Consumer Price Movements – Implications for Welfare

Sohail Jehangir Malik Chairman

Innovative Development Strategies (Pvt.) Ltd.

With thanks to Amna, Asma, Asjad, Hina and Wajiha

Pakistan Strategy Support Program Annual Conference December 13, 2012

Pakistan Today: An Economy in Crisis

Terrorism Political Unrest Poor Economic Management ◦ growing deficit, rising prices, increasing unemployment

Energy Crisis Shutdowns and Rising Unemployment Natural Disasters Serious Economic Downturn

.

Increasing Unemployment, Underemployment and Rising

Prices resulting in loss of welfare

Ability to Accurately Measure Consumer Price Movements in

Essential for Effective Economic Policy Making

The Consumer Price Index is used for: • the indexation of

– wages – rents – contract payments – social security payments

• the deflation of household consumption in the national accounts

• macroeconomic indicator: – especially for inflation targeting and managing

money supply – setting interest rates – Establishing Purchasing Power Parity etc. etc.

Most Importantly It has been used by the Government in Extrapolating

the Poverty Line to estimate the Incidence of Poverty

This also makes the CPI a highly politically sensitive measure

Trends in Monthly CPI (July 2008 to April 2012)

Source: Pakistan Bureau of Statistics (various issues)

100

110

120

130

140

150

160

170

180

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

CPI (

2007

-08=

100)

112

168

56 point increase since Jul 08

Real Wages of Skilled and Unskilled Workers

Source: Pakistan Economic Survey 2010-11

0

50

100

150

200

250

300

350

40019

93

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2008

2009

2010

2011

Rs/d

ay

Mason

Unskilled worker

Real household consumption expenditure in Pakistan remained more or less stagnant or declined

Source: HIES (various issues), PRHS for 2012 For real expenditure (2000-01=100)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2001-02 2004-05 2005-06 2007-08 2010-11 2012

Rs p

er m

onth

Nominal

Real

Source: Government of Pakistan Economic Survey 2011-12

Changes to the CPI Methodology in 2011-12

CPI rebased from 2000-01 to 2007-08

• Basket of commodities increased from 374 to 487 items

• Commodity groups from 10 to 12. • Coverage of cities increased from 35 to 40 • Food group weight reduced from 40.3 percent

to 34.8 percent • 21 items in the old basket dropped • 111 new items have been added

Elements of Change of Base Year

2000-01 to 2007-08

• Revision to commodity groups • Weights derived from Family Budget Survey

2007-08 • Coverage of items to capture the changing

pattern of consumption of the people.

Family Budget Surveys of Pakistan • Last one conducted in 2007-08 next one due this year

– 54,309 households – 65 cities. – 487 commodities

• In addition recorded: – prices from 40 urban centers – 1 to 13 markets surveyed in each – four quotations in each market

• “markets are selected on the basis of the volume of sales, assuming that majority of the consumers buy goods from these markets”. Price data collected on monthly basis according to a predetermined time schedule.

• Survey is Urban • Sampling Frame, Coverage, Questionnaire NOT available

in Public Domain

Theoretically: four categories of biases are possible

• Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.

• Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.

• Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.

• New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

Source: Boskin Commission, 1996

Expenditure Shares – Family Budget Survey and Household Income Expenditure Survey 2007 - 08

Food Clothing Housing Health Transport

Communication

Education

Miscellaneous

Family Budget Survey 34.83 7.57 29.41 2.19 7.2 3.22 3.94 2.76HIES Pakistan 43.61 6.62 23.61 3.69 8.26 2.21 2.33 2.63HIES Urban 36.82 5.87 28.86 3.12 8.34 2.66 3.32 2.82HIES Rural 50.6 7.38 18.2 4.27 8.19 1.75 1.3 2.43

0

10

20

30

40

50

60

Perc

enta

ge (%

)

The Family Budget Survey Underestimates the share of Food

Expenditures by nearly 9 percentage points

Further - Survey data indicate the average share of food expenditure in household consumption

expenditure shows a sharp increase since 2007-08

Source: HIES (various issues), RHPS for 2012

42

44

46

48

50

52

54

56

58

2004-05 2005-06 2007-08 2010-11 2012

% sh

are

This Biases the CPI downwards since Food Prices historically have

risen more sharply than other prices and

remember also that the poor spend a higher proportion of their

expenditures on food.

Changes in General and Food Price Indices

2006-07to 2007-

08

2007-08to 2008-

09

2008-09to 2009-

10

2009-10to 2010-

11

2006-07to 2010-

11

2007-08to 2010-

11General 12 20.8 11.7 13.9 72.2 53.7Food 17.6 23.7 12.5 18 93.1 64.1

0102030405060708090

100

Year

ove

r Yea

r Cha

nge

(%)

Trends in CPI and FPI

2006-07 2007-08 2008-09 2009-10 2010-11General 89.3 100 120.8 134.9 153.7Food 85 100 123.7 139.1 164.1

0

20

40

60

80

100

120

140

160

180

Inde

x

Detailed Statistical Tests based on the HIES 2010 2011 Data Indicate Significant Differences in Prices

within and across rural and urban areas

The CPI Methodology does NOT cover

Rural Areas

Rural Urban Prices Differences (Rs per Kilogram) – HIES 2010-11

Urban Rural t-testWheat and Wheat f 29.8 28.5 21.78*Rice and Rice flour 63.7 58.8 17.21*Milk 49.4 44.6 29.88*Yogurt 59 49.8 28.09*Cooking oil 150.6 153.5 -4.17*Beef 234.7 222.5 12.86*Mutton 409.4 394.7 5.35*Potatoes 26.8 27.5 -4.37*Onion 32.8 34.4 -5.99*Banana 32.1 30.8 4.80*Sugar 74.3 76.5 -14.29*

The Economic Survey 2011-12 recognizes the importance of food prices – some quotes

• “Food carries the largest weight and hence influences the movement of the indices with a slight variation in prices”

• “The most visible impact of rising food prices on economy is acceleration of inflationary pressure – In such a situation controlling the inflation becomes

unmanageable” • “We are experiencing double-digit inflation over the

last several years mainly due to increase in prices of food”.

• And yet the CPI understates the weight of food expenditures and does NOT cover the rural areas where the share of food expenditures is higher

Changes in Key Commodity Prices

Wheatflour

Moongpulse

Redchillies Sugar Fresh

milk General Food

2006-07 to 2007-08 32.5 -6.8 56.2 -12.3 14 12 17.62007-08 to 2008-09 41.9 -4.9 -1.7 38.7 20.3 20.8 23.72008-09 to 2009-10 12.2 55.7 4.9 47.5 15.6 11.7 12.52009-10 to 2010-11 2.7 74.9 51.1 27.3 18.4 13.9 182006-07 to 2010-11 116.7 141.4 143.3 128.3 87.5 72.2 93.12007-08 to 2010-11 63.6 159.1 55.8 160.5 64.5 53.7 64.1

-40-20

020406080

100120140160180

Perc

enta

ge C

hang

e (%

)

Food Prices are critical for Food Security, hunger and poverty

Food price inflation is the most regressive of all taxes—it hurts the poor

the most.

Asian Bank 2008 simulation estimates for Pakistan……….

• 10% increase in food prices = additional 7.05 million poor people 20% increase in food prices = 14.67 million additional poor people

• 30% increase in food prices = 21.96 million poor people

“Currently 77 million people, almost half the population, is food insecure in Pakistan - daily calorie intake below the minimum recommended level” -Report of the Prime Minister’s Task Force on Food Security (2008)

The situation in 2011 is more urgent

Nearly half the Population of Pakistan was declared Food Insecure in 2008 after the food price hike!!!

Pakistan is amongst the 26 countries having serious/alarming levels of hunger (2011 GHI - IFPRI)

“Food policy dilemma” - promoting high prices for producers or low prices for

consumers?

• Market interventions are not costless – and can result in substantial government subsidies and efficiency losses

• There is a mismatch between objectives (producer and consumer price levels and stability, availability of grain for distribution programs, minimum stock levels, etc.) and policy instruments (procurement and sales prices, levels of government imports, etc.)

Wheat is central to Food Security in Pakistan

• Wheat accounts for over 55 percent of total caloric consumption

• Poor households spend 24 percent of food expenditure on wheat

• 26 percent of total households produce wheat and 97 percent households consume wheat.

• Among the wheat producers – 21.6 percent are the net buyers – 18 percent are the net seller of wheat

• An increase in wheat price benefits only the net sellers of wheat

Source: HIES 2010-11

Careful, Unbiased and Accurate recording and reporting of

consumer price movements is essential for ensuring policies to

promote the welfare of the people

Recommendations

• Revise and update the methodology for Constructing the CPI to – Reflect the actual (higher) weights of the Food

Expenditures – Reflect the Rural Sector weights and prices

• HIES Categories are not according to the classification of individual consumption according to purpose (COICOP) – which is followed by the Family Budget Surveys – make these consistent

• Test for and continuously remove the potential biases that can exist in calculating the CPI

Key References • GOP (2012). Methodology of price collection and computing price

indices. Pakistan Bureau of Statistics. March 2012. http://www.pbs.gov.pk/content/methodology-0

• Government of India (2010). Manual on Consumer Price Index 2010. Ministry of Statistics and Programme Implementation. Central Statistics Office, New Delhi. www.mospi.gov.in

• Government of Pakistan (2012). Economic Survey 2010-12. Ministry of Finance. Islamabad.

• Pakistan Bureau of Statistics (2007-08). Household Integrated Economic Survey 2007-08.

• UN (2009). Practical guide to producing Consumer Prices Indices. ECE/CES/STAT/NONE/2009/2. www.unece.org/stats/publications/Practical_Guide_to_Producing_CPI.pdf

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