Drift in Producer Price Indexes for the Former Soviet Union (FSU) Countries
IMF Working Papers, March 1, 1994
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Bibliographic details
- Authors: Kimberly D. Zieschang, François Lequiller
- Published: March 1, 1994
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451978476.001
Purpose and scope
- Demonstrates that, under the price fluctuations that characterize most transition economies, the commonly used chain index derived from the published month-to-month price change of the PPI in some cases dramatically overstates the rate of price inflation.
- Analysis draws in part on a seminal paper by Szulc (studying drift for a wide class of index formulae) and in part on observations of price movements made by the Fund’s missions.
- Emphasis on transition economies and countries of the Former Soviet Union, with greatest observed drift during the year 1992.
Key findings
- The chain index based on month-to-month published PPI changes can in some cases dramatically overstate the rate of price inflation.
- The magnitude of drift was greatest in 1992.
- The drift declines with slower rates of inflation and, possibly, with changing patterns of price increases.
- Drift remains important for countries such as Russia, where monthly inflation continues to run well into the double digits.
Methodology and evidence
- Uses theoretical results from Szulc on the problem of drift for a wide class of index formulae.
- Supplements theoretical analysis with empirical observations of price movements reported by the Fund’s missions.
- Focus on chain index constructed from published month-to-month PPI changes and comparison to alternative index behavior under volatile price conditions.
Policy implications and recommendations
- Caution is warranted in using the commonly published chain PPI index to measure inflation in high-frequency, high-volatility environments typical of transition economies.
- Analysts and policymakers should consider the potential for upward bias ("drift") in chain PPI measures, particularly for periods like 1992 and for economies with sustained double-digit monthly inflation.
- Consideration of alternative index formulae or adjustments is implied by the reliance on Szulc’s results and mission observations (specific alternative methods are discussed in the paper itself).