(Box)
April 1998

The CPI consists of prices of selected consumer goods and services that account for a substantial portion of household consumption. The CPI is made up of the net inflation index and the index of regulated prices. At present, the CPI contains 754 items; the index of regulated prices, 91 items and the net inflation index, 663 items.). The sub-indices of tradables and nontradables prices are also used when analysing CPI inflation.

Net inflation
Net inflation represents the movements of unregulated prices (i.e. the CPI adjusted for regulated prices) further adjusted for the effect of indirect taxes or subsidy elimination. Within the net inflation index, there exist two important sub-indices whose trends are separately monitored due to different characteristics. The food price index is more variable and is subject to seasonal changes (e.g. weather factors and the impact of agricultural policies. The adjusted inflation index (i.e. the net inflation index adjusted for the food price index) has a stronger link to monetary measures of the central bank.

According to the CSO definition, net inflation is "calculated from an incomplete consumer basket, adjusted for items with regulated prices and items affected by other administrative measures. Items whose prices change due to tax adjustments remain part of the consumer basket (net inflation), but the effect of tax adjustments is eliminated".

Regulated prices
Regulated prices include maximum prices for which a ceiling can be set at the central as well as local levels, prices regulated on a cost-plus basis (items whose prices can only reflect economically justified costs and adequate profit) and administratively fixed fees. The selection of these items is based on the Price Bulletin of the Czech Ministry of Finance which publishes annually the lit of goods with regulated prices.

The effect of indirect taxes, subsidy elimination
CPI adjustment for effects of indirect tax changes is carried out by all central banks which introduced the system of inflation targeting. In 1998, changes in indirect taxes on unregulated items apply to tobacco, alcohol and petroleum (excise tax increase) and coal and wood for heating (VAT increase); subsidy elimination applies to school canteens.

Tradables (consumer basket items)
International competition and exchange rate movements are the main factors influencing the prices of tradables. This group includes those consumer basket items whose prices compete with prices of imported products. Tradables are further divided into tradable foodstuffs and other tradables.

Nontradables (consumer basket items)
This group includes those consumer basket items whose prices cannot be influenced by prices of imported products. Nontradables are further divided into regulated nontradables and other nontradables. Prices of regulated nontradables are influenced by state administration while prices of other nontradables are affected by supply and demand on the domestic market.