Consumer Price Movements – Implications for...
Transcript of Consumer Price Movements – Implications for...
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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