The January 2010 consumer basket update

In the past, the CZSO usually introduced a new consumer basket once every five to seven years. Starting in 2007, the consumer basket will change every five years owing to EU harmonisation. Consumer basket items are selected and their weights determined on the basis of surveys of the expenditure items of the national accounts statistics and the household budget statistics. Usually only partial changes are made to a consumer basket while it is in effect, for example when an item ceases to exist or when a new item needs to be included in the basket. In such cases, eliminated items are replaced by other items of a similar nature and their weight is kept the same. These changes are usually made at the start of the year and their effect on headline inflation is negligible.

In addition, starting with the January 2010 data, the weights of the consumer basket were updated extensively for the first time, without any changes being made to the basket itself (see Table 1). Aside from some minor changes, only the weighting scheme of the representatives was revised, not the list of representatives. The CZSO was inspired to make this change by methods used abroad. The reason for this change was that the inflation calculated using the previous weights is, from the CZSO’s point of view, significantly different from the inflation that would have been calculated using the new weights. In future, a new consumer basket can be expected to be introduced every five years and the weights will be updated as described above three years after the new basket takes effect. Only the data since January 2010 have been calculated using this updated consumer basket. Those data have been linked to the data calculated until the end of 2009 using the previous consumer basket (a process known as chaining).

Table 1 (Box) Change in consumer basket weights
The weight of adjusted inflation excluding fuels increased the most, while the weight of regulated prices declined
(percentages)

The following table shows the revisions made to the constant weights, which change only when the consumer basket is updated, and the recalculated weights as of the end of 2009. The inflation aggregation principle (using the Laspeyres formula; see, for example, the methodological manual on the CZSO’s website) implies that items with above-average price growth contribute increasingly to headline inflation, while items with below-average growth (or even declines) in prices contribute decreasingly. These price-dependent changes in the shares of individual items in the overall basket are described by the recalculated weights. It happens in practice that several years later the recalculated weights no longer correspond to the true situation. This is one of the reasons for updating the consumer basket. When the basket is changed or the weights are completely updated, the recalculated weights “re-converge” to the actual values, i.e. to the newly determined constant weights.

It is relevant to compare the recalculated weight in December 2009 with the constant weight valid from January 2010. The weight of regulated prices has been reduced significantly. Within regulated prices, the weight of regulated rents has been reduced considerably. This is a significant contributor to the growth in regulated prices in 2010. Consequently, if we hypothetically retain the forecasted increases in the components of regulated prices for 2010, we obtain a lower forecast for overall growth in regulated prices and also a lower impact on headline inflation. An increase in the weight of food prices and adjusted inflation excluding fuels, which are currently negative, also has a currently anti-inflationary effect, hence an increase in their weight results in a greater negative impact on headline inflation if the forecast remains otherwise unchanged.

Our analyses show that if the January forecast for price growth in the individual components of net inflation and the individual regulated prices is retained, the update of the consumer basket weights in January 2010 resulted in a decline in the annual rise in headline inflation during 2010 of 0.1–0.3 percentage point.