Pakistan’s Consumer Price Index (CPI) is in the process of being rebased. Consultations for rebasing have begun and the plan is to change its base from 2007/08 to 2015/16; and thereafter every ten years. Before we briefly highlight some of the many pressing concerns that the rebasing exercise should take into account, allow us to bust a myth.
The myth so goes that the rebasing exercise is done to tweak statistics in the governments’ favour such that it shows lower inflation. However, according to Saghir Pervaiz, joint director at the central bank’s research department, the CPI rebasing does not lead to lower inflation. “If anything, it is quite the contrary,” he said while presenting at the workshop organized by the Pakistan Bureau of Statistics (PBS) last week.
But be that as it may, there are many methodological concerns that demand a certain amount of thinking by the society, or at least the key stakeholders. These methodological concerns pertain mostly to the data that is not captured by the index or to the index formula and/or related calculations. The first of those issues is discussed below; whereas some of the other key ones will be discussed tomorrow in the same space.
At present, the PBS measures prices of 487 items collected from 76 markets in 40 cities across Pakistan, which effectively means that the CPI only represents the urban consumption basket at the exclusion of the rural households.
This runs contrary to common sense. When 62 percent of Pakistan’s population lives in rural areas, then the national CPI should not only track urban consumption patterns to calculate inflation but also include rural economy.
It is true that developed economies like the US or Australia, for example, don’t have rural CPI. But then, their rural population is only 20 percent and 11 percent respectively, according to World Bank development indicators.
India, however, which has a rural population of 68 percent, compiles CPI for both urban and rural areas in each of its states. Their national CPI is then computed by merging urban and rural CPIs with appropriate weights.
Likewise, Bangladesh, with rural population of 67 percent, also has rural as well as urban CPI. In Indonesia too, which has a rural population of 48 percent, prices are collected from large cities and rural areas.
Aside from the population factor, rural CPI can also be used to deflate those components of national accounts that lie squarely in the rural economy, and therefore result in better measurement of the same.
Also, as World Bank’s lead economist Ghazala Mansuri, highlighted at last week’s workshop that if CPI is underestimating non-food inflation in rural areas then inflation and poverty may be substantially higher than what it is at the moment. Indeed this too, strengthens the argument for collecting price data in rural areas.
It is hoped that the PBS would at least consider having a separate rural CPI, if not have one national CPI inclusive of both urban and rural numbers.
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