameras by Hedonic approach (PDF: 448KB)" of the"Outline of the 2010-Base Consumer Price Index".
For regression models and other formulas, etc., employed in actual price index calculations for 2011, please refer to "Appendix 6: Hedonic Regression Formula for PCs and Cameras (PDF: 91KB)" (available only in Japanese) in the "Annual Report on the Consumer Price Index, Japan 2011".

[For your reference]
The Corporate Goods Price Index (CGPI), calculated by the Bank of Japan, involves quality adjustment that employs the hedonic method with regard to some items, including PCs and video cameras.
Application of the Hedonic Method in the 2005-Base Corporate Goods Price Indexexternal sites” (available only in Japanese)

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[G. Frequently asked questions about the CPI]

G-1 One new product after another shows up on the market. Does the CPI survey reflect prices changes of these new products?

Concerning the survey specifications, we investigate the distribution and sales of the major specifications of each and every item and, if we find any existing survey specification declining in distribution, we switch to another specification that is selling more. In addition, we try to cover new products in the survey on a timely basis. For instance, in case a manufacturer abolishes the production of a survey specification and launches a new, follow-up product, we change the survey specification in response. Thus, we always keenly follow the market in an effort to survey the prices of specifications that truly represent the items.
* To see what items and specifications are covered by the RPS, see “List of Items” in the “Retail Price Survey” (available only in Japanese).

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G-2 Are private brand commodities surveyed?

Some Private brand (PB) commodities that conform to the prescribed basic specifications and sell the best at each outlet are basically subject to the survey, and the prices are used for calculating the CPI. For example, as to many items (about 70%) of groceries such as milk, white bread, edible oil, fruit juice, etc., PB commodities conforms to the specifications and are subject to the survey.

PB commodities: Those for which leading supermarkets or similar outlets independently plan, develop and establish their own brands for sale.

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G-3 Are disucount stores included as survey subjects?

In the RPS which collects the price data for the CPI, we choose representative retail stores that have greater sales volumes for each item in each survey district and investigate the retail prices of these stores. Therefore, if the discount store in a survey district is considered to be a representative retail stores that has greater sales volumes, it will be included in the survey.

[For your reference]
Q&A about the Retail Price Survey

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G-4 Will the CPI appropriately reflect the change of quality such as functional improvement of products?

The objective of the CPI is to measure the pure price movements which shall not include the influence of quality changes. Therefore, we remove price differences caused by quality changes in case where old products surveyed can be replaced by new products, etc., taking into account the differences in functions, characteristics, and volume (See F-1).

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G-5 It is said that there is an upward bias in Japan's CPI. Is this true?

The CPI in Japan is calculated by fixing the combination (basket) of goods and services purchased by households to measure the chronological change of their cost.
However, goods and services purchased by households may change according to the appearance of new goods and services, and changes in people's tastes. Therefore, if the consumption structure were fixed for an extended period, the index would not reflect the actual situation. Generally speaking, the index tends to be biased upward over time.
In order to reflect changes of consumption structure in the index, CPI items and their respective weights are revised every 5 years (base revision). The standards of the International Labour Organization (ILO) stipulate that weights shall be revised at least every 5 years, and the weights for Japan's CPI conform to this revision frequency.
Since the 2000-base CPI, we have introduced a system that allows us to review index items in a midpoint year during the 5-year period before the next revision year when there would be any drastic change after the base revision, such as a rapid influx of new products. In addition, since January 2007, the index calculated by Laspeyres' chain index method, which uses weights updated annually, has been published monthly for reference (See H-1).

[For your reference]

When comparing change from the previous year of the 2005-base “index for all items, less fresh food” between the official index and the index calculated by Laspeyres' chain index method, the difference is about 0.3 point at the maximum.

Table: Change from the previous year of the “index for all items, less fresh food”

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G-6 I heard that Japan has adopted a different method for selecting products subject to the RPS from that of the United States. Is Japan's selection method different from other countries?

The international standards for calculation of the CPI, which were established by the International Labour Organization (ILO), stipulate that the CPI aims to measure chronological changes of prices, and shall be calculated by measuring the cost of purchasing a fixed basket of goods and services of the same quality and attributes. In line with this basic concept, the international standards specifically define that, for each item surveyed, its detailed description such as the quality and attributes should be specified so that prices of the same quality should be surveyed continuously. In Japan, surveys have been conducted in accordance with these standards as in Canada and major European countries, including the UK (See B-2).
In addition, Japan has reviewed the survey specifications according to changes of an influx of products to ensure that prices of the most representative products which sell the best are surveyed consistently.
Thus, in Japan, the RPS has been conducted by paying close attention to detail in accordance with international standards.
Although the CPI is calculated almost entirely based on the international standards in the United States, the survey specifications in accordance with the international standards are not defined in advance. Instead, a unique method that allows enumerators to pick out items according to distribution of products for each shop and survey their prices, is adopted. In this method, products picked out vary according to shops, and they may include those which are classified as the same item but do not have the same quality. As a result, it is likely that there will be large fluctuations in prices within each item.

[For your reference]

For instructions on how to calculate the CPI in Japan, please refer to “III. Calculation of the Consumer Price Index(PDF:448KB)” of the “Outline of the 2010-Base Consumer Price Index”.

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G-7 Is there anything I should note when I compare the CPI and Corporate Goods Price Index (CGPI) published by Bank of Japan?

The CPI includes almost 50% more (in terms of the calculation weights) items than does the CGPI, which does not cover such service items such as School fees, Rent, Eating out, and so on. Also, prices of services tend to fluctuate less than those of goods, since labor costs account for more service prices than prices of goods.
Also, the CPI covers goods purchased by households and does not include crude oil and other raw materials, intermediate materials like electric components, construction machinery and other types of equipment, etc. Thus, a price hike in these goods affects the CPI only indirectly.
For these reasons, the CPI and the CGPI do not necessarily show similar changes.
Note, however, that, if the scopes of the two indices are narrowed down to cover the same items as far as possible, i.e., if we compare the CPI for “Goods, less fresh food“ with the domestic CGPI for “Final consumer goods“ alone, the two indices show similar fluctuations.

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G-8 I hear that the CPI and the GDP deflator (Published by the Cabinet Office) are different from each other. Why is this?

Compared with the recent movement of the CPI and that of the GDP deflator, the range of drop of the GDP deflator has been larger than that of the CPI. The discrepancy between the CPI and the GDP deflator is mainly ascribable to the different things they cover. Other causes of the discrepancy include, among others, the different calculation formulae employed.

(1) The Target
While the CPI focuses only on household consumption, the GDP deflator covers business investments in equipment, etc., in addition to household consumption. Since much of the investment in equipment today is made in information technology goods, whose quality is rapidly improving, price falls in such goods considerably affect the deflator. For this reason, the change ratios of the deflator tend to be lower than those of the CPI.
Also, while the prices of petroleum products and other imported goods are rising, the CPI is usually pulled up. On the other hand, the deflator tends to drop until such price hikes are all reflected in the relevant product prices. Thus, the discrepancy between the two grows wider.
If the scopes of the two indices are narrowed down to cover the same items as far as possible, i.e., if we compare the CPI for “All items” with the GDP deflator for “Final household consumption expenditure” alone, the two indices show quite similar fluctuations.

(2) The Formula
While the CPI calculation employs the Laspeyres formula, the GDP deflator employs the Paasche formula. Generally, the Paasche formula, which calculates a weighted average using the quantitative weights at the time of comparison, tends to provide a lower index, while the Laspeyres formula, which employs quantitative weights at reference period, usually produces higher values. In addition, since quality improvement is reflected in the form of an increase in volume, Paasche formula gives a larger weight to an item whose price has fallen due to quality improvement. For this reason, the rate of decline of the GDP deflator, which employs Paasche formula, tends to be getting larger.
Also note that the GDP deflator employs a “chain method” with the reference periods it updates weights annually, to minimize the bias accompanying calculation of the index. Such a chain method is also used with the CPI as well, to provide and publish an additional, referential value to the index.

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[H. Consumer Price Index calculated by Laspeyres' chain index method]

H-1 What kind of index is “Consumer Price Index calculated by Laspeyres' chain index method” compiled as one of the supplementary indices?

We publish the CPI that the fixed base Laspeyres formula is applied to and the reference period and weights have been fixed for 5 years as basic classification indices. However, the consumption structure of households might change from the one at the reference period as the time elapses because it changes due to influx of new products (goods and services) and change in consumer taste.
“Consumer Price Index calculated by Laspeyres' chain index method ”(hereinafter referred to as “chain index”) is the index which is calculated with weights annually updated instead of fixed to the reference period so as to reflect changes in the consumption pattern more rapidly. The chain index is published monthly as a supplementary index (Monthly Report on the CPI e-Stat, Table 14 “Consumer Price Index Calculated by Laspeyres' Chain Index Method”).

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H-2 How is the chain index calculated?

The chain index is calculated with the weights annually updated. We calculate the chain index as follows (an example of February 2012):

(1) We calculate the link index in February 2012 with “the latest weights” (the weights in the previous year). That is, the link index in February 2012 calculated by weighted averaging the ratio of the prices in February 2012 to the prices in December 2011 with the weights in 2011;

(2) We calculate the chain index in February 2012 by multiplying the chain index in December 2011 by the link index in February 2012.
For detailed formulae, consult “Chapter5 Method of index calculation and the index series(PDF:448KB)” of “2010-Base Explanation of the Consumer Price Index”.

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H-3 What is the difference in the rate of change between the chain index and the fixed base Laspeyres index?

In general, it is said that the rate of change of the chain index is lower than that of the fixed base Laspeyres index (*). This is illustrated in the following simple example: suppose the CPI is calculated with the two substitutive items A and B, A's price continues to fall and B's price hardly changes. In this situation, consumers would buy A rather than B, so that the weight of the item A would be larger than that of the item B. Because the weights used to calculation for the chain index could be reflected the increase of the weight of the item A, the chain index would be smaller than the fixed base index.
In addition, the chain index is calculated by multiplying the link indices calculated at a point in time based on the immediately previous point in time (in the case of monthly index, December of the year before), therefore the effect of resetting the index to 100 causes the lower rate of change.

(*) The chain index tends to rise to a smaller extent when the rate of change is positive, and it tends to fall to a larger extent when the rate of change is negative.

For detailed formulae, consult “Chapter5 Method of index calculation and the index series(PDF:448KB)” of “2010-Base Explanation of the Consumer Price Index”.

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H-4 Why didn't you position the chain index as official?

It is said that a phenomenon called “drift”, the index could be high, may occur in the chain index when the prices of some items repeat ups and downs. In the case of the chain index, the weighted averages of indices of lower level groups or items do not match those of the corresponding upper level groups (the chain index has no additivity)
Therefore, we publish the chain index as a supplementary index, not as an official one. In addition, the chain index are published on the same day as the indices of basic classification every month, so that either index is available.

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[I. Consumer Tax]

I-1 Does the CPI include the Consumer Tax?

The objective of the CPI is to measure the movements in prices of goods and services purchased by households. Therefore, the CPI reflects what consumers actually pay, including the Consumer Tax.
The international standards for calculation of the CPI, which were established by the International Labour Organization (ILO), stipulate that the CPI contains indirect taxes, which include the Consumer Tax in Japan.

[For your reference]
The Consumer Tax in Japan was introduced in Apr. 1989, at which time the tax rate was 3%. In Apr. 1997, the tax rate was increased to 5%. It will be increased to 8% in Apr. 2014.

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I-2 In Apr. 2014, when the Consumer Tax rate will be increased to 8% generally, the tax rate will temporarily remain 5% for particular goods and services. Does the CPI reflect these temporary tax rates?

The temporary tax rates which apply to particular goods and services will be reflected in the CPI. For example, in “Electricity”, “Gas”, “Telephone charges” and “Mobile telephone Charges”, we will adopt prices including 5% tax rate in Apr. 2014, and an 8% rate following May 2014. For another example, in “Water charges”, “Sewerage charges” and “Charges for treatment of human waste”, we will adopt the prices including the tax rates which are actually paid by consumers, as stipulated in respective municipal by law.

[For your reference] Other notable items

  • “Housing rents”, “School fees”, “Insurance premiums”, etc.
        These items are excluded from taxation.
  • “Automobiles”
        Consumer prices include the “Automobile acquisition tax”, one of the indirect taxes in Japan. The “Automobile acquisition tax” is excluded from the scope of taxable prices for the Consumer Tax.
  • “Hotel charges” and “Bathing charges”
        In some cases, consumer prices include the “Bathing tax”, one of the indirect taxes in Japan. The “Bathing tax” is excluded from the scope of taxable prices for the Consumer Tax.
  • “Charges for playing golf”
        Consumer prices include a “Tax for golf course usage”, one of the indirect taxes in Japan. The “Tax for golf course usage” is excluded from the scope of taxable prices for the Consumer Tax.
  • Seasonally survey items
        Some items are not covered by the survey in Apr. because these commodities are not distributed in the market in Apr. (for example, winter clothes). In these seasonal items, the average index in the last survey period is applied in the months not covered by the survey (See B-4). Therefore, it will reflect the prices including 8% tax rate after next survey months.

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