Consume Price Index & Inflation Rate in Pakistan

Consumer Price Index

Presenters

Hafiz Islam CEP-FALL10-005Faisal Basra E/M SPR10 – 060Haris JameelE/M FALL10-006

PRICE STATISTICS

• Price statistics includes collection of retail and whole sale prices and computation of following indices:-

• 1. Consumer price index (C.P.I)

• 2. Wholesale price index (W.P.I)

• 3. Sensitive price indicator (S.P.I)

• “ Consumer Price Index 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 is generally accepted as a measure of inflation in the country”.

Consumer Price Index

SENSITIVE PRICE INDICATOR (SPI)

• Sensitive Price Indicator (SPI) is designed to assess price movement of essential consumer items at short intervals (on weekly basis ).

WHOLE SALE PRICE INDEX (WPI)

Wholesale price index ( WPI) is designed to measure the change of price in the primary and wholesale markets.

Why Three Types of Indices?

• CPI measures Inflation rate in the country

• SPI is computed to assess the price movement of essential commodities at short interval of time to review the price situation in the country.

• WPI measures the General Price level in the whole sale market.

The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies.

Function of CPI

WHAT CPI MEASURES?• It measures Price changes of fixed market

basket of goods and services of constant quality and quantity.

• It tells how much cost of living has risen or fallen due to price changes irrespective of changes in consumer behaviour or quality of goods.

• It does not reflect the cost of living or in house hold consumption expenditure as such but only the influence of price fluctuation on the trend.

The Consumer price index was computed for the first time with 1948-49 as a base for industrial workers in the cities of Lahore, Karachi and Sialkot only. Continuous efforts have

been made, since then, to make CPI more representatives by improving and expanding its scope and coverage in terms of

items, category of employees, cities and markets. Accordingly, the CPI series were computed with 1959-60,

1969-70, 1975-76, 1980-81 and 1990-91 as base years.

A History of Inflation in Pakistan with reference to CPI

Selection of Markets/Outlets and Cities

• Items are selected on the basis of Family Budget Survey

• Markets are selected through retail and wholesale trade survey.

• Outlets are selected on transaction value basis.• Cities are selected on population basis• Stratified sampling are used for selection of

cities.

Weights for CPI

The results of Family Budget Survey provide the average percentage expenditure(Consumption pattern) of Households on each item/each commodity group and for each income group for the cities covered in CPI. These average percentage expenditures on item and commodity groups are called weights and are being used in computation of the CPI.

Po x qo

Wi = ------------- x 100

Po x qo

Example: 1. Total Expenditure: Rs. 3000,

2. Expenditure on Wheat Flour:- Rs. 100

3. % of Expenditure on Wheat flour = (100/3000)*100 = 3.33

Weight of Wheat flour = 3.33%

Commodity Groups Wise Items and Weights C.P.I (2000-01)

• Commodity Group Weights Items

01. Food, Beverages & Tobacco 40.34 12402. Apparel, Textile & Footwear 6.10 4203. House Rent 23.43 0104. Fuel & Lightening 7.29 1505. House Hold, Furniture & Equipment etc. 3.29 4406. Transport & Communication 7.32 4207. Recreation & Entertainment 0.83 1608. Education 3.45 2409. Cleaning, Laundry & Personal Appearance 5.88 2610. Medicines/Medicare 2.07 29

TOTAL 100.00 374

What goods and services does the CPI cover?

The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

•FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

•HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

•APPAREL (men's shirts and sweaters, women's dresses, jewelry)

•TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

•MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

•RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);

•EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);

•OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

COVERAGE OF CITIES AND MARKETS IN BASE YEAR FOR CPI 2000-2001

Name of City No of Markets Name of City No of

Markets

Punjab1. Islamabad (Federal Capital Area) * 04 10. Jhang 01

2. Rawalpindi * 06 11. Okara 01

3. Lahore * 07 12. D. G. Khan 01

4. Gujranwala * 01 13. Bahawalpur * 01

5. Faisalabad * 02 14. Bahawalnagar 01

6. Multan * 03 15. Mianwali 01

7. Jhelum 01 16. Vehari 01

8. Sialkot * 01 17. Attock 01

9. Sargodha * 01 18. Samundari 01

COVERAGE OF CITIES AND MARKETS IN BASE YEAR FOR CPI 2000-2001

Name of City No of Markets

Name of City No of Markets

Sindh N.W.F.P.19. Karachi * 13 27. Peshawar * 03

20. Hyderabad * 04 28. Mardan 01

21. Sukkur * 02 29. Abbottabad 01

22. Nawabshah 01 30. D. I. Khan 01

23. Larkana * 01 31. Bannu * 01

24. Mirpurkhas 01 Balochistan25. Shahdadpur 01 32. Quetta * 02

26. Kunri 01 33. Khuzdar * 01

34. Turbat 01

35. Loralai 01

Total Cities = 35 Total Markets = 71

INCOME GROUPS OF CPI

1. Up to Rs. 3000.00

2. Rs. 3001.00 - 5000.00

3. Rs. 5001.00 – 12000.00

4. Above Rs. 12000.00

Time table for Collection of PricesPart-IFood, Beverages Tobacco

Monthly 11-14 of each month

Part-IIApparel, Textile and Foot WearFuel and Lighting


Part-IIIHouse Hold, Furniture & EquipmentTransport & Communication


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


Part- VII Whole sale price


Part-VIS.P.I

Weekly Each Thursday

Daily Prices of 18 items Daily Daily

FORMULA USED FOR COMPUTATION OF CPI Laspeyre's formula as given below is being used for

the computation of CPI.

(Pn/Po) x wi

In = --------------------- x 100

wi

Where In = CPI for the nth period

Pn = price of an item in the 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 / Po x Qo

wi = Total weight of all items.

EXAMPLE FOR COMPUTATION OF CPI

ITEM UNITBASE

PRICE (Po)PRICE IN

MAR, 06 (Pn)WEIGHT

(Wi)Pn / Po

Po / Pn x

Wi

Moong Pulse Kg 29.91 47.61 0.2230 1.5918 0.3550

Mash Pulse Kg 45.01 52.72 0.2017 1.1713 0.2363

Masoor Pulse Kg 36.23 44.03 0.2214 1.2153 0.2691

Gram Pulse Kg 28.99 31.50 0.4272 1.0866 0.4642

1.0733 1.3246

( Pn/Po) x Wi

Index = -------------------------------- x 100 Wi

1.3246I = -------------------------- x 100 = 123.41 1.0733

Inflation Rate Definition

In mainstream economics, the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was

used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or

monetary inflation. Inflation is measured by comparing two sets of goods at two points in time, and computing

the increase in cost not reflected by an increase in quality. There are, therefore, many measures of

inflation depending on the specific circumstances.

Year Inflation rate (consumer prices) (%)

2000 62001 5.22002 42003 3.92004 2.92005 4.82006 9.12007 7.92008 7.62009 20.3

Inflation Rate in %

Limitation of CPI

1) Coverage is limited

2) Only covers Urban Centres

3) Prices may have different trend in rural & urban centres.

4) Rent is computed through construction input items index instead of rent survey.

5) It measures partially inflation not total consumer’s expenditure.

FUTURE PLANNING

1. Change of base of CPI, WPI & SPI from 2000-2001 to 2006-2007.

2. Rural areas will be covered in CPI.

3. Rent will be computed on rent survey basis.

4. COICOP classification will be used in CPI and CPC in WPI.

5. Enhance scope of indices in terms of cities/items and income groups.

Conclusion

Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population.

It needs to be controlled by strategic planning. Domestic production should be encouraged instead of imports; investment

should be given preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and developed countries should be requested

for financial and managerial assistance. And lastly a strong monitoring system should be established on different levels in order to have a sound evaluation of the process at every stage.