Price Measurement and Mismeasurement in Central Asia

WP/95/82-EA
WP/95/82
Price Measurement and Mismeasurement in Central Asia by Vincent Koen



This paper examines consumer price measurement issues as they arise in
Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.
Much of the discussion also applies to other transition economies, where
absolute and relative price movements have been similarly dramatic during
the last few years. Under these circumstances, vastly different estimates
of increases in the overall price level are obtained depending on which
index is actually used.

The Paasche retail price indices inherited from the central planning
regime had a number of shortcomings. In particular, they suffered from
inadequate geographical, outlet, and product coverage, and their shifting
weights precluded chaining. These indices were therefore gradually replaced
by Laspeyres consumer price indices.

Although the introduction of Laspeyres indices represents a distinct
improvement, a number of practical and conceptual problems remain. The
former include insufficient coverage of private outlets, use of
inappropriate exchange rates, and the lack of human and computer resources
needed to produce a reliable price index. The latter encompass the urban
bias typically affecting the consumer price index, the exclusion of certain
social groups, the treatment of expenditure inequalities across households,
and the use of fixed base-period quantities as weights, which prevent the
Laspeyres index from capturing substitution effects.

Even if one were satisfied that the optimal implementable index formula
has been selected, the question remains of the appropriate level at which to
compute it. Since prices vary substantially across regions and consumption
patterns differ across social groups, it may be worth considering a set of
specialized subindices in addition to the overall, national consumer price
index.

Quite aside from the nature of the index formula and level of
disaggregation, the signals sent by short-run movements in the consumer
price index may be misleading in that they may not reflect actual inflation
trends. High-frequency disturbances include discrete adjustments in
administered prices, shifts in the taxation mix, and seasonal variations.
The persistence of shortages may also distort the meaning of the index.