Higher-Level Aggregation Using Long-Term Links in the Swedish CPI

Statistics Sweden employs a unique approach to higher-level aggregation of the Consumer Price Index (CPI). In the Swedish method, so-called “long-term links” are used to incorporate contemporaneous weight information into the index with a two-year lag. We compare this approach to the more standard method used for the European Harmonized Index of Consumer Prices (HICP), as well as to a long-term link variation of the HICP methodology. Our main focus is on year-on-year rates of change. This is motivated by the fact that, while long-term links by construction should improve the measurement of price change over longer time periods, effects on year-on-year inflation are less clear. In a simulation study performed on Swedish data, inflation rates are evaluated against a common benchmark measure. Several types of decompositions are also derived to help further explain differences and similarities between the methods.