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Consumer Price index: its limitation and improvements/suggestions.

The Consumer Price Indices is a measure of average change in the prices of a fixed basket of goods and services customarely purchased by households. In other words, the CPI compares the cost of fixed basket of goods and services this month with its cost of a month ago or a year or so. The point of time to which the price are compared is called the base period of the index which is always equal to 100.

The percent e change reflected from CPI indicators the difference between one time and other, in average prices for the same quantities of goods and services and of the same qualities priced in the same market and service establishments. The word same is very important because the index is a measure of change in price and price alone, the effects of other changes are not permitted to creep into the measure.

The term points of change and percentage change in the index does not mean the same thing. In price index series for determining the rate of increase from one period to an other, percentage change need to be considered instead of changes in index points. To indicate the difference between percentage change and change in index points is given in Table-1.

Collection, of Prices

Consumer prices with base period (1980-81=100) were collected from 25 centres and this procedure continued for base period (1990-91=100), whereas during base period (1975-76), collection of retail prices was only from 12 centres. Retail prices are collected through price schedules designed earlier known as schedules part 1,2,3 and 4 contain items of groups classified under:

1) Food and Beverages and Tobacco;

2) Apparel, Textile and Footwear;

3) Fuel and Lighting:

4) Household Furniture and Equipments;

5) Transport and Communication;

6) Recreation, Entertainment and Education

7) Cleaning, Laundry and Personal Appearance and;

8) Miscellaneous.

Retail Prices Collection Centres--1990-91

01. Gujranwala

02. Islamabad

03. Lahore

04. Faisalabad

05. Multan

06. Rawalpindi

07. Sialkot

08. Sargodha

09. Kasur

10. Okara

11. Jehlum

12. D.G. Khan

13. Mianwali

14. Shorkot

15. Chakwal

16. Karachi

17. Hyderabad

18. Sukkur

19. T.M. Khan

20. Nawabshah

21. Peshawar

22. Mardan

23. Abbottabad

24. Quetta

25. Khuzdar

Conceptual Basis of Consumer Prices

Retail prices used for computation of CPI are collected from retail shops! stores and services direct to the consumers. In other words, prices are collected as transaction prices as against list of tag prices fixed by the manufacturers/agencies concerned. Transaction prices are believed to be lower as there is neither any control on prices nor price collection staff has any authority to inspect the records of the shop-keepers.

Price Schedule

The prices of different goods and services are collected through four price schedules, the package of items of each price schedule is different in terms of commodities or in term of unit of commodities. Price of basic consumption perishable goods and services as meat, fish, eggs, vegetables and fresh fruits etc. are collected fortnightly while the prices of other articles such as clothing, footwear, medicines and other general consumption goods which do not fluctuate so rapidly are collected monthly.

The details of price collection schedules are furnished below:
Type of No. of
Schedules Items

Part - I 144
Part - II 414
Part - III 347
Part - V 145
 TOTAL: 1050


Out of 1050 items in the price schedules, the price of 357, 166 and 200 items are used in the Computation of consumer price index with base 1975-76,1980-81 and 1990-91.

Price Collection

Collection is done by the experienced staff of regional and field offices of FBS. There are 41 regional and field offices. Out of these 41 regional/field offices, 35 are price collection centres. In 13 other price collection centres, price collection work is done by the nearest regional/field office staff. The price collections are exclusively engaged for price collection work. Supervision of price collection is the responsibility of Chief Statistical Officer of Regional Office and Statistical Officer together to check the accuracy of prices. Despite tight control, the price collectors having experience of job, fill the schedules at their residence. Thus prices of such areas/districts are found un-representative at the time of checking/comparison with previous month schedules.

Representation of Cities

The 46 cities covered in the four provinces represent a predominant portion of total urban population of the country. In the latest series 1990-91 as base following number of cities have been covered:
Province No. of Cities

Punjab 22
Sindh 10
NWFP 9
Balochistan 5
 TOTAL: 46


These number of cities almost cover major portion of urban population.

Selection of Markets

Depending upon the size of the city 1 to 8 markets have been selected from where prices are obtained. The markets have been chosen predominately, keeping in view the volume of sales, assuming that the majority of the category of employees for CPI make the purchases from these markets and the price collected these represent the consumer prices paid by them. Prices are being collected from markets in 46 cities.

Scrutiny of Price Schedules

On receipt of schedules these are thoroughly scrutinised, keeping in view the previous month trend of prices to ensure maximum possible accuracy of data. In the even of doubtful prices, clarification is sought from the concerned Regional Office.

Commodity Groups

Price schedules have bee so designed that commodity groups are easily managed through computer and their prices are used for publications in the monthly Statistical Bulletin and other publications are given in Table-II.

Comparative over three base years items during last two base years, all essential commodities have been given due representation in the Consumer Price Indices to bring indicator on international level.

Household Income and Expenditure Surveys (HIES)

The main problem in the computation of CPI is to determine the fixed basket of goods and services or to determine what people buy and how the industrial, commercial and government employees spent their money.

While household income and expenditure surveys (HIES is conducted, the main objective for multipurpose surveys is to obtain detailed income and expenditure data of household for revising the Consumer Price Index. Every care is taken to note down the income groups. This practice continued while base period of OPI was decided during 1g75-76, mainly during 1980-81 and 1990-91. Given in Table-Ill, statement depicts the income groups and various, coverage of essential items worked out on the basis of results of household income and expenditure surveys.

Consumer Price Index Weights

On the basis of survey results of consumption expenditure, weights are worked out Weights are expenditure percentage made for each commodity which sum up fall under commodity group bring out total expenditure of all commodity group against total expenditure during base period.

Thus weights (percentage expenditure) are worked out in the following form of each base period to compute Consumer Price Index:

1. Weights by selected cities by occupational categories .and by income group.

2. Weights for combined groups by cities, occupational categories, by income groups and commodity groups.

3. Weights for combined group of each income group, by occupational categories/commodity group.

Consumption expenditure on Food, Beverages and Tobacco group weight during 1990-91 according to household expenditure survey was reduced by 13.2 percent over 1980-81 survey result whereas expenditure weighton apparel, textile and footwear group increased by 14.3 per cent during base period 1990-91 over 1980-81. Also weight of house rent increased by 12.3 per cent and weight of fuel and lighting by 4 per cent during 1990-91 over 1980-81. Against above three increased weights the weights of household expenditure on equipments dip by 12.3 percent, of transport and communication by 18 per cent and of Recreation, entertainment group by 3.4 per cent respectively. Very nominal increase in weight by 0.2 per cent was recorded in the cleaning, laundry and personal appearance group during 1990-91 over 1980-81. All other consumption expenditure weight of all under miscellaneous group dip by 2.3 per cent during base period 1990-91 over 1980-81.

All above increase and decrease in weights in different commodity groups are attributed to inflation, change of habits and other reasons.

Limitations of Consumer Price Indices and Suggestions for its Improvements

There is on record in the Federal Bureau of Statistics that no census of retail trade has so far been conducted in Pakistan and, therefore, no information on the quantum of transactions is available between markets within a city or between cities of regions. As such no weighting has been done for prices between markets before they are used for CPI.

Agricultural commodities are not graded hence it is difficult to maintain a standard list of these commodities for collection of retail prices.

Consumer Price Indices measure only price changes of a fixed basket of goods and services in the same proportion month after month and year after year. It is not necessary that the consumers will actually purchase the same goods and services in the same proportion. Consumers tend to adjust their shopping practices to changes in relative prices have increased relatively little for items whose prices have increased relatively more. Forexample, if the price of mutton rises rapidly while price of chicken does not, consumers may buy more chicken and less mutton.

In view of the above mentioned shortcomings of the present system of calculating CPI, a scheme for its improvement is given below:

Import unit price Indices. Separate list of (1) raw materials and (2) capital goods imported by commercial importers and industries for their own use should be drawn after though studies, market surveys and research to establish ratios of items of these two categories of import. Regular invoice prices as become available with Bills of Entries of two categories of import can be used in the unit value indices. These two series of indices will depict true picture of import prices of raw material and capital goods at port stage for commercial sale and the other series based on imports of industrial raw materials and capital goods used in industry concerned.

Wholesale prices of some items of raw materials and capital goods sold by importers/wholesalers to retailers should be collected regularly to be used in the wholesale price indices of commercial imports only. Difference between the import unit value prices of raw materials and capital goods for commercial use and wholesale price indices of same items after adjustment of local taxes will show percentage profit being earned by the wholesalers/importers against their commercial imports. Similar difference between retailers price indices of same items and wholesale price indices will give percentage profit of retailers.

Similarly import unit value indices of raw materials and capital goods being imported by the industrial concerns should be linked up with ex-factory prices of concerned industry after adjustment of the financial and management expenditures. This difference between two series of price indices of raw material and capital goods used in the industries for the manufacture of their products and products ex-factory price indices (after adjustment of taxes) will give percentage of price of factory products concerned. Primarily this exercise of raw material and capital goods, new price indices should be undertaken in the light of detailed study of documents of this system as already in vogue in two developed countries like Japan and Holland since long.

For monthly regular consumer price indices family expenditure survey may be considered to conduct every poor to give possible effect in weighting pattern in CPI in view of rapid change in composition of expenditure by income groups. This yearly expenditure survey can easily be planned and undertaken by FBS presently having about one thousand trained staff both in the field/regional offices and in Headquarter in Islamabad, Yearly expenditure survey results for use in CPI through computer will yield true picture of inflation for the year rather than absolute weights being used presently in calculation of inflation.

In case the annual survey of family expenditure is administratively not possible for one reason or the other, than FBS should review weighting pattern after every five years as per recommendation of UMSO and revise weights accordingly. The use of such revised weights would bring CPI series in line with other countries.

A list of common items other than raw materials and capital goods after a thorough market survey and study thereof should be drawn to cover the same items in the import unit price! wholesale price and retail price indices.

The purpose of such price indices is to assess arid dig out reasons of the percentage increase in prices of covered items at three stages dealt/marketed through importers/wholesalers and retailers. In this case too import unit price index should be constructed on the basis of invoice value and not on Bills of Entry CIF value. Prices of agriculture products of major and minor crops should be arranged to be collected at the farm gate. Provincial agriculture departments should establish commodity exchange centers at existing points of villages to note down products prices for use in separate producers price indices which has not as yet been undertaken in FBS. Similarly prices of manufacturing items should be collected at factory gates and separate index of ex-factory prices should be prepared as some countries are presently doing.

Consumer price indices with more coverage of items, cities and revised weighting pattern with latest base year should be started on monthly basis for general use.

Rent which is one of the important item of consumer price indices should be arranged to be collected from provincial Excise and Taxation Department which has recently conducted survey to estimate property taxes.

Rent collection should base on (1) Two-room apartment with one bedroom, one drawing room etc Moderate, High, very high (2) Three-room apartment with one bedroom, one living room, kitchen, Monthly rent Moderate, High, very high (3) Four-room apartment with two bedrooms, one living room, kitchen, Monthly rent, Moderate, High, very high (4) Five/six-room apartment with three bed rooms, one living room, kitchen, Monthly rent, moderate, High, very high Scope of rent collection, of houses/apartments may also be considered to include in the future coverage of CPI.
TABLE-1

Period Base-A Base-B Base-C

I 112.5 168.8 225.0
II 121.5 182.3 243.0
Index points change 9.0 13.5 18.0
Percentage change 9X100 13.5X100 18.0X100
 112.5 168.8 225.0
 8.0 8.0 8.0

TABLE-II

Commodity Groups and Items Covered in the Groups in Different Base Years
(Item Covered)

Commodity Groups 1975-76 1980-81 1990-91

Food, Beverageand Tobacco 143 178 163
Apparel, Textile and Footwear 57 73 69
House Rent -- 1 1
Fuel and Lighting -- 15 17
Household Furniture and Equipments 31 38 53
Transport and Communication -- 44 43
Recreation, Entertainment and Education -- 44 45
Cleaaning, Laundry and Personal Appearance -- 45 45
Miscellaneous 126 88 24

TOTAL: 357 466 460

TABLE-IV

The following picture of combined weights of commodity group for
respective base years is given in Table-IV

Commodity Groups 1975-76 1980-81 1990-91

Food, Beverage and Tobacco 53.50 50.97 49.35
Apparel, Textile and Footwear 9.20 6.61 7.56
House Rent -- 16.88 18.96
Fuel and Lighting -- 5.89 6.13
Household Expenditure -- 2.28 2.00
and Equipments
Transport and Communication -- 6.18 5.08
Recreation, Entertainment -- 3.23 3.12
Cleaaning, Laundry and -- 5.39 5.40
Personal Appearance
Miscellaneous 17.08 2.44 2.38
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Article Details
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Author:Mazhar-ul-Islam
Publication:Economic Review
Geographic Code:9PAKI
Date:Jan 1, 2003
Words:2566
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