The Laspeyres bias in the Spanish consumer price index

Abstract

The CPI compares the cost of acquiring a reference quantity vector at current and base prices. Such reference vector is the vector of mean quantities actually bought by a reference population, whose consumption patterns are investigated during a period tau prior to the index base period 0. This paper shows that unless the price change between these two dates is taken into account, the CPI ceases to be a proper statistical price index of the Laspeyres type. Among several negative consequences, the most important is that this omission produces a bias in the measurement of inflation: the 'Laspeyres bias'. Using Spanish data, the size of the Laspeyres bias is estimated at -0.061% per year, during 1992-1998. The Laspeyres bias in shorter time periods reached -0.122% per year in 1992, and -0.108 in 1997.