Page 16 - Invited Paper Session (IPS) - Volume 2

IPS178 Sana Antoine S. J.
Statistics at the level of households and individuals. The CPI is computed by
applying the Laspeyres index which uses historical quantities (weights):

∑
0
=1
= ×100 is the base period quantity of good i
0

is the base period price of good i
0
∑ is the time t price of good i
0 0

=1

Where each subindex i is related to a given item of the basket. The choice
of weights q_i is fixed and changes to CPI occur through changes in the price
levels p_i. Headline inflation refers to the rate of change in the CPI. It captures
the changes in the cost of living based on prices fluctuations of items in the
basket of commodities and services consumed by households. However, using
the headline inflation rate for monetary policy analysis is sometimes
misleading due to the volatility of certain components included in the CPI. The
current composition of the CPI basket and the weight for each one of the items
can be found in the following figure.

Figure 1: composition of CPI Sources: CAS

Based on the previous formula, we can compute the volatility of CPI due to
each of sectorial items. Two factors come into play in determining the impact
of each item:
 Weight: the higher the weight of the item in the CPI formula, the more
impact it will have on headline CPI
 Volatility of prices per sector: the higher the variations of prices in a
given sector (compared to other sectors), the higher the influence of
this sector on headline CPI

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