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Going beyond the Consumer Price Index (CPI)

Ibrahim Athif Shakoor

The Consumer Price Index (CPI) measures the change in prices of a selected basket of goods and services within an economy, over a period of time. The CPI is therefore a vital indicator of the health and wellbeing of the economy. A rising CPI, ceteris paribus indicates a loss of value of the national currency and a reduction in in the spending power of its citizens.

The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising items representative of those purchased by Maldivian households. Now imagine the basket is purchased each month. As prices change from one month to the next, so too will the total price (or cost) of the basket. The CPI is simply a measure of the changes in the price of this fixed basket as the prices of items in it change.

Review of the Consumer Price Index, 2012, Maldives Bureau of Statistics

The basket of goods measured for CPI purposes will, of course, differ from country to country and may even differ from period to period within the same country as the purchasing patterns of the population change over time.

In the latest CPI (July 22) figures released by the Maldives Bureau of Statistics show that in general prices have gone up by an average of 5.19% from Jun 2021 to Jun 2022.

But what does an average increase of 5.19% over the period mean? Does it mean that all prices have gone up by 5.19% over the review period? Decidedly it does not mean so.

As defined by the Statistics Bureau, the CPI consists of price fluctuations of a ‘basket of goods and services’ that vary over time. Apart from the essential products like food and beverages, the basket also includes items like tobacco, arecanuts, furniture, apparels, meals in restaurants and household equipment. Among other things. The CPI basket also includes the movement in the cost of services like health, education, financial and internet services.

As can be seen in Table 1 above, while the average movement of the CPI over the 1 year period is 5.41, different components of the CPI basket has changed with different degrees of change to arrive at the overall change in CPI of 5.41%.

Going beyond the CPI numbers

It is interesting and indeed illuminating to drill down, go beyond the CPI numbers and reflect on the causes and the implications.

The CPI report issued by the Bureau of Statistics is accompanied with notes regarding the reasons for changes. They are fairly detailed and any interested observer will gain much knowledge and understanding by a perusal of the same.

Here, we shall attempt to go beyond the details provided in the CPI report and attempt to go beyond and reveal some factors affecting the CPI numbers. Factors that even while keeping the CPI low, may mean that the net effect to the economy and public debt are still considerable.

Note: Unless otherwise stated the following commentary refer to annual changes from June 21-June 22.

1. The largest movement is seen in the ‘Housing, water, electricity, gas and other fuels’ segment which as the heading itself indicates include several components.

As also noted by the Bureau, the main reason for the large variance in this group arose from the increase of the price of petrol in the local market which had carry on effects on general transport prices including taxi fares and international and domestic transport.

However, it is important to note the following

· Local prices of fuels have not been allowed to vary as sharply as international prices as local authorities have attempted to dampen inflationary tendencies

· Even while the price of petrol and diesel have varied, electricity tariff have not varied over the period, as state authorities have ‘sheltered’ the rise in the cost of electricity generation within the already burdened state companies

· Housing prices have come down as the 7,000 Hulhumale housing units and additional state and private housing projects have matured. This is an important factor to consider as actual rental prices account for almost half (11.68%) of the 23.29% overall weightage allocated for the segment

2. Following naturally from the above, the 9.17% change in Transport is inevitable and unavoidable.

· Passenger transport would have increased for all manner of transport. However, the price of bus and ferry services managed by the state company, MTCC have not been allowed to chang,e and it is those services provided by private parties that have varied with fuel prices

· In the same vein, although important to mention separately, airline tickets of the state airline, Island Aviation attract a separate subsidy that helped keep overall prices low.

3. The rise of 5.19% of ‘Food and non-alchoholic beverages’ including fish. Several issues may be noted here

· The review period has witnessed peak international grain prices for a 15 year period. However, local market prices for rice, flour and sugar have been kept artificially low, again by concealing the prices hikes within the state company STO.

· That being said, it is also important to note that pasta and other similar products that are privately imported are also included in the group, albeit with a lower weightage, which would have reflected some of the international prices hikes.

· On a month-to-month basis, the most significant gains in the category were for fish which accounted for a 3.44% rise from the previous month. The fact that this period is the roughest months of the westerly monsoon would have accounted for the rise in fish prices and do not, in and by itself, indicate any important long term inflationary tendency

4. The -7.06% reduction in the ‘Information and communication’ group indicates an understanding reached between that state as one party and the existing 2 telecommunication companies.

· This agreement was reached on the basis of the state NOT allowing the entry of a third party to the telecommunication industry if existing actors agree to lower prices.

· This considerable reduction, therefore, does not indicate any lowering of producer costs but instead speaks of strategic and long-term interests of the telecom players.

· This agreement also means that the potential benefit of a third party in the industry, thereby increasing competition, and potential gains to the consumer has been averted.

5. The 3.37% rise in the ‘Restaurant and Accommodation Services’

· While prices of meals in restaurants and cafes had gone up, the indiscriminate availability of food subsidies, even to restaurants, café’s and even resorts have meant that some potential changes are concealed.

· In the near future, if the stated intention of the government is acted upon, and such subsidies are not available for commercial actors, this segment will show a sudden and dramatic rise.

It is also important to note that different categories of the CPI have different weights. The weight determines the impact of that item on the overall index. Higher weighted items have a greater impact on the overall index.

1. Food and Alcoholic beverages attract 28.44% and Housing, Water, and Electricity, gas and other fuels attract 23.29% weightage in the CPI. Together both these categories carry a 51.73% weightage on the total CPI index and will therefore, in and by itself, mean that a change in any of these categories will have a considerable impact on the overall CPI

2. However, it is important to note that for example the ‘Food and non-alcoholic beverages’ category include several subcategories with FOOD items being 26.12% and that non-alcoholic beverages account for only 2.31% of the total 28.44% weightage allocated to the Food category.

3. It maybe also interesting to note that of the several items in the Food basket, Fish carry the heaviest weightage of 8.65%. And as already mentioned, changes in local fish prices, from month is mostly an indicator of weather.

4. However, with the increase in prices fuel oil, fish prices, may in the long run, show a marked and sustained price hike and fisherfolk try and absorb the additional cost of harvesting, processing and marketing fishery products.

5. Health services attract 5.42% weightage while Education is offered 2.50% weightage. Therefore, changes in the cost of education will, therefore, affect the CPI lower that a change in the cost of Health services.

Like any other piece of vital national statistics, the CPI is couched in very specific language and refer to very specific numbers arising out of specific circumstances. To fully appreciate the CPI it is important to drill down and understand the language of the CPI numbers.

The CPI is an essential tool to understand the health of the economy and offers insight and understanding to those interested to go beyond the headline.

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