The coronavirus pandemic has created major measurement problems for national statistical offices. Due to lockdowns in multiple countries, whole industries have been shut down and millions of goods and services that had been available to households and businesses have suddenly become unavailable. The resulting measurement problems are particularly acute for constructing the Consumer Price Index (CPI). This is the main measure of inflation and is used for multiple purposes, such as interest rate policy, and wage, business contract, and welfare payment indexation. Countries base the construction of their CPI on a fixed basket of goods that people typically buy. But with lockdowns the fixed basket has become almost totally irrelevant—we can’t buy many of those typical items. If consumer prices cannot be measured accurately, then after-inflation total consumption cannot be measured accurately either. Policymakers and the public will eventually lose confidence in such indices. This creates a crisis for policy and business decisions that rely heavily on these statistics.
The current advice from EuroStat, the International Monetary Fund, and the United Nations is for prices of the missing goods and services to be “carried forward,” that is, to use prices of goods from the most recent pre-virus period to construct inflation measures, even if the goods they are based on are unavailable now. The problem is that relying on this advice will introduce biases into economic statistics. The CPI will underestimate changes in the cost of living, and it will overstate after-inflation consumption growth.
Another complicating factor is that national statistical offices in virus affected countries have stopped sending employees to retail outlets to collect prices. Most agencies have switched to online pricing over the internet. The prices on the internet will not be the same as in-store prices. If a statistical agency is already using scanner data from retail chains, as some agencies already do, the problem is mitigated. For other agencies and for broader categories of goods, reorganizing historical methods for collecting and processing price data will be a huge challenge.
Estimates of GDP can be revised as improved information becomes available. However, estimates of the CPI cannot be revised due to legal difficulties with interested parties that use the CPI for contract indexation, especially many retirement payments. Once published, there is no taking back the estimates when better information becomes available. Economic statistics produced with incomplete data and methods that no longer suit their purpose can have irreversible real-world consequences.
In addition to new sources for price data, information on actual rather than historic expenditure patterns is required. The only way to produce a meaningful CPI within the lockdown period is through establishing a continuous consumer expenditure survey—measuring what and how much people are actually buying each month.
There is also a strong case for allowing the CPI to be revised as new information becomes available. At a minimum, at least one “experimental” and hence revisable CPI series should be published in addition to the CPI constructed using standard methodology.
This is an unprecedented situation. Without urgent action to improve measurement of key economic statistics, the information needed to guide economies through and out of the current crisis will be dramatically compromised. A consequence is that economic recovery may be delayed, meaning that the economic, health, and social pain may be more prolonged than necessary.
© Erwin Diewert and Kevin J. Fox
Erwin Diewert is Professor of Economics at the Vancouver School of Economics, University of British Columbia, Canada, and at the School of Economics, UNSW Sydney, Australia. He is a Research Associate of the NBER.
Kevin J. Fox is Professor of Economics at the School of Economics, and Director of the Centre for Applied Economic Research, UNSW Sydney, Australia. He is President-Elect of the International Association for Research in Income and Wealth.
Read more on the coronavirus crisis:
"Coronavirus and the labor market," by Daniel S. Hamermesh
"Fighting a coronavirus recession," by Daniel S. Hamermesh
"Pandemics and the labor market—Then and now," by Karen Clay
"Pricing the lives saved by coronavirus policies," by W. Kip Viscusi
"Health effects of the coronavirus recession," by Christopher J. Ruhm
"The long-term consequences of missing a term of school," by Simon Burgess and Hans Sievertsen
"Coronavirus, telecommuting, and the labor market," by Nikos Askitas
"Expectations about Covid-19 social-distancing measures in Italy and their impact on compliance," by Guglielmo Briscese, Nicola Lacetera, Mario Macis, and Mirco Tonin
"The coronavirus crisis and the next generation," by Bart Cockx
"Korea: A paragon of dealing with coronavirus," by Sok Chul Hong
"Economic implications of postponing the Tokyo 2020 Olympic Games," by Peter J. Sloane
"The sudden growth of employee autonomy during the coronavirus lockdown," by Elisa Gerten and Michael Beckmann
"Mitigating the work–safety trade-off," by Tito Boeri, Alessandro Caiumi, Marco Paccagnella
"Trading off lives for jobs," by Daniel S. Hamermesh
"Trends in Covid-19 infection: What New York City neighborhoods tell us," by George J. Borjas
"Labor markets during the Covid-19 crisis: A preliminary view," by Olivier Coibion, Yuriy Gorodnichenko, Michael Weber
"Did California’s shelter-in-place order work? Early coronavirus-related public health effects," by Andrew Friedsen, Drew McNichols, Joseph J. Sabia, Dhaval Dave
"200 billion hours to spend: The Covid-19 opportunity to upskill," by Peter Siminski, Emil Temnyalov
"The CARES Act—Massive government intervention in the economic crisis," by Richard Prisinzano
"What is happening to unemployment in the post-Covid-19 labor market?," by Katharine G. Abraham
"Measuring employment and unemployment—Primer and predictions," by Daniel S. Hamermesh
Please note:
We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.