Tests for price indices in a dynamic item universe

TL;DR

This paper develops five axiomatic tests tailored for price indices in a dynamic item universe, addressing issues of quality change and new goods, and evaluates existing indices against these tests.

Contribution

It introduces a new set of five explicit tests for price indices in dynamic environments and proposes a large index family that can potentially satisfy all tests.

Findings

No current index satisfies all five tests simultaneously.

The tests serve as a diagnostic tool for index appropriateness.

A large index family is outlined that could meet all tests.

Abstract

There is generally a need to deal with quality change and new goods in the consumer price index due to the underlying dynamic item universe. Traditionally axiomatic tests are defined for a fixed universe. We propose five tests explicitly formulated for a dynamic item universe, and motivate them both from the perspectives of a cost-of-goods index and a cost-of-living index. None of the indices satisfies all the tests at the same time, which are currently available for making use of scanner data that comprises the whole item universe. The set of tests provides a rigorous diagnostic for whether an index is completely appropriate in a dynamic item universe, as well as pointing towards the directions of possible remedies. We thus outline a large index family that potentially can satisfy all the tests.