Are Integration and Comparison Between CPIs and PPPs Feasible?

Abstract

The integration and comparison between the Consumer Price Indices (CPIs) and the Purchasing Power Parities (PPPs) has been widely discussed in literature and the need of a more integrated approach for calculating these indices has been emphasized. The paper focuses on these issues, both from a theoretical and practical point of view, suggesting the use of a broader definition of the comparability of products for the PPP calculation and a simple statistical method for investigating the advantages of broadening the definition of comparability to include additional products in the PPP calculation. Concerning the comparisons between CPIs and PPPs, the paper illustrates price index decomposition methods in order to measure the factors (essentially due to the evolution of prices and to the share of consumption expenditure concerning the different products and services) which explain the divergences between the CPIs of two countries from time t−1 to time t, and the variations over the same period of the PPPs concerning these countries calculated at time t−1 and time t. However, it is clear that for achieving the integration of PPP computation with CPI activities an increased amount of information should be collected and processed at least in a benchmark year. Therefore, is necessary to carry out more research on these topics at an international level in order to agree on a broader definition of comparability of products for the computation of the PPPs by using the analyses that we have suggested in this paper.