CPI figures: Analysts puzzled by inflation drop

Accuracy of methodology used by PBS questioned.

KARACHI:

The Pakistan Bureau of Statistics (PBS) surprised most analysts last week by announcing lower-than-expected headline inflation numbers in December, which clocked up at 9.2% on a year-on-year basis.

More importantly, the PBS said the Consumer Price Index (CPI) decreased 1.3% on a month-on-month basis compared with an increase of 1.3% in the preceding month.

A closer look at the break-up of the CPI by groups of commodities and services reveals that the month-on-month decrease of 1.32% in the headline inflation number is caused by a substantial drop in the prices of perishable food items, whose group weight in the index is 4.99%.

“The month-on-month decline in the CPI Index has been reported at 1.32%, which apparently does not tally with the percentage changes of individual items− particularly perishable food items− of the CPI basket,” Lakson Investments Senior Research Analyst Colin Miranda said while speaking to The Express Tribune on Thursday.

The value of the perishable food items group decreased from 270.2 points in November to 201.17 in December, representing a month-on-month decrease of 25.55%.

Given that the total weight of the perishable food items group in the overall CPI is 4.99%, the impact of the decrease should have ideally been 1.27% in December, he said.

In simple words, the monthly decline of 25.55% in the prices of perishable food items should have left a net impact of a 1.27% drop on the headline inflation number in December, according to Miranda.

However, the monthly review issued by the PBS for December says otherwise. The impact of the decline in the prices of perishable food items on the headline inflation number equalled 1.8% in December, which makes the entire CPI calculation for December questionable in Miranda’s view.

Speaking to The Express Tribune, a senior official of the PBS said concerns about the accuracy of the CPI calculation were unsubstantiated because most analysts fail to take into account the complete set of data that is used to compute the figure every month.

“Many analysts ignore two key factors that are used to determine the CPI number. One, they don’t take into account the base-year (2007-08) prices of the same items. And two, most of them don’t consider the weight of each item that is represented in the index,” he said, adding that the CPI covers as many as 487 items, 89 commodities and 12 groups.

Food items whose prices registered a major drop on a monthly basis include tomatoes (53.83%), potatoes (35.94%), fresh vegetables (30.59%) and fresh fruits (4.24%).

“The State Bank of Pakistan verifies our data and processes on a regular basis. Our data and the computation exercise are 100% authentic,” he added.

Published in The Express Tribune, January 10^th, 2014.

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