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Wednesday, 7 September 2011

Daily Consumer Price Index - Part 2

Daily Consumer Price Index - Part 2

Daily inflation–indexing monetary items is thus not a new concept. Chile is the country which is closest to inflation–indexing its money supply. 30–Day deposits are not inflation–indexed. 20 to 25% of Chile´s broad M3 money supply is inflation–indexed on a daily basis in terms of the UF according to the Banco Central de Chile.


The Consumer Price Index is an example of a non–monetary general price level index. The annual percentage change in the CPI indicates the annual rate of inflation. The CPI for a particular calendar month is normally published in the second or third week of the next month.

A daily instead of a monthly general price level index is required to implement financial capital maintenance in units of constant purchasing power during inflation and deflation (Constant Item Purchasing Power Accounting). Using the CPI published monthly may result in sudden increases or decreases in values on the date the new CPI is published. A Daily CPI which is a lagged daily interpolation of the CPI solves this problem. The UF is a very successful monetized daily indexed unit of account used in Chile during the last 44 years and was copied by Ecuador, Mexico and Columbia. (See Shiller, 1998, p6.)

Constant Purchasing Power Accounting (CPPA) during hyperinflation requires either a daily parallel hard currency exchange rate – normally the daily US Dollar parallel rate – or a Brazilian style Unidade Real de Valor daily index primarily based on a daily parallel hard currency rate. The URV was an excellent daily index published by the government during hyperinflation in Brazil because it was mainly based on the US Dollar parallel rate (a hard currency parallel rate is essential during hyperinflation which is an exceptional circumstance), but, the CPI was also included in the formula.

The CPI is the weighted average index value of a typical basket of consumer goods purchased by a typical consumer statistically stated as a non–monetary initial index value of 100 at the start date. The CPI is thus fixed in real terms – not in nominal terms. It changes monthly in nominal terms, but, it stays fixed in real terms.

An example is the harmonized consumer price index of the Euro Area stated as the non–monetary index value of 100 in 2005. This fixed internal unit of real value is then compared to the weighted average price of the typical basket of consumer goods and services a year later in order to determine the annual rate at which inflation is eroding the real value of only money and other monetary items in only the monetary economy or deflation is creating real value in only money and other monetary items in only the monetary economy. Inflation and deflation have no effect on the real value of non–monetary items. The same is true for hyperinflation.

The stable measuring unit assumption (not inflation and hyperinflation) erodes the real value of constant items never maintained constant (never measured in units of constant purchasing power in a double–entry accounting model where the real value of capital is equal to the real value of net assets) during inflation and hyperinflation under the Historical Cost paradigm. Similarly, it is not deflation, but, the stable measuring unit assumption that creates real value in constant items never maintained constant (qualified as per the previous sentence) during deflation under HCA.

The annual percentage change in the CPI indicates the annual rate at which only the real value of the national (or monetary union, e.g. the European Monetary Union) monetary unit and other monetary items is being eroded by the economic processes of inflation and hyperinflation or being increased by the economic process of deflation.

A Daily Consumer Price Index is a lagged daily interpolation of the CPI based on the formula to calculate the daily price of a government inflation-indexed bond in a particular country, e.g., the formula used to calculate the Unidad de Fomento in Chile or the formula to calculate the daily price of TIPS in the US.



Every country which issues inflation-indexed government bonds has a Daily Consumer Price Index based on the respective CPI. In practice, a DCPI is used to inflation–adjust monetary items, to update historical variable items and to measure constant items in units of constant purchasing power under Constant Item Purchasing Power Accounting; i.e. financial capital maintenance in units of constant purchasing power during inflation and deflation as authorized in International Financial Reporting Standards (IFRS) in the original Framework (1989), Par 104 (a).

The Unidad de Fomento in Chile is the most successful monetized daily indexed unit of account to date.

A DCPI is calculated and published daily, for example, the UF published daily by the Banco Central de Chile. The monthly published CPI for the first day of any month is only available – at the earliest – round–about the tenth of the next month: up to 41 days later. The SA CPI for the first of the month can become available up to the 24th of the next month: i.e. up to 55 days later. This is very impractical for daily financial capital maintenance in units of constant purchasing power.

The Daily Consumer Price Index - Part 3

Nicolaas Smith

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