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Inflation & Price index

By: WAQAS AHMED

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Inflation

Inflation is a situation where there is a continuous increase in general price level over time

Causes of inflation:

Demand pull inflation

Increase in money supply Increase in govt. expenditure Increase in exports

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Supply Pull Inflation

The basic cause is the rising of costs of production such as

Increase in wage rate Increase in the prices of raw materials

Ways to control inflation

Adaptation of tight monetary policy Contractionary fiscal policy Direct govt. control

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Inflation in Pakistan

The inflation in Pakistan has depicted downward rigidity. All prices indexes like CPI,WPI and SPI witnessed a clear trend in recent months. The CPI inflation for Fy09 is around19.1% in march. Core inflation is 18.5%. Food inflation 19.7% and non food inflation 18.5%.

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Concepts and Methods

Annual inflation Year on year inflation Month on month inflation Monthly year on year inflation Quarterly inflation

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Consumer Price Index (CPI)

Consumer Price Index (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.

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Coverage of Cities and Selection of Markets

The CPI series cover 35 urban centers of Pakistan. Depending upon the size of the city, 1 to 13 markets have been selected from where the prices are obtained. The markets have been chosen keeping in view the volume of sales, assuming that majority of the category of employees for CPI make the purchases from these markets. Thus, the prices represent the actual consumer prices. The number of markets covered in 35 cities is 71.

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S. No. Name of City Name of Market S. No. Name of City Name of Market

1 Lahore 07 19 Karachi 13

2 Faisalabad 02 20 Hyderabad 04

3 Rawalpindi 06 21 Sukkur 02

4 Multan 03 22 Nawabshah 01

5 Gujranwala 01 23 Larkana 01

6 Sialkot 01 24 Mirpurkhas 01

7 Sargodha 01 25 Shahdadpur 01

8 Islamabad 04 26 Kunri 01

9 Jhang 01 27 Peshawar 03

10 Bahawalpur 01 28 Mardan 01

11 Bahawalnagar 01 29 Abbotabad 01

12 Okara 01 30 D.I Khan 01

13 Jhelum 01 31 Bannu 01

14 D.G Khan 01 32 Quetta 02

15 Mianwali 01 33 Khuzdar 01

16 Attock 01 34 Turbat 01

17 Samundri 01 35 Loralai 01

18 Vehari 01 Total Markets 71

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Income Groups and Occupational Categories

As the consumption pattern of individuals depends on their income level and occupation, the population under observation is therefore, categorized under various income groups and occupational categories. This serves to a certain the impact of price changes of various commodities on their purchasing ability. The income groups and occupational categories covered in the CPI are given below as base year 2000-2001

1. Up to Rs. 3000/-

2.        Rs. 3001/ to Rs.   5000/-

3.        Rs. 5001/ to Rs. 12000/-

4. Above Rs. 12000/-

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Basket of Goods and ServicesThe current CPI covers 374 items in the basket of goods and services, which represent the taste, habits and customs of the people. This basket has been developed in the light of results generated through the Family Budget Survey conducted by the FBS in 2000-01. The basket of goods and services comprises on 10 major groups (2000-2001 base).

S.No. Group Number of item 2000-2001 Weights

1 Food & Beverages 124 40.34

2 Apparel, Textile & Footwear 42 6.10

3 House Rent 1 23.43

4 Fuel and Lighting 15 7.29

5 Household, Furniture & Equipments 44 3.29

6 Transport & Communication 43 7.32

7 Recreation & Entertainment 16 0.83

8 Education 24 3.45

9 Cleaning, Laundry & Personal Appearance 36 5.88

10 Medicare 29 2.07

        Total 374 100.00

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Method and Frequency of Data Collection

FBS staff located in 35 Regional/Field offices collects price data regularly on monthly basis. They personally visit shops, stores, and establishments according to a predetermined time schedule and collect the prices of the selected items. Prices are reported in schedules developed for this purpose. The contents of the schedules include name of the city, item, its specification and unit price quoted by four different shopkeepers. The time schedule for collection of prices is given below:-

Name of Schedule Frequency data Date of collectionPart-IFood & beverages Monthly 11-14 of each month

Part-IIApparel, Textile, and Footwear, Fuel & Lighting

Monthly 1-3 of each month

Part-IIIHousehold, Furniture & Equipment etc. and Transport & Communication

Monthly 4-6 of each month

Part-IVRecreation, Entertainment & Education Cleaning, Laundry & Personal Appearance & Medicare

Monthly 7-10 of each month

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Formula used for computation of CPI

Laspeyre's formula as given below is being used for the computation of CPI.

                                             ln  =      Σ (Pn/Po) x wi    x  100                                                              Σ wi

Where        ln = CPI for the nth period                 Pn = price of an item in the nth period                 Po = price of an item in the base period                 wi = weight of the ith item in the base period

= Po x qo / Σ PoxQo                Σwi = Total weight of all items.

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Computation of CPI : An illustration

The computation of CPI can be illustrated with the help of an example. Suppose we want to calculate index of pulses for the month of February, 2002. The same is computed as under:-

Item Unit Base Price Po

Price Feb.02

 Pn

 Weight

 W

Price relative (Pn/P0)

Weighted Price relative

 (Pn/P0) x W

Moong Pulse Kg. 29.91 51.23 0.2230 1.7128 0.3820Mash Pulse Kg. 45.01 69.81 0.2017 1.5510 0.3128Masoor Pulse Kg. 36.23 54.00 0.2214 1.4905 0.3300Gram Pulse Kg. 28.99 40.87 0.4272 1.4098 1.6023Total       1.0733   1.6270

As per formula                                ln =    Σ (Pn/Po) x wi  x 100                                               Σwi                                  =  1.6270  x 100 = 151.59                                       1.0733

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Sensitive Price Indicator (SPI)

The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price movements of essential commodities at short intervals so as to review the price situation in the country.

Income Groups & Occupational CategoriesThe SPI is being computed for the employees belonging to 4 income groups and all income groups combined as in CPI (with base 2000-2001).

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Basket of GoodsS. No.Item S. No.Item S. No.Item S. No.Item

1 Wheat 15 Milk fresh 29 Tea packet 43 Electric bulb (60-wts)

2 Wheat flour 16 Milk powdered (Nido) 30 Tea (prepared) 44 Match box

3 Rice basmati (broken) 17 Curd 31 Cooked beef (plate) 45 Washing soap

4 Rice irri-6 18 Vegetable ghee (tin) 32 Cooked dal (plate) 46 Bath soap (Lifebuoy)

5 Masoor pulse 19 Vegetable ghee (loose) 33 Cigarettes K-2 47 Chicken farm

6 Moong pulse 20 Mustard oil 34 Latha (coarse) 48 Gas Charges

7 Mash pulse 21 Cooking oil (Dalda) 35 Lawn 49 L.P.G.

8 Gram pulse 22 Potatoes 36 Voil 50 Electric Charges9 Beef with bone 23 Onions 37 Shirting 51 Petrol

10 Mutton 24 Tomatoes 38 Sandal gents (Bata) 52 Diesel

11 Eggs 25 Bananas 39 Sandal ladies (Bata) 53 Telephone Charges (Local)

12 Bread plain 26 Salt 40 Chappal sponge (Bata)    

13 Sugar 27 Red chillies 41 Kerosene oil    14 Gur 28 Garlic 42 Firewood    

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Coverage of Cities and MarketsSPI is based on the prices prevailing in 17 major cities for the base year 2000-2001. The number of markets covered in each city is given below:

S. No. NAME OF CITY No. OF MARKET

1 Islamabad 42 Rawalpindi 63 Gujranwala 14 Sialkot 15 Lahore 76 Faisalabad 27 Sargodha 18 Multan 39 Bahawalpur 1

10 Karachi 1311 Hyderabad 412 Sukkur 213 Larkana 114 Peshawar 315 Bannu 116 Quetta 217 Khuzdar 1

Total 53

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Methods Of Derivation Of Weights

Computation of weights of SPI are the same as that of the CPI . In the base 2000-2001, fresh developed weights through Family Budget Survey conducted in 2000-2001 are being used. The weights for each groups are combined by taking simple average of weights of 17 cities for each item. Then, all income groups are combined at Pakistan level taking simple average of weights of 4 income group.

Periodicity Of Price Collection

Prices used in SPI relate to Thursday of each week. The field staff collects retail prices of 51 consumer items by personally contacting the shopkeeper of the markets covered in the SPI. Prices are obtained by the headquarters on telephone/fax from the concerned Field/Regional Offices on the same day.

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Wholesale Price Index (WPI)The Wholesale Price Index (WPI) is designed to measure the directional movements of prices for a set of selected items in the primary and wholesale markets. Items covered in the series are those which could be precisely defined and are offered in lots by producers/manufacturers.

COVERAGE OF CITIES AND MARKETS

The wholesale prices are collected from the single market by the price collecting staff of FBS located at the following 18 cities

S. No. Cities S. No. Cities1 Karachi 10 Sargodha

2 Lahore 11 Quetta

3 Faisalabad 12 Sukkur

4 Rawalpindi 13 Bahawalpur

5 Hyderabad 14 Sahiwal

6 Multan 15 Nawabshah

7 Gujranwala 16 Larkana

8 Peshawar 17 Mirpurkhas9 Sialkot 18 Mingora

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Basket of Goods

The WPI covers 425 items in the base 2000-2001. The items have been divided into five groups. The groups and number of items are given below

S. No. Commodity GroupItems Weight

2000-01 2000-01

1 Food 106 42.12

2 Raw Materials 25 7.99

3 Fuel, Lighting & Lubricants 17 19.29

4 Manufactures 227 25.87

5 Building Material 50 4.73

Total 425 100.00

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Frequency Of Data CollectionThe wholesale prices are collected by the Statistical Assistant of Regional/Field offices from 13th to 15th of each month.

Calculation Of Average Prices At Market/City LevelFor each commodity 4 quotations from different shops of a market are obtained. Average of these 4 quotations is taken as a representative price for the commodities in the market/city.

Methodology Of Data CollectionThe method of data collection is the same as explained in CPI.

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GDP Deflator

GDP deflator is a measure of the price level, calculated as the ratio of nominal GDP to real GDP times 100.

GDP Deflator = Nominal GDP × 100

Real GDP

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Nominal GDPQuantity of 1st commodity × price per unit

+

Quantity of 2nd commodity × price per unit

Real GDP

Quantity of 1st commodity × base year price per unit +Quantity of 2nd commodity × base year price per unit

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Conclusion…

Inflation is a key indicator of a country and provides important insight on the state of the economy. A stable inflation not only gives a nurturing environment for economic growth, but also uplifts the poor and fixed income citizens who are the most vulnerable in society.

So Govt. should take initiatives to tackle high inflation rate for stable economic growth.

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?Any Question