The deflation of the annual household final consumption expenditure in Italian National Accounts: the chain-linking approach

The deflation method that Italian National Accounts (NA) has adopted since the 2000 benchmark is based on moving-base deflators, so that deflating NA aggregates now means expressing them at the precedent year prices. The moving base deflators are the first step to calculate the chain linked deflators and then to obtain the annual household final consumption expenditure expressed at a base year prices (2000). Before the 2000 benchmark, the deflation system was based on a fixed-base approach. The use of chain indices is recognised as representing a superior method to deflate NA aggregates,especially in periods of structural change and rapid movements of relative prices. The actual movements of prices (or volumes) from period to period are measured by the moving base indices, that take into account all the modifications occurred between two consecutive periods. Changes in prices (or volumes) between periods that are separated in time are then obtained by cumulating the short-term variations or, in other words, by linking the indices between consecutive periods, to form “chain indices”. The main disadvantage of the chain indices is represented by the loss of additivity, as it will be discuss in the next paragraphs. This paper will focus on the particular method set up to express household final consumption expenditure at the precedent year prices.