Looking back on 100 years of the index

Consumer prices
Looking back on 100 years of the index

The consumer price index (CPI) is 100 years old. The consumer price index (then called the retail price index) was published for the first time on 29 February 1920. Statbel, the Belgian statistical office, calculates this index every month and summarises its history for you.

What is the consumer price index?

The consumer price index is an economic tool that measures the price changes of a range of goods and services representative of household spending patterns. This is also the main measure of inflation. The CPI also forms the basis for indexing pensions, social benefits, rents, wages and salaries in Belgium via the smoothed health index, also called the smoothed index (= the average value of the health indices of the last 4 months multiplied by a factor, where appropriate).

A selection is made, the so-called “basket” of goods and services that is systematically updated in order to closely follow the evolution of the cost of living. Every year, new products and services are added and other less representative products and services are removed. These items are weighted based on their share in the total expenditure of households. The selection and weighting of the items is based on Statbel’s Household Budget Survey (HBS), a biennial survey that analyses the expenditure patterns of the households.

How did the index come into being?

Before the 20th century, the Belgian economy barely experienced inflation and the prices of the most important consumer goods remained virtually stable. The outbreak of the first World War brought about spectacular price developments, which caused social unrest during the war years and subsequent years of economic crisis. The Minister of Industry, Labour and Supply at the time proposed an objective measuring instrument to follow the evolution of retail prices. This is how the first index of retail prices was created in 1920, with April 1914 = 100 as basis. This first index was calculated using 56 products (mainly food products) collected in 59 localities (cities and municipalities).

Reforms between 1920 and 1994

The Index Commission of Retail Prices was established in 1935. This new advisory commission consisted of representatives of employees' and employers' associations and scientists. In 1939, the definition of 13 products was modified and 3 localities were added. The main methodological innovation was that each locality was given a weighting coefficient based on the population figure. In 1945, the responsibilities of the Index Commission were extended to include the study of household expenditure (which will lead to the creation of the household budget survey). The 1955 reform extended the basket with a.o. 5 additional services (haircut, public transport,...) based on a first limited household budget survey. The 1968 reform doubled the number of products and services in the basket. Furthermore, this was the first reform based on a sound household budget survey. The fourth major reform (1976) again provided for a doubling of the number of products and services, each being given a weighting coefficient for the first time. Rents and pharmaceutical products were also included for the first time. The main feature of the fifth reform (1984) was the improvement of the specific calculation methods for certain products. This was also the case for the sixth reform (1991), besides the usual update of the basket of products and services as to their weighting.

1994: the health index

From January 1994 onwards, an additional index is calculated: the health index. This is in fact a more limited version of the index basket without tobacco, alcohol and motor fuels. Not only wages and social benefits, but also rents and insurance premiums, were linked to the health index instead of the consumer price index.

Reforms of 1998 and 2006

Since January 1997, every Member State of the European Union has to calculate a harmonised index of consumer prices (HICP). The HICP is used to uniformly compare inflation rates in the EU Member States. It is used by the European Central Bank in its monetary policy. The HICP used the new international classification system of consumption expenditure: the COICOP nomenclature (Classification Of Individual COnsumption by Purpose). In the Belgian CPI, this classification was adopted from 1998 onwards, moving from an initial 4-group classification to an 8-group classification to a 12-group classification.

In the framework of the 2006 index reform, it was decided to carry out a biennial update, removing less representative products from the basket and adding new ones if they represent a significant share of the spending pattern.

Current index: 2014 reform

Until the reform of 2014, the consumer price index was a fixed-base Laspeyres index. Prices were compared to those of a fixed base year and the weights of all main groups and subgroups remained unchanged over a longer period of time. As a result, the weighting scheme, which must be in line with the consumption pattern of Belgian households, has become less representative over the years.

Since January 2014, the consumer price index is a chain index: there are no longer any fixed reference years. In practice, this means that the prices of the 12 months of the current year are each time compared with prices from December of the previous year. This means that an annual update of the index is possible, not only in terms of weighting scheme and selection of products and services, but more importantly also in terms of methodology.

In recent years, some important methodological innovations have been implemented, mainly in the use of big data. From January 2015, in addition to the traditional price recordings by surveyors, scanner data from department stores are also used, and since 2019 web scraping is also used in the calculation of the CPI. This is a method to automatically collect prices on websites. Today we calculate 28 % of the weight of the index basket based on scanner data and web scraping.

By using these new techniques, the index basket consists today of 235 product groups and several thousand goods and services, a big difference from the first basket of 56 products from 1920.