Consumer Price Movement: Implications for Welfare by Sohail Malik, Innovative Development Strategies Ltd
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 inEssential 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 usedby 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) 180 170 168 160 CPI (2007-08=100) 150 56 point 140 112 increase since Jul 08 130 120 110 100 Sep-08 Sep-09 Sep-10 Sep-11 Mar-09 Mar-10 Mar-11 Mar-12 Jul-08 Jan-09 May-09 Jul-09 Jan-10 May-10 Jul-10 Jan-11 May-11 Jul-11 Jan-12 Nov-08 Nov-09 Nov-10 Nov-11Source: Pakistan Bureau of Statistics (various issues)
Real household consumption expenditure in Pakistan remained more or less stagnant or declined 18,000 16,000 Nominal 14,000 Real 12,000Rs per month 10,000 8,000 6,000 4,000 2,000 - 2001-02 2004-05 2005-06 2007-08 2010-11 2012Source: HIES (various issues), PRHS for 2012For real expenditure (2000-01=100)
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
The Family Budget Survey Underestimates the share of FoodExpenditures by nearly 9 percentage points
Further - Survey data indicate the average share of food expenditure in household consumptionexpenditure shows a sharp increase since 2007-08 58 56 54 52 % share 50 48 46 44 42 2004-05 2005-06 2007-08 2010-11 2012Source: HIES (various issues), RHPS for 2012
This Biases the CPI downwards since Food Prices historically haverisen more sharply than other prices andremember also that the poor spend a higher proportion of their expenditures on food.
Changes in General and Food Price Indices 100 90Year over Year Change (%) 80 70 60 50 40 30 20 10 0 2006-07 2007-08 2008-09 2009-10 2006-07 2007-08 to 2007- to 2008- to 2009- to 2010- to 2010- to 2010- 08 09 10 11 11 11 General 12 20.8 11.7 13.9 72.2 53.7 Food 17.6 23.7 12.5 18 93.1 64.1
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 180 160 140Percentage Change 120 100 80 60 40 20(%) 0 -20 -40 Wheat Moong Red Fresh Sugar General Food flour pulse chillies milk 2006-07 to 2007-08 32.5 -6.8 56.2 -12.3 14 12 17.6 2007-08 to 2008-09 41.9 -4.9 -1.7 38.7 20.3 20.8 23.7 2008-09 to 2009-10 12.2 55.7 4.9 47.5 15.6 11.7 12.5 2009-10 to 2010-11 2.7 74.9 51.1 27.3 18.4 13.9 18 2006-07 to 2010-11 116.7 141.4 143.3 128.3 87.5 72.2 93.1 2007-08 to 2010-11 63.6 159.1 55.8 160.5 64.5 53.7 64.1
Food Prices are critical for Food Security, hunger and poverty
Food price inflation is the mostregressive 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
Nearly half the Population of Pakistan wasdeclared Food Insecure in 2008 after the foodprice hike!!!“Currently 77 million people, almost half thepopulation, is food insecure in Pakistan - dailycalorie intake below the minimum recommendedlevel”-Report of the Prime Minister’s Task Force on Food Security (2008)The situation in 2011 is more urgentPakistan is amongst the 26 countries havingserious/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 wheatSource: HIES 2010-11
Careful, Unbiased and Accurate recording and reporting of consumer price movements is essential for ensuring policies topromote 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•