ZEW Study on the Reform of Price Measurement Methods: Transparent Statistics Help Economic Policies Hit their Targets

Is the growth rate in the United States in reality not much higher than the German growth rate? Is it possible that the German inflation rate is at a lower level than official statistics indicate?

How can analysts takequality improvements in new cars or computers into account if the price of the new model has not increased or even decreased compared to the price of the previous model? These are just some of the many issues that were discussed by 110 renowned researchers and numerous representatives from statistical offices from 24 different countries at an international conference organised by the German Federal Statistical Office in collaboration with the Mannheim Centre for European Economic Research (ZEW).

According to the research findings, quality changes have a significant impact on price development. This effect holds for a great number of goods. However, improving quality adjustments in price statistics can result in both higher and lower estimations. While traditional methods tend to overestimate price increases in the IT sector, price changes in the clothing industry tare generally underestimated.

In contrast to the US, statistical analyses in many Europeans countries, including Germany, do not accurately reflect quality changes of certain goods and services. This can compromise the validity of price and quantity indices in official statistics. Within the framework of the tariff negotiations that are currently under debate, special attention is given to the development of inflation. In this respect, inaccurate baseline figures can lead to false conclusions. This is why it is crucial to take quality changes into account in price statistics. During the conference, all participants agreed that the efforts to introduce hedonic methods in official statistics should be intensified. This has the potential to not only bring about greater transparency in the future, but also provide a more realistic picture of the economic situation in Germany.

According to the American economic researcher Jack Triplett from the Brookings Institution and Wolfgang Buchwald from the German Federal Statistical Office, the introduction of new methods and statistical tools could come at the cost of considerable financial and staffing resources as well as additional expenses for qualification schemes. Buchwald also pointed out that expectations regarding hedonic price indices are often unrealistically high. Simulation calculations carried out by the Federal Statistical Office indicate that introducing hedonic methods in Germany would result in only minor differences compared to the traditional price indices used for inflation and growth rates. Tripplet also stressed that the value of more accurate and transparent statistics is that they will provide a more accurate measure to quantify the contribution of technological progress to growth and productivity of an economy. In the long term, these methods could ensure business activities and economic policies greater success in hitting their intended targets.

With regard to the development of hedonic statistics over the next ten years, Paul Schreyer from OECD and John Astin from Eurostat explained that it might be necessary for the statistical offices across Europe to cooperate with one another in order to ensure that this desired harmonisation becomes a reality. This could be especially beneficial in terms of international comparability. In particular, countries with similar statistics could benefit from increased collaboration since this might reduce the costs associated with the introduction of hedonic methods. As a first step, the reform should include improvements to product indices. The development of more suitable indices for the service sector is, however, equally important.

Contact

Dietmar Moch, E-Mail: moch@zew.de