Affiliations: [a] Department of Economics, University of British
Columbia, Vancouver, B. C., Canada V6T 1Z1. E-mail:
diewert@econ.ubc.ca
Abstract: The paper considers the use of a Consumer Price Index (CPI) for three possible
purposes: (1) as a Cost of Living Index (COLI); i.e., as a measure of the
relative cost of achieving the standard of living when facing two different sets
of prices for the same group of commodities; (2) as a consumption deflator;
i.e., the price change component for a decomposition of a value ratio into price
and quantity components and (3) as a measure of general inflation. The
theoretical concepts suitable for the first two purposes are laid out and the
problems involved in finding practical approximations to the unobservable
theoretical constructs are discussed. The concept of a conditional cost of
living index is also discussed; this type of index holds constant various
environmental factors. The problems involved in aggregating over groups of
consumers are also discussed. Finally, the differences between the harmonized
index of consumer prices used in the European Union to measure general inflation
and a COLI are discussed.
Keywords: inflation, index numbers, superlative indexes, consumer price indexes, cost of living indexes, deflation, harmonized indexes of consumer prices, pure price indexes, conditional cost of living indexes, aggregation over households
