Measuring inflation in the eurozone with (open) data
Publication Date/Time
2022-06-08T11:30:00+00:00
Country
Europe
Why measuring inflation is harder than it looks, and how new data
sources help
RISING PRICES - THE CONSUMER’S VIEW

Inflation has become a news headline in Europe, with Eurostat
reporting
[https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjn-PuZlZH4AhXBhf0HHVMBDpwQFnoECBAQAQ&url=https%3A%2F%2Fec.europa.eu%2Feurostat%2Fdocuments%2F2995521%2F14636256%2F2-31052022-AP-EN.pdf%2F3ba84e21-80e6-fc2f-6354-2b83b1ec5d35&usg=AOvVaw2gp35_piwSW5LzhJbsvlQi]
that the average increase in prices from last year was 8.1%. At the
same time, consumers see price increases for some everyday items
increasing by substantially more. Petrol prices in Germany, for
example, have increased by more than 20% since last year. In the
Netherlands, the price for meat
[https://www.foodbusiness.nl/financieel/artikel/10898322/prijsstijging-voeding-neemt-toe-vooral-vlees-duurder]
has increased by more than 10% from last year, surpassing price
increases in other categories. Inflation captures the average person
buying an average number of goods and services—but a meat-loving
driver will experience inflation much differently than a vegetarian
using public transport.

Not only will groups experience inflation in a different way, but
inflation also causes people to change their behaviour to adjust for
rising prices. Higher petrol prices cause people to drive less or buy
more fuel-efficient vehicles
[https://www.econstor.eu/bitstream/10419/231318/1/1749270188.pdf] or,
in some cases, to take public transit. Some expect higher fuel prices
to further drive the electrification
[https://cleantechnica.com/2022/05/06/germanys-plugin-ev-share-up-to-24-3-economic-pressures-mounting/]
of personal automobiles, whether hybrid or fully electric. But even
here, different groups can substitute in different ways. People living
in rural areas have fewer opportunities to reduce driving or take
public transportation, meaning that they cannot compensate for higher
fuel prices in a way that others living in dense city centres can.

RISING PRICES - THE ECONOMIST’S VIEW

These habits are important because inflation is measured based on an
average “basket” of goods and services that people buy. This
basket contains a wide range of goods, such as food, appliances, and
footwear, as well as services, such as maintenance costs. When people
substitute one good for another, then the content of that basket
should change to properly reflect inflation, as the think tank Bruegel
points out
[https://www.bruegel.org/2021/03/how-has-covid-19-affected-inflation-measurement-in-the-euro-area/].
If apples become prohibitively expensive, but pears are a ready
substitute that people are buying, it does not necessarily make sense
to continue to measure price increases in apples.

These substitutions are why many countries, including those in the
eurozone, still rely ON INDEXES of consumer prices TO MEASURE
INFLATION OVER THE _LONG-TERM_ rather than looking at CONSTANTLY
CHANGING CONSUMER HABITS. The Euro area’s Harmonised Index of
Consumer Prices
[https://ec.europa.eu/eurostat/web/hicp#:~:text=The%20Harmonised%20Indices%20of%20Consumer,calculated%20according%20to%20harmonised%20definitions.]
(HICP), for instance, tracks the price of 295 goods and services from
19 Euro area countries, broken down by categories like food,
transport, health, and housing.[1] Price changes are recorded monthly
or annually, but what goods and services go into HICP’s basket
changes only every February.  Changing the basket only once a year
gives officials time to try to understand changing consumption
patterns. While these updates are necessary, they are by definition
slow and fail to capture immediate reactions of inflation to sudden
shocks, like the global pandemic and war.

New datasets, including open ones, offer economists and policy-makers
a chance to understand better how people are consuming goods and
services in real time. The greater the variety of data—and the more
frequently it is updated—the more accurate the picture can be for
those looking to understand how inflation is being experienced.

STATISTICS OFFICES ON THE FOREFRONT OF NEW INFLATION DATA

New Zealand has been studying how to collect and use price information
[https://www.nzae.org.nz/wp-content/uploads/2021/07/Stansfield.pdf]
from new sources and is developing a new framework to integrate and
calculate inflation. They point out that these new data sources can
clearly give a close-to full coverage of products compared to more
traditional frameworks. Supermarket scanner data, collected in
co-operation with New Zealand businesses, also provides an almost
real-time picture of substitutions that consumers are making on a
daily basis.

Similarly, the UK Office for National Statistics (ONS) has ambitious
plans to leverage new sources
[https://www.ons.gov.uk/economy/inflationandpriceindices/articles/usingalternativedatasourcesinconsumerpriceindices/may2019]
of data to produce aggregate measures of consumer-price statistics by
January 2023, also looking to source web-scrapped pricing and scanner
data from retailers. For web-scraped data, the ONS plans to work with
pricing data scraped by a third-party data collector, MySupermarket
[https://www.mysupermarket.site/], and has developed relationships
with various retailers to collect data on consumer purchases.

THE ROLE OF OPEN DATA AND “DATA SPACES”

Many of the datasets, particularly on consumer-consumption patterns,
are not traditionally associated with open-data portals. Companies
that rely on sales are reticent about sharing information about their
customers, given concerns around data privacy and commercial
confidentiality. This is not to say, however, that open-data portals
do not already have access to valuable data sets that can help
economists and policymakers to better understand inflation. 

One important component of the basket of goods are government-provided
goods and services. This can include, for example, information on
public transportation. Here, Bordeaux Métropole in France collects
point of sale information on transport tickets
[https://data.europa.eu/data/datasets/61a025afd703aa72624ed79c?locale=en].
At the same time, web scraped pricing data could also be provided
online as an open-data source, and already exists on data.europa.eu as
indices using web scraped price data in the United Kingdom
[https://data.europa.eu/data/datasets/research-indices-using-web-scraped-price-data?locale=en].

Getting a complete picture of inflation for statistics offices will
likely require co-operation between data providers of both open and
closed data. This is where the European Union’s framework for data
spaces—a topic addressed in a recent webinar on data.europa.eu
[https://data.europa.eu/en/academy/role-dataeuropaeu-context-eu-data-spaces]—can
help facilitate co-operation.

A POTENTIAL WAY FORWARD FOR THE EUROZONE?

Assuming that data collectors can co-operate to provide the right data
ecosystem to bring a more accurate picture of inflation, economists
and policy-makers still face challenges dealing with a more nuanced
and much larger dataset. New measuring methods need to account for
large volumes of data and high product churn. New index calculation
methods need to understand how to automatically adapt to changes of
quality, the appearance of new services, or the rapid swinging of
seasonal product prices such as vegetables and fruits.

Ultimately, these new data sources can lead to an unlimited number of
baskets for goods and services, covering all kinds of products for all
kinds of consumers. The wider coverage of this data also implies the
inclusion of information conceptually out of the scope of normal
inflation indexes (such as businesses expenditures).

Nonetheless, these methodological challenges, once resolved, can lead
to potentially huge benefits for a better understanding of inflation
and open-data portals have an important voice in the development of
this new data ecosystem that could better measure inflation.

 

_[1] Under “food”, for example, one can find the sub-category
“meat
[https://www.ecb.europa.eu/stats/ecb_statistics/escb/html/table.en.html?id=JDF_ICP_COICOP_ANR]”
and then the price of different types of meat: from beef to lamb, to
edible offal._

 
