hermann remsperger : the evolution of inflation measurement : a central banker's view address by professor hermann remsperger, member of the directorate of the deutsche bundesbank, at the symposium “ hedonic methods in price statistics ” held in wiesbaden, 21 june 2001. * * * i five years ago, the boskin commission reminded us that inflation measurement is anything but simple. although experts had known many of the problems for quite a long time, it took the boskin report to reawaken public awareness. this forced statistical offices – and, of course, also central banks – to sit up and take note of the situation in their countries. the boskin report prompted the bundesbank, too, to devote more attention again to the problems of inflation measurement. in the mid - sixties, the bundesbank submitted a report to the federal fiscal court in which the following opinion was reached : “ in general, it should not be considered a reduction in the value of money if the cost - of - living index rises by, say, 1 per cent per annum ; and an annual increase of between 1 and 2 per cent in the index can be regarded as indicating a deterioration in the value of money only with certain reservations. ” in the bundesbank ’ s annual derivation of its monetary target, this factor was reflected in a medium - term price assumption of 1½ to 2 % per year. in 1998, our research group arrived at the conclusion that the range of uncertainty in measuring inflation in western germany is clearly below 1 per cent. there were hardly any thorough empirical studies on that topic for germany at that time. and not very much has changed in the meantime. yet this is exactly the reason why problems with measuring german prices will remain on our research agenda. we certainly do not wish to take the easy way out by doctoring inflation figures downward, nor do we wish to overstate germany ’ s real economic performance. instead, it is our duty to run reality checks on statistical methods, and to analyse their implications for economic policy in general and their importance for monetary policy in particular. this work is also important for the calculation of real aggregates in the national accounts. in our may 2001 monthly report, we presented the results of a new study on this topic. it shows how real growth would have developed in the second half of the nineties if us methods of calculating the national accounts had been applied in germany. the quantitative outcome of hedonic

methods lead to diverging results depending on the individual “ price collector ”. therefore, centralisation of quality adjustment is the path often proposed. however, this is out of reach at the european level for the time being. another way is to eliminate unreliable methods for quality adjustments so that the applied methods by individual “ price collectors ” will on balance result in unbiased estimates of the true price change. this is how germany has been trying to solve the problem, and this has also been eurostat ’ s method so far. in my view, the pragmatic approach should be carried out very carefully with all relevant parties cooperating in a network of experts. what i mean here – among other things – is accompanying research on a permanent basis. official methods have to be checked against potential alternatives. hedonic price indices should be thoroughly developed and assessed. at the end of the conference, we may be better able to answer the question as to how far hedonics can be used to generate indices in a timely manner. at any rate, there is much to be done regarding quality adjustment in price statistics. but before you go back to addressing the quality of price statistics tomorrow, it is now a pleasure for me to invite you to test the quality of our buffet. unlike in the use of hedonics, here “ there is a free lunch ”.