Changes in the prices of essential food items and other goods and services that are used commonly in households seldom go unnoticed. A quick trip to the market place or a brief conversation with a home maker will provide clues about the general trend of prices in any locale. However, anecdotal evidence and individuals' perceptions about the affordability of products cannot provide trustworthy benchmarks for economic planners.
Governments across the world need to quantify the general trend of prices that are faced by consumers for myriad purposes. Statistical estimates of variations in the prices of such items provide insights that are essential for evaluating the real value of wages and other incomes, and for monitoring affordability when viewed in relation with average household incomes.
This information also allows central banks to adjust their monetary stance with a view of curtailing inflation. Policy makers monitor price changes at different levels using various indices which are comprised of a sampling of goods and services that are relevant to that specified purpose.
In Pakistan, the Federal Bureau of Statistics (FBS) computes three different indices, for this purpose:
-- Consumer Price Index (CPI)
-- Sensitive Price Index (SPI)
-- Wholesale Price Index (WPI)
Perhaps the most commonly used indicator among these is the Consumer Price Index (CPI). According to the FBS website, CPI is "the main measure of price changes at the retail level. It measures changes in the cost of buying a representative fixed basket of goods and services and generally indicates inflation rate in the country".
When the CPI was calculated for the first time in 1948-49, its scope was restricted as a base for industrial workers only in Karachi, Lahore and Sialkot. However, since that time, the number of cities covered by the survey as well as the number of markets touched in each city has steadily been increased.
FBS data show that at present, the index is calculated based on information gathered from 40 cities of the country. It is worth mentioning here that from the ten biggest cities of the country (in terms of population), data from more than one market are gathered, while one market in each of the relatively smaller, remaining cities is also included in the exercise.
The CPI index has been computed using 1959-60, 1969-70, 1980-81, 1990-91, 2000-01 and 2007-08 as the base year; over successive periods in order to provide an accurate assessment of recent price trends. Along with the latest rebasing, the composition of the CPI index and its sub-groups is also altered, in August 2011. For this purpose, FBS conducted a "Family Budget Survey" in 2007-08 which covered 54,309 households in 65 cities so that it could better evaluate what goods should be added/ removed from the relevant data set and the relative weightages to be assigned to each item.
As a result of this survey, the number of items included in the CPI has been increased from 374 to 487. Presently, products and services included in the computation of the index are divided into the following groups:
-- Food and non-alcoholic beverages (includes non-perishable food items and perishable food items)
-- Alcoholic beverages and tobacco
-- Clothing and Footwear
-- Housing, water, electricity, gas and other fuels
-- Furnishing and household equipment, maintenance, etc
-- Health
-- Transport
-- Communication
-- Recreation and culture
-- Education
-- Restaurants and hotels
-- Miscellaneous
The classification and composition of these groups have been revisited in the revised CPI index, while their wieghtages have also been altered with a view of representing shifts in consumption patterns of the population using the United Nations' classification criteria entitled "Classification of Individual Consumption According To Purpose" (COICATP).
For instance, alcoholic beverages and tobacco have been listed separately from the food and non-alcoholic beverages so that changes in price levels of essential food items are not stifled by changes in the general price level of these items. Previously, the rent component used to be an estimate which was calculated using indices of prices of building materials and labour wages. However, FBS conducted a rent survey covering 39708 households for its base year and now gathers data on a quarterly basis from 6344 households, to track changes in house rent.
As can be seen from the illustration, the wieghtage of the food and non-alcoholic beverage group has been reduced while the contribution of communication and transport groups has been increased, as these services have proliferated among the population over the past decade.
Summarily put, the CPI index is an amalgamated "measure of weighted average of relative prices (current prices over base period prices expressed in percentage)". Since each item in the index has been assigned weights based on the relative proportion of the household budget spent on it; variations in the price of each item are depicted in accordance with its relative proportion in the average household's budget.
The rebasing of the CPI has tamed down inflation in July 2011 from the previous tally of 13.8 percent (calculated using the previous base year of 2000-01) to 12.4 percent. Likewise, inflation as recorded by the CPI in August 2011 stood at 11.56 percent, compared to the likely tally of 12.5 percent; had the previous base been used to evaluate the same price changes.
While the rebasing of the CPI has been a periodic exercise, the efforts undertaken to redress the composition of the index and its various sub-groups along with their relative weights; to make it a better representative of consumption patterns, is commendable and will hopefully provide more reliable estimates of the general price levels faced by consumers in the country.
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CPI grouping by Weight
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Rebased 2007-08 Group Weight (%)
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Food & non-alcoholic beverages 34.8
Non-perishable food 29.8
Perishable food 5.0
Clothing & footwear 7.6
Housing, water, electricity,
gas & other fuels 29.4
Transport 7.2
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Old base 2000-01 Group Weight (%)
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Food & beverages 40.3
Non-perishable food 35.2
Perishable food 5.1
Apparel, textile & footwear 6.1
House rent 23.4
Fuel & lightening 7.3
Transport & communication 7.3
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Source: FBS
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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