Abstract
Research background: The Consumer Price Index (CPI) is a basic, commonly accepted and used measure of inflation. The index is a proxy for changes in the costs of household consumption and it assumes constant consumer utility. In practice, most statistical agencies use the Laspeyres price index to measure the CPI. The Laspeyres index does not take into account movements in the structure of consumption which may be consumers' response to price changes during a given time interval. As a consequence, the Laspeyres index can suffer from commodity substitution bias. The Fisher index is perceived as the best proxy for the COLI but it needs data on consumption from both the base and research period. As a consequence, there is a practical need to look for a proxy of the Fisher price index which does not use current expenditure shares as weights.
 Purpose of the article: The general purpose of the article is to present a hybrid price index, the idea of which is based on the Young and Lowe indices. The particular aim of the paper is to discuss the usefulness of its special case with weights based on correlations between prices and quantities.
 Methods: A theoretical background for the hybrid price index (and its geometric version) is constructed with the Lowe and Young price indices used as a starting point. In the empirical study, scanner data on milk, sugar, coffee and rice are utilized to show that the hybrid index can be a good proxy for the Fisher index, although it does not use the expenditures from the research period.
 Findings & Value added: The empirical and theoretical considerations con-firm the hybrid nature of the proposed index, i.e. in a special case it forms the convex combination of the Young and Lowe indices. This study points out the usefulness of the proposed price index in the CPI measurement, especially when the target index is the Fisher formula. The proposed general hybrid price index formula is a new one in the price index theory. The proposed system of weights, which is based on the correlations between prices and quantities, is a novel idea in the price index methodology.
Highlights
The Consumer Price Index (CPI) is a basic, commonly accepted and used measure of inflation
In the case of the so-called “traditional data collection,” statistical agencies use the Laspeyres (1871) price index to calculate the CPI (see Clements and Izan (1987) or White (1999)).The Laspeyres index does not take into account movements in the structure of consumption which may be consumers' response to price changes during a given time interval
The values of the above-mentioned price indices were determined for the annual time segment using information about consumption lagged by one year compared to the base period (τ =Dec, 2017)
Summary
The Consumer Price Index (CPI) is a basic, commonly accepted and used measure of inflation. The CPI is important in the monetary policy if the central bank uses the direct inflation targeting strategy. It has been in force in Poland since 1999, and the CPI has been the reference indicator from the beginning. Please note that this kind of CPI bias results from changes in relative prices of individual goods included in the CPI basket. Apart from the fact that many central banks use the direct inflation targeting strategy, in many countries (including Poland), the CPI index is used for the valorization of pensions and for indexing financial contracts, including interbank ones. The CPI estimation should be as accurate as possible and the reduction of the CPI measurement bias by even a per mille has financial significance
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