The much awaited rebasing and reassigning of weights for the Consumer Price Index (CPI) has reportedly been approved by the Pakistan Bureau of Statistics’ (PBS) relevant council. Of the daily dose of flack which the government has been receiving of late, most of it has revolved around inflation, which is measured by the CPI. The importance has been felt at the very top with ministers putting emphasis on the need to have a system in place that correctly reflects changes in price across quintiles, especially in the energy prices.
That the PBS will also compute inflation for rural areas, is a welcome move. But the real deal will be the basket of goods, the assigned weights, and the computation methodology. Making the CPI basket public for starters, would not hurt. What will hurt though is the continuation of computation methodology across key consumption categories – house rent, electricity and gas to name a few.
The case of gas price increase is most relevant and should single-handedly be reason enough for the computation methodology to change. There must be numerous statistical formula and techniques to arrive at a more reasonable price change, in cases where consumption varies hugely across quintiles and categories – than simple average. Using simple average, the PBS arrived at 85 percent increase in gas price, that too after downward revision from 102 percent. Using common sense and consumption based weighted averages; the PBS would have arrived at 28 percent increase in gas price. What has followed since is well documented – as CPI, rightly or wrongly, continues to be the single most important variable when determining interest rates.
The electricity prices also went up in January 2019. The impact was computed at 8.5 percent – much closer to the weighted average impact of 7.7 percent. Not that the PBS did it right that time, it was only because power tariffs in most categories remained unchanged, and the increase was not higher than 15 percent in the extreme case. Had the highest slab for power, consuming less than 4 percent of all domestic power consumption, gone up by the infamous 143 percent, the impact based on simple average would have been 46 percent – and the impact on CPI in percentage points up from 0.3 to 2.
On top of it all, electricity and gas consumption numbers are well documented to the most granular detail, across consumption categories and cities. The Household Integrated Economic Survey (HIES) 2015-16 tabulated the electricity consumption in good detail. One would expect sizeable errors in such surveys, but the total electricity expenditure for FY16 worked back from HIES 2015-16 comes exactly at the actual value of domestic power revenues at Rs480 billion. The PBS and the relevant ministry would do well to iron out the shortcoming, for inflation, leads to decisions of critical value, and the impact could result in billions of dollars.
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