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Uleac cost of living and inflation measurement in lebanon part 1

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  • 1. Session 2:Cost of Living andInflation Measurement in LebanonInaugural ConferenceUpgrading Lebanon’s Economic Analytical CapacityLebanese Economic Association - International Development Research CentreSeptember 23, 2010, Crowne Plaza Hotel, BeirutRima Turk-Ariss, Ph.D.Board Member,
  • 2. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 2OutlinePART ONE: Background on InflationPART TWO: Inflation in LebanonPART THREE: Inflation Working Group
  • 3. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 3PART ONE:BACKGROUND ON INFLATION
  • 4. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 4What is inflation?A rise in the general level of prices of goods andservices in an economy over a period of time. Each unit of currency buys fewer goods andservices.decay in the purchasing power of individuals.
  • 5. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 5Why do Prices Rise?• High inflation rates could be caused by anexcessive growth in the money supply.• Other causes are fluctuations in demand of goodsand service and/or changes in available suppliesof a product (scarcity).• However, long sustained periods of inflationgenerally result from the money supply growingfaster than the economy.
  • 6. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 6How Does Inflation Affect Us?• Implicit tax on income:– Lowers the value of money and income (reduces real wages)– Diminishes value of savings• Affects fixed pension funds• Redistributes wealth, increasing the gap between richand poor• Affects government revenues and expenses, leakinginto the financial budget and fiscal deficit• Reduces real GDP growth• …
  • 7. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 7• High inflation rates hurt the economy, but…• A low rate of inflation is also generally favored:– Low inflation reduces the severity of economic recessions• The task of keeping the rate of inflation low andstable is usually given to the monetary authority Rule Versus discretionary policy debate:– Monetarists favor price stability and inflation targeting by the centralbank (objective of most central banks up till the global financial crisis)whereas Keynesians favor interventionist policy (e.g recent stimuluspackages).How Does Inflation Affect Us?
  • 8. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 8How do we measure inflation?• Price indexes are designed to track inflation by measuringchanges in price level or cost of living at a particular date.– Indexation is used as a reference in order to make policy as wellas firm decisions.• A price index is used to aggregate detailed information onprices and quantities into scalar measures of their levelsor their growth.– CPI: a measure of the average price paid by consumers for abasket of consumer goods and services,– Other examples include PPI, Real Estate Price Index,Export/Import price index, GDP deflator.
  • 9. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 9PART TWO:INFLATION IN LEBANON
  • 10. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 10Inflation measures in LebanonFour main entities produce inflation measuresfor Lebanon:– The Central Administration of Statistics (CAS).– The Ministry of Economy and Trade (MoET)– The International Monetary Fund (IMF)– The Chamber of Commerce and Industry in Beirut(CCIB)– Consultation & Research Institute
  • 11. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 11Inflation measures in Lebanon• The Central Administration of Statistics (CAS) is theprincipal national institution responsible for measuringinflation in Lebanon.• CAS started tracking the price of consumer goods sinceDecember 1998.– It published a quarterly CPI since 1999 with the technicalassistance of IMF.– In 2007, the CPI weights were updated using the 2004Household Budget Survey. A new CPI began to be monthlyissued as of March 2008.
  • 12. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 12• CAS compiles the monthly prices of 50,000 goods at2,000 point of sales, grouping them into 12 time series.• The weights used by CAS show the averagehousehold’s expenditures on goods and services, nottaking into account the household’s size, income andsocial status.– Weights do not represent at all the expenditures of a typicalaverage household in Lebanon.Inflation measures in Lebanon
  • 13. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 13The CAS has started an initiative as of May 2008 tocompile its data according to internationally acceptedmethods.•The data coverage has been expanded to include thewhole country and not just Beirut and its suburbs.•An attempt has been made to impute housing rents intothe CPI.•CAS also has plans to produce a PPIInflation measures in Lebanon
  • 14. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 14Inflation measures in Lebanon• In 2000, the MoET started issuing a consumer priceindex based on around 650 items from varioussupermarkets nationwide.– MOET index suffers from weighting that dates back to 1997,supermarket misreporting, focusing on F&B mostly.• In the Private sector:– Chamber of Commerce and Industry in Beirut (CCIB)started a CPI in 1998, but discontinued it later.– Consultations and Research Institute has published amonthly CPI since 1978.
  • 15. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 15Inflation measures in Lebanon• IMF publishes figures on inflation in Lebanon basedmainly on figures that are estimated by the Centralbank and IMF employees, and not using CAS orMOET figures.• How do locally produced inflation measures correlatewith the IMF figures?– We divide our analysis in pre and post 2007, following theCAS change in inflation measurement
  • 16. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 16Annual Inflation Rate: 2004-2006Source: Adapted from Dr. Jad Chaaban, "Doing the Sums: A new approach to calculating inflation in Lebanon", Lebanon Opportunities, March 2008
  • 17. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 17Cumulative Annual Inflation: 2004-2006Source: Adapted from Jad Chaaban, "Doing the Sums: A new approach to calculating inflation in Lebanon", Lebanon Opportunities, March 2008.
  • 18. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 18Annual Inflation Rates: Post-2007Source: Author’s calculations from CRI, CAS, & IMF data.
  • 19. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 19Monthly Inflation Rates: Post-2007Source: Author’s calculations from CRI & CAS data.
  • 20. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 20Weights Applied  CRI ACSFood & Beverages 35.40% 22.00%Clothing & Shoes 6.55% 6.20%Housing 6.49% 25.70%Durable Consumer Goods 8.18% 3.90%Health 9.82% 6.80%Transport and Telecommunication 14.39% 17.10%Education 12.45% 7.70%Leisure 2.70% 6.40%Personal Care & Other Products 4.02% 4.20%Source: Thibault CRUZET, Bilan de l’inflation au Liban au 1ersemestre 2009, Ambassade de France.
  • 21. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 21What Do All These Figures Tell Us?• There is evidence to suggest that current measuresof inflation are conflicting.• Hence the need to revise national price data. • Why? Price shocks put the Lebanese economy in avulnerable position, and as such any policies totackle these price fluctuations must first be basedon reliable nationwide data.
  • 22. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 22PART THREE:INFLATION WORKING GROUP
  • 23. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 23Project Broad ObjectiveBuild on recent advances on inflation measurement inLebanon to construct a more comprehensive androbust inflation indicator for Lebanon.– Price Monitoring and Revision of DataTime Horizon: 2 years.
  • 24. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 24Specific Objectives1) Undertake a critical revision of available priceinformation in Lebanon, including public, private andinternational sources of information.2) Establish new price statistics from available data,when feasible, such as export-import price indexes,real estate price indexes, and producer price indexes.3) Develop a framework for price statistics to explainthe links between various price indexes and betweenprice indexes and other relevant economic statistics.
  • 25. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 25
  • 26. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 26Working Group CompositionThe working group will comprise 6 members from thefollowing organizations (mid and senior level civilservants) distributed as follows:- CAS: 2 persons- MoET: 1 person- MoF: 1 person- BdL: 2 persons
  • 27. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 27Working Group External Linkages• The Working Group will be open to all interestedorganizations, both public and private, in addition toacademia and international organizations, invitingthem to participate in its work program.• The Working Group activities are expected to receivewider exposure through discussion at relevantoutreach meetings and regular communication withinternational experts and groups using electronicmedia such as the Internet.
  • 28. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 28Working Group Activities• Attend 3 courses, each for duration of 5 days:- Statistical techniques for decision making- Analytical writing skills for reports and public policy briefs- Public economics principles and methodology.• Advance on the production of outputs during 5meetings in 2-day workshops each.• Participate in 2 project retreats (each for 2 days), andin 3 public consultations and outreach events (each for1 day).
  • 29. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 29Working Group Expected Output1) Analytical report on inflation measurement in Lebanon– Theory of indexes– Issues in inflation index construction– Available price statistics in Lebanon– Proposal for new price indexes2) A National Price Monthly Monitoring Newsletter:– Information about the various price indexes used– Trends in the evolution of prices– Expected impacts of price movements on other economicindicators in Lebanon
  • 30. LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 30Your thoughts?

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