Inconsistencies in Comparing Relative Prices over Time: Patterns and Facts

Purchasing power parities (PPPs) aim to measure relative price levels across countries, like inflation aims to measure relative price levels over time. Ideally, the change in PPPs over time should be consistent with relative inflation, but in practice inconsistencies tend to be substantial, which leads to uncertainty about the relative size of economies or about inflation in countries such as China. In this paper, we look for patterns in the PPP data to better understand when and where inconsistency is a more serious problem. We find smaller inconsistencies for more recent PPP comparisons, for countries that are more similar in terms of income levels and expenditure patterns, but larger inconsistencies for consumption products where measurement challenges are larger. We also find that inconsistencies that distort the international income distribution are uncommon. More frequent PPP surveys are unlikely to decrease inconsistency considerably.