The estimation of the INPC at the municipal level: an analysis of three methodologies

Abstract

The consumer price index (CPI) for Mexico is estimated using representative information from 46 cities that belong to the 32 Mexican States, however, this information is not enough in studies at municipality level because up to 81% of the Mexican municipalities are left without a price index. This paper proposes three methodologies to assign prices at local level: i) assignation of prices using a regional price index; ii) assignation of prices using distance and infrastructure criteria; and iii) an econometric model based on the 19% of municipalities that have a price index. Results show that the three methodologies generate price indexes with a similar mean but different variance. A three step ahead forecast error is generated using data from the three methodologies. The results show that the minimum three step ahead forecast error is obtained using the regional price indexes.