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How to calculate CPI?

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Manic Posted: Thu, Apr 2 2009 12:27 PM


I have an idea for my next project where I would create web site that will monitor average consumer prices by regions, towns etc. in my country (Bosnia and Hercegovina). On that site I would like to show real CPI and other inflation related statistics. Now, I do not trust my government CPI data, so I am interested into finding out what is the real CPI.

What I need to now is this:

  1. How do I calculate CPI?
  2. What resources do I need to collect all necessary data for calculations?
  3. Where does inflation come from in my country?

Explanation for the last question:

I fairly understand inflation in USA, FED, fiat-money and so on, but what I don't understand is where does inflation in my country comes from?

We have strange monetary system where our currency, convertible mark, is fixed depending on euro, and exchanges at rate 1.955830.

1 EUR = 1.955830 KM



ps. I'm not economist. :)

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I wish I could help you, this is a noble project.  Perhaps you should look for like minded people from Bosnia who might have some talent in these areas.  Perhaps a free market think tank.

One site that may provide relevant information is

"When you're young you worry about people stealing your ideas, when you're old you worry that they won't." - David Friedman
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Manic replied on Fri, Apr 3 2009 5:28 AM

I am politically active so I could find people to help me, but there aren't many libertarian economists here. Big Smile
I would like some pointers, if nothing else. Geeked

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Kakugo replied on Fri, Apr 3 2009 11:09 AM

I am not as learned as many persons around here but I can offer a few down to earth pointers.

  1. Each first day of the month go to the same shop and note down the price of the same basic commodities, say same kind of biscuits, same kind of fresh vegetables, same kind of canned food. You can work out how each good as moved up or down in price. It's very simple math.
  2. If you have the time you can pick a number of shops: one in a well-off area, another in the suburbs, another in a rural area etc. You can keep a table with prices from each shop.
  3. Try to find out which prices are more manipulated than others: for example fuel prices are usually the first targets of government legislators as well as bread and milk. These goods should be put in a separated list.
  4. Getting people involved to see what percentage of their income they spend each month on food, fuel, lodging etc is a good idea but first try to find out what privacy laws have to say in your country. You don't want to get into trouble. It's useful to have as a varied sample as you can get: married couple with young children, aged couple living alone, unmarried young man etc. This can help you out work how the increase in, say, fresh vegetables prices affected income in yout sample.
  5. At the end of each semester you can see how much prices in each good have risen and how much they affected your sample. I bet they'll be quite different from official datas.

On the issue of inflation is tough to say. I know that the EU has been spending lots of money in BiH for the past few years so that's surely a source of inflation. I am also pretty sure that your government is doing its bit by inflating the currency as much as it can to pay wages, debt etc.

PS: I am not an economist myself so please forgive me...


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fsk replied on Fri, Apr 3 2009 5:19 PM

I wrote a post on the CPI.

There's a political incentive for the CPI to understate true inflation.  For a better measure of inflation, look at M2, M3 (no longer published) or the price of gold.

The CPI is reweighted quarterly or annually.  (I'm not sure.)  The weights are chosen in a manner to bias inflation downward.  Things that rapidly rose in price are given less weight.  Things that rise in price slowly are given more weight.

The weights are selected retrospectively.  In January 2008, the bureaucrats who calculate CPI don't say "These will be the weights for 2008!"  In January 2009, they look back at price data for 2008, and *THEN* choose the weights.

I couldn't find any public disclosure of the weights when I looked.

Also, CPI is calculated via a geometric mean instead of an arithmetic mean.  If you know Math, then you'll know that the geometric mean is less than the arithmetic mean.

For example, the arithmetic mean of {1, 3, 9} is (1+3+9) / 3 = 4.33.   The geometric mean is (cube root(1*3*9)) = 3.

Money supply inflation does not lead to uniform price inflation.  These tricks allow the CPI to understate true inflation.

For example, in one year, inflation might be high in California but low in New York.  The next year, inflation might be high in New York but low in California.  The geometric mean, plus reweighting, makes the CPI less than true inflation.

As another example, suppose chicken rises in price while the price of beef is flat in 2007.  In 2008, the price of beef rises rapidly while the price of chicken is flat.  In 2007, the weight of beef is increased.  In 2008, the weight of chicken is increased.

The CPI is pure propaganda and should not be taken seriously.

I have my own blog at FSK's Guide to Reality. Let me know if you like it.

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Manic replied on Sat, Apr 4 2009 1:03 AM

Great posts. Thanks for some pointers.


So what do you suggest? What data sould I calculate to show on my page?
What would be good data to show to public and how to get it?

ps. Could anyoune tell me who controls the supply of money in my country? EU?

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I'm going to say the CBBH (Central Bank of Bosnia and Hercegovina).

"Central Bank of Bosnia and Herzegovina maintains monetary stability by issuing domestic currency according to the Currency Board arrangement (1 KM: 0,51129 EURO) with full coverage in freely convertible foreign exchange funds under fixed exchange rate 1 KM: 0,51129 EURO."

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fsk replied on Tue, Apr 7 2009 11:03 PM

If you want a good alternate measure of inflation, consider the price of gold.  These two webpages are a good source for historic gold prices.

Another measure is M2.  The Federal Reserve publishes M2 statistics.

This page has "reconstructed M3".  The Federal Reserve stopped publishing M3 a few years ago, so they could cover up how bad inflation actually is.

In the Eurpoean Union, the ECB (European Control Board) is the central bank.  It's the same as the Federal Reserve in the USA.

I have my own blog at FSK's Guide to Reality. Let me know if you like it.

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