‘Is the Carli Index flawed? Assessing the case for the RPIJ’

Date: 10 November 2016

This paper discusses the decision in March 2013 of the UK's Office for National Statistics to replace the controversial Carli index with the Jevons index in a new version of the Retail Prices Index - the RPIJ. In doing so we make three contributions to the way price indices should be selected for measures of consumer price inflation when quantity information is not available (i.e at the `elementary' level). Firstly, we introduce a new price bouncing test under the test approach for choosing index numbers. Secondly, we provide empirical evidence on the performance of the Carli and Jevons indices in different contexts under the statistical approach. Thirdly, applying something analogous to the principle of insufficient reason, we argue contrary to received wisdom in the literature, that the economic approach can be used to choose indices at the elementary level, and moreover that it favours the use of the Jevons index. Overall, we conclude that there is a case against the Carli index and that the Jevons index is to be preferred.