# Index shows how HK families spend their money

PUBLISHED : Tuesday, 29 June, 1993, 12:00am
UPDATED : Tuesday, 29 June, 1993, 12:00am

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THE Consumer Price Index (CPI) serves as an indicator of the price level of goods and services purchased by households for daily consumption.

You must have heard about inflation rate. It is calculated as the rate of increase of the CPI in a certain reference period over that in the same period a year ago. How do we actually compile the CPI? First, determine a fixed basket of goods and services commonly purchased by households; second, carry out a continuing pricing survey to find out the cost of this basket of goods and services.

A basket of goods and services is determined on the results of ''Household Expenditure Surveys'' (HES). For this conceptual basket, we are particularly interested in the relative amounts of money spent on different types of goods and services.

The HES is carried out once in five years. Households covered by the HES are divided into three groups - at lower, medium and higher expenditure levels.

Households at the lower expenditure level are likely to spend a larger proportion of their money on daily necessities, while those at the higher expenditure level would spend more on other items such as clothing and services.

Correspondingly, three CPIs are produced - CPI (A), CPI (B) and Hang Seng CPI - which relate closely to those three groups of households. Their movements will in time respectively show the different impact of price changes on the different groups of households.

The expenditure pattern of households covered by CPI (A) is shown in the chart below.

What about the pricing survey? Prices of representative items of goods and services are collected from many different types of retail outlets and service providers.

With the necessary data available, item indices reflecting the price movements of individual items of foods and services are first compiled. An item index is obtained by comparing the current price level of the item with the corresponding price level in the base period (i.e. a period chosen as a common reference).

The index takes the value of 100 in the base period. For example, if the price of an item has increased 10% since the base period, then the item index will be 110.

The CPI, let's say CPI (A), is compiled by taking a weighted average of all the item indices. At right is a simple example illustrating the basic method used in the compilation of the CPI.