Behind the Scenes of Measuring Inflation — This Is What You Need to Know!

We can feel in our own skin a decrease in the purchase value of our money. Inflation is not an unusual economic process, but it has been unusually high for more than a year now, and it is having an intense impact on our daily lives. We may encounter constantly rising prices on store shelves during our shopping or when we are just using some service. The January report of the KSH revealed that inflation has already risen to 25.7% annually in Hungary, which has not been the case so far in our country. Based on March data, we can currently talk about an annual increase of 25.2%. Could this mean that price increases peaked in January and we can expect a decline from there?

Every day there are a lot of articles about price increases. The evolution of the indicator in the economy is key, but little is known about how growth is actually measured. How can we say that the price of food has increased by 36%? What exactly do we mean by inflation?

The basis for calculating inflation is the consumer price index (consumer basket), which measures the change in the prices of goods and services purchased by households for their own use over time. This indicator also measures the deterioration of money, since over time, in addition to increasing prices for our money, we can already buy fewer products. The consumer price index is taken into account when determining tax rates, interest rates or even the minimum wage. In each country the statistical offices carry out the calculation of this, and curiously, the content of the consumer basket varies from country to country, in order to be country-specific.

In professional circles It is also highly disputedwhether it is methodologically correct to measure inflation. Researchers and experts also sometimes question the usefulness of the consumer price index as an indicator of inflation, since it follows it with a delay, so we never get a current picture. Many also dispute the content of the average consumer basket.

How is the measurement done?

Price changes are measured based on a predefined list of products. A prices for representativesit is prescribed monthly by the territorial staff of the KSH in settlements, markets and other places of the country. The measurement of the price of products/services purchased mainly online (technical article, plane ticket, etc.) is carried out by researchers via the Internet. It is a requirement that the consumer basket contains the specific monthly offer, so what is not available in the specified measurement period will not be included in the current consumer basket. They try to take the actual demand as the basis for the selection, so they note the price of the most popular product in one category.

Comparability is also not negligible from an analytical point of view, so since 1992 they try to prescribe the price of the same assortment with which they started prescribing. If an item fails to be recorded for any reason, it will be imputed in accordance with the methods prescribed by the EU Member States. The consumer price index is given as a weighted average of the prices of each product group. The price of products with a higher weight in the basket affects the level of the index more.

The weights in the index are compiled from the System of National Accounts, as well as from the Household Budget Survey. The weighting thus varies flexibly from year to year according to the consumption structure of households. Thanks to consumer habits, it was also necessary to follow habits that have changed due to the COVID pandemic, for example. The price changes of tariff items (electricity, piped gas, district heating, water and sewer charges, etc.) are taken into account when the new tariffs appear on the consumer's account, so the current overhead increases will also appear in the reports only in 1-2 months, when the consumer already feels its impact.

I show you an excerpt from the list, in which you can see that the products are defined in sufficient detail.

Consumer representativesPeeled walnuts, whether or not packed (not ground, not sugared) Poppy, not sugared (whether or not packed) Roasted hazelnuts, 80-125 g sugar, microwave poppable, 3×90-100 g/can, various flavoringBensolet canned food, 400-420 g net weight stuffed cabbage canned food, 2 pcs with filling, 400 g net weightPizza, meaty, quick-frozen, 300-500 gBaby food, liver/meat + vegetable-fruity, 163-220 g, glass

Source: KSH

The risks behind data — how do we manage them?

The purpose of the measurement used by the KSH is to map the average consumption habits, thus taking into account specific products. It may be that if we typically only buy in a store or buy special products, we perceive their price change differently than according to officially reported data.

Let's look at some of the distorting factors. Take, for example, the way in which the price of travel abroad is measured. According to March data, its price has risen by 17% in the past year. But if we do not stay with the following conditions or not in these places, we may perceive the evolution of the price in a different way.

Consumer representatives: Holidays abroad
‍Greece, travel by plane (mandatory other fees), 3 or 4 star hotel, half board, 8 days/7 nights
Italy, travel individually, apartment for 3-4 persons (cleaning fee), for 1 person, self-catering, 8 days/7 nights
Spain, travel by plane (mandatory other fees), 3 or 4 star hotel, half board, 8 days/7 nights
London, travel by plane, breakfast, accommodation with bathroom, 4 days, 3 nights
Paris, travel by plane, breakfast, accommodation with shower, 4 days, 3 nights
Egypt, travel by plane (mandatory other fees), 4 or 5 star hotel, all inclusive, 8 days/7 nights
Ski trip to Austria, individual trip, half board, with ski pass, 6 days/5 nights
Tunisia, travel by plane (mandatory other fees), 4 or 5 star hotel, all inclusive, 8 days/7 nights
Ski trip to Italy, travel individually, half board, with ski pass, 8 days/7 nights
Croatia, individual trip, 3 star hotel, half board, 8 days/7 nights

Source: KSH

We can talk about what we have data about, and the offices work according to laid down rules. For example, 1-2% of the market apartment rent is included in the basket, since officially a small percentage of the population rents an apartment, but in reality the situation is different, since many rent an apartment without an official notarial deed. We can also talk about technological progress. Suppose that the consumer basket includes the iPhone 12 month after month, the price of which is decreasing, therefore, in essence, deflation can be measured. When the latest version of a phone comes out and, following consumer habits, it is added to the cart after a while, the resulting price change can be perceived as inflation in that category, when in fact there is only technological progress or quality improvement.

Can we trust the measurements?

Based on the foregoing, we may wonder whether we can trust the measurements? Basically, yes, as researchers always try to define a general, country-specific consumer basket. We can only estimate from accurate and official data, so the basis of everything is to have official data, such as the apartment rental problem mentioned earlier or a comprehensive database of stores.

Private companies already carry out data collections that collect the price of products of all chain stores, as well as the barcodes of the products, eliminating the possibility of errors that a particular product is only included in the measurement. Such distortions can also be avoided by such methods where the price of the product does not change, but the presentation is reduced.

In addition to all this, of course, it would be possible to measure inflation in a much more modern, complete and thorough way. It can be said that the domestic measurements are carried out following the guidelines of Eurostat, but at the global level the methodology could be improved in every way through uniform and up-to-date data collection and the improvement of the content of the consumer basket.

If you have further questions about data analysis methods or want to know how you can create value from your data, contact our colleagues in thisthrough the form!