Tests for Price Indices in a Dynamic Item Universe

Li-Chun Zhang 1 , Ingvild Johansen 2  and Ragnhild Nygaard 2
  • 1 University of Southampton, , SO17 1BJ
  • 2 Statistics Norway, , 0131, Oslo, Norway

Abstract

There is generally a need to deal with quality change and new goods in the consumer price index due to the underlying dynamic item universe. Traditionally axiomatic tests are defined for a fixed universe. We propose five tests explicitly formulated for a dynamic item universe, and motivate them both from the perspectives of a cost-of-goods index and a cost-of-living index. None of the indices that are currently available for making use of scanner data satisfies all the tests at the same time. The set of tests provides a rigorous diagnostic for whether an index is completely appropriate in a dynamic item universe, as well as pointing towards the directions of possible remedies. We thus outline a large index family that potentially can satisfy all the tests.

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