Frequently asked questions about the Icelandic CPI in light of circumstances arising from COVID19
If an item of goods or services is not available but is expected to become available soon the price is kept unchanged from the previous month. The same method is applied if it is not possible to replace the item immediately in the basket. This method is accepted and applied internationally.
Due to actions aimed to prevent the spread of COVID19 many shops and firms have had to close. This has mainly decreased the availability of services and likely some goods. Meanwhile Statistics Iceland will not be able to measure prices for the non-available items. If an item is not measureable due to closed shops the previous price of the item is carried forward and used as a valued price measure. This method is satisfactory and up to standard as it does not elude any price development where no business takes place. The item price will then receive a regular measurement when trade resumes.
More evaluation methods are available, such as to apply a price change from similar items or to find another way to derive a reliable price change. Such methods are designed to measure prices where prices are missing on items which have been bought by consumers in the period.
The price measurement needs to view each item separately to decide on the appropriate evaluation method. All cases are treated with prudence. Sub-indices for consumption with diminishing trade are not expected to show sudden jumps between months.
Bear in mind that the situation which is formed by the spread of COVID19 will end. The assumption is that shops and firms will reopen and trade resume. When the situation passes people will resume consumption according to their needs and income. It is expected that the consumption will in general terms adjust to previous levels.
If a shop or another point of sale is closed down the calculation of the CPI will utilize price changes of goods and services in the outlets which are still in the sample. Statistics Iceland renews the sample as soon as possible to replace outlets or items which become unavailable.
Due to actions aimed to prevent the spread of COVID19 many shops and firms have had to close. This has mainly decreased the availability of services and likely also some goods. Meanwhile Statistics Iceland will not be able to measure prices for the non-available items. Statistics Iceland assumes this situation to be temporary and for shops and firms to reopen when the time comes. Therefore, shops will not be substituted from the CPI sample unless it will become evident that they will not reopen. See also the answer to “What is done if a good or a service disappears?”
No. Changes in buying patterns of this type have an impact on household expenditure (cost-of-living) but not on consumer prices. The consumer price index does not measure volume changes of the index basket but rather the price changes of the goods and services which the basket contains. A fall or an increase in household consumption does therefore not have a direct impact on the results of the calculation of the CPI.
The change in consumption we are witnessing now due to the spread of COVID19 is not a result of consumer’s willingness to change their consumption behaviour. Due to this unprecedented external situation the consumers now prioritise purchases of necessities and delay other consumption choices. Statistics Iceland weighs the CPI with average household consumption which is measured over a long period and omits short-term deviations. The effect of COVID19 on consumption behaviour is expected to be temporary.
Yes, a price measure can be zero if goods or services are offered free of charge to consumers, which they have up until then paid for. This rarely happens, however a few occurrences exist in the Icelandic CPI.
An example is when the charge of a road toll fee was cancelled in Hvalfjarðargöng tunnel in October 2018 whereas the tunnel remained open for traffic as before. The price of the item was reduced to zero as this was a service which consumers generally paid for and the item had a weight in the CPI. (In January 2019 a new road toll fee emerged with the opening of the new tunnel in Vaðlaheiði leading to a rise in the sub-index 07248 Road toll fees.)
If a store closes resulting in a good or a service becoming temporarily unavailable, the price cannot be measured zero. This is because the consumer cannot buy the item at that price. This is why the price is not put to zero on items which cannot be measured in the CPI due to closed stores or services because of the protective measures taken to prevent the spread of the COVID-19 coronavirus.
See answers to “What is done if a good or a service disappears?” and “What is done is an outlet closes?” to see how price measures are treated when it is not possible to measure due to temporary restrictions affecting availability of consumer items.
Did Statistics Iceland react to changes in consumption pattern at the time of rebasing of the index in April 2020?
Yes. Statistics Iceland did update the composition of the basket of goods and services which constitutes the index base on 29 April 2020. This was a routine update of the basket weights which is an annual event. The new base referred to March 2020. The new basket was based on the results of the household budget survey of 2016-2018. The upgrade of CPI weights did not account for the temporary consumption changes stemming from the COVID19 situation as it is assumed that normal consumption will resume when this is over.
Are the weights of the Icelandic CPI reviewed if general consumption decreases or stops due to COVID19?
No. CPI weights stay fixed despite indications that consumption is affected by the actions taken to prevent the spread of COVID19 in Iceland. The CPI is a fixed basket index and the weights are derived from general consumption indicators which are measured in Statistics Iceland’s Household Expenditure Survey. The Survey results reflect consumption under normal conditions.
The change in consumption we are witnessing now due to the spread of COVID19 is not a result of consumer’s willingness to change their consumption behaviour. The consumers are prioritising their consumption temporarily due to an external situation. When the situation passes, people will resume consumption according to their needs and income. It is expected that the consumption will adjust to previous levels.
Let’s take an example and assume a consumer who can only choose one necessity item and one service item which is currently inaccessible due to temporary restrictions.
The necessity item could be a food product and the services item could be an art event. The CPI is composed of the two items in weights according to the way the consumer divides expenses between them. When all of the consumer’s expenses are spent on the food product, because the art event was delayed until further notice, the price of the food product may rise due to an increase in demand. The price for the art event neither rises nor falls as the event does not take place. The change of the index will then be the weighted change of the higher food price and the unchanged price of the art event.
If the weight of the art event would however be reduced to zero the weight of the CPI would be entirely on the food item. The change of the CPI would be the same as the rise in the food price. This situation can only occur if all art events will be cancelled for good, whereas since the art event has only be postponed the weight remains unchanged.
Does the CPI become biased if weights are not removed for breaks in certain consumption groups arising from COVID19?
Despite the spread of COVID19 being fast, there has still been a short period for preparation which consumers have used to stock up on necessities. Meanwhile, they are postponing consumption which can wait. The COVID19 situation is considered to be temporary. When the situation passes, people will resume consumption according to their needs and income. It is expected that the consumption will adjust to the previous levels. Bias resulting from a consumption reduction can in the short run lead to a temporary underestimation of the CPI, however if the consumption will resume to previous levels, this bias will be negligible.
Does the CPI properly reflect the price level in current situation where COVID19 is affecting consumer behaviour?
Yes, the CPI measurements are thorough and accurate despite the situation. Statistics Iceland measures prices for the CPI in a detailed manner and in good cooperation with shops and firms. Many shops and firms can expect difficult business months amid COVID19 effects. And some of them may have to close or reduce operations. Statistics Iceland will in such cases evaluate the prices of the goods or services which are not available to consumers. See also the answers to “What is done if a good or a service disappears?” and “Are the weights of the Icelandic CPI reviewed if general consumption decreases or stops due to COVID19?”
There is no particular reason to expect the situation stemming from COVID19 to incite inflation. A rise in prices of necessities, of which consumers are now buying more of, is to be expected, while prices of other items which are temporarily unattainable or in reduced demand should remain unchanged or even lower. Weights of consumption items are not adjusted due to COVID19 effects as the situation is considered temporary and expected to adjust to former levels when the situation passes. As consumer demand in general is now suppressed, relative price stability is to be expected while the situation lasts.
When indexation was introduced by law in 1979, the Central Bank of Iceland published a composite Credit Term Index based on the existing Cost of Living Index and the Building Cost Index. In 1989, the Wage Index was added. In 1995 when the Act on Interest Rates and Indexation no. 38/2001, indexation is only allowed if the CPI is used.
The indexation of savings and credit is based on the Act on Interest Rates and Indexation no. 38/2001 with subsequent changes. The act states that savings and credit may be indexed if the indexation is based on the CPI. The decision to apply the CPI for indexation purposes is thus not made by Statistics Iceland which is mandated to compile the CPI in accordance with the CPI Act, No 12 1995, and international practice.
The use of the CPI for indexation purposes is always a political decision and there are of course other price indices which can be used. The decision to utilize the CPI alone for indexation was based on the arguments that it was an advantage to use a yardstick which is general in nature, comprehensive and recognized both within the country and abroad.