Presentations made at the PSSP First Annual Conference - December 13, 14, 2012 - Planning Commission, Islamabad, Pakistan

1. Consumer Price Movements –
Implications for Welfare
Sohail Jehangir Malik
Chairman
Innovative Development Strategies (Pvt.) Ltd.
With thanks to Amna, Asma, Asjad, Hina and Wajiha
Pakistan Strategy Support Program Annual Conference
December 13, 2012

3. Pakistan Today: An Economy in Crisis
 Terrorism
 Political Unrest
 Poor Economic Management
◦ growing deficit, rising prices, increasing unemployment
 Energy Crisis
 Shutdowns and Rising Unemployment
 Natural Disasters
 Serious Economic Downturn

4. Increasing Unemployment,
Underemployment and Rising
.
Prices resulting in loss of welfare
Ability to Accurately Measure
Consumer Price Movements in
Essential for Effective Economic Policy
Making

5. The Consumer Price Index is used for:
• the indexation of
– wages
– rents
– contract payments
– social security payments
• the deflation of household consumption in the
national accounts
• macroeconomic indicator:
– especially for inflation targeting and managing
money supply
– setting interest rates
– Establishing Purchasing Power Parity etc. etc.

6. Most Importantly It has been used
by the Government in Extrapolating
the Poverty Line to estimate the
Incidence of Poverty

7. This also makes the CPI a highly
politically sensitive measure

8. Trends in Monthly CPI
(July 2008 to April 2012)
180
170 168
160
CPI (2007-08=100)
150
56 point
140 112 increase
since Jul 08
130
120
110
100
Sep-08
Sep-09
Sep-10
Sep-11
Mar-09
Mar-10
Mar-11
Mar-12
Jul-08
Jan-09
May-09
Jul-09
Jan-10
May-10
Jul-10
Jan-11
May-11
Jul-11
Jan-12
Nov-08
Nov-09
Nov-10
Nov-11
Source: Pakistan Bureau of Statistics (various issues)

9. Real Wages of Skilled and Unskilled
Workers
400
Mason
350
Unskilled worker
300
250
Rs/day
200
150
100
50
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2008
2009
2010
2011
Source: Pakistan Economic Survey 2010-11

10. Real household consumption expenditure in
Pakistan remained more or less stagnant or declined
18,000
16,000
Nominal
14,000 Real
12,000
Rs per month
10,000
8,000
6,000
4,000
2,000
-
2001-02 2004-05 2005-06 2007-08 2010-11 2012
Source: HIES (various issues), PRHS for 2012
For real expenditure (2000-01=100)

11. Source: Government of Pakistan Economic Survey 2011-12

12. Changes to the CPI Methodology
in 2011-12
CPI rebased from 2000-01 to 2007-08
• Basket of commodities increased from 374 to
487 items
• Commodity groups from 10 to 12.
• Coverage of cities increased from 35 to 40
• Food group weight reduced from 40.3 percent
to 34.8 percent
• 21 items in the old basket dropped
• 111 new items have been added

13. Elements of Change of Base Year
2000-01 to 2007-08
• Revision to commodity groups
• Weights derived from Family Budget Survey
2007-08
• Coverage of items to capture the changing
pattern of consumption of the people.

14. Family Budget Surveys of Pakistan
• Last one conducted in 2007-08 next one due this year
– 54,309 households
– 65 cities.
– 487 commodities
• In addition recorded:
– prices from 40 urban centers
– 1 to 13 markets surveyed in each
– four quotations in each market
• “markets are selected on the basis of the volume of sales,
assuming that majority of the consumers buy goods from
these markets”. Price data collected on monthly basis
according to a predetermined time schedule.
• Survey is Urban
• Sampling Frame, Coverage, Questionnaire NOT available
in Public Domain

15. Theoretically: four categories of biases are
possible
• Substitution bias occurs because a fixed market
basket fails to reflect the fact that consumers
substitute relatively less for more expensive goods
when relative prices change.
• Outlet substitution bias occurs when shifts to lower
price outlets are not properly handled.
• Quality change bias occurs when improvements in
the quality of products, such as greater energy
efficiency or less need for repair, are measured
inaccurately or not at all.
• New product bias occurs when new products are
not introduced in the market basket, or included
only with a long lag.
Source: Boskin Commission, 1996

16. Expenditure Shares – Family Budget Survey and
Household Income Expenditure Survey 2007 - 08
60
50
Percentage (%)
40
30
20
10
0
Transpor Commun Educatio Miscella
Food Clothing Housing Health
t ication n neous
Family Budget Survey 34.83 7.57 29.41 2.19 7.2 3.22 3.94 2.76
HIES Pakistan 43.61 6.62 23.61 3.69 8.26 2.21 2.33 2.63
HIES Urban 36.82 5.87 28.86 3.12 8.34 2.66 3.32 2.82
HIES Rural 50.6 7.38 18.2 4.27 8.19 1.75 1.3 2.43

17. The Family Budget Survey
Underestimates the share of Food
Expenditures by nearly 9 percentage
points

18. Further - Survey data indicate the average share of
food expenditure in household consumption
expenditure shows a sharp increase since 2007-08
58
56
54
52
% share
50
48
46
44
42
2004-05 2005-06 2007-08 2010-11 2012
Source: HIES (various issues), RHPS for 2012

19. This Biases the CPI downwards
since Food Prices historically have
risen more sharply than other prices
and
remember also that the poor spend
a higher proportion of their
expenditures on food.

20. Changes in General and Food Price Indices
100
90
Year over Year Change (%)
80
70
60
50
40
30
20
10
0
2006-07 2007-08 2008-09 2009-10 2006-07 2007-08
to 2007- to 2008- to 2009- to 2010- to 2010- to 2010-
08 09 10 11 11 11
General 12 20.8 11.7 13.9 72.2 53.7
Food 17.6 23.7 12.5 18 93.1 64.1

21. Trends in CPI and FPI
180
160
140
120
100
Index
80
60
40
20
0
2006-07 2007-08 2008-09 2009-10 2010-11
General 89.3 100 120.8 134.9 153.7
Food 85 100 123.7 139.1 164.1

22. Detailed Statistical Tests based on
the HIES 2010 2011 Data Indicate
Significant Differences in Prices
within and across rural and urban
areas
The CPI Methodology does NOT cover
Rural Areas

23. Rural Urban Prices Differences (Rs per Kilogram) –
HIES 2010-11
Urban Rural t-test
Wheat and Wheat f 29.8 28.5 21.78*
Rice and Rice flour 63.7 58.8 17.21*
Milk 49.4 44.6 29.88*
Yogurt 59 49.8 28.09*
Cooking oil 150.6 153.5 -4.17*
Beef 234.7 222.5 12.86*
Mutton 409.4 394.7 5.35*
Potatoes 26.8 27.5 -4.37*
Onion 32.8 34.4 -5.99*
Banana 32.1 30.8 4.80*
Sugar 74.3 76.5 -14.29*

24. The Economic Survey 2011-12 recognizes the
importance of food prices – some quotes
• “Food carries the largest weight and hence influences
the movement of the indices with a slight variation in
prices”
• “The most visible impact of rising food prices on
economy is acceleration of inflationary pressure
– In such a situation controlling the inflation becomes
unmanageable”
• “We are experiencing double-digit inflation over the
last several years mainly due to increase in prices of
food”.
• And yet the CPI understates the weight of food
expenditures and does NOT cover the rural areas
where the share of food expenditures is higher

25. Changes in Key Commodity Prices
180
160
140
Percentage Change
120
100
80
60
40
20
(%)
0
-20
-40
Wheat Moong Red Fresh
Sugar General Food
flour pulse chillies milk
2006-07 to 2007-08 32.5 -6.8 56.2 -12.3 14 12 17.6
2007-08 to 2008-09 41.9 -4.9 -1.7 38.7 20.3 20.8 23.7
2008-09 to 2009-10 12.2 55.7 4.9 47.5 15.6 11.7 12.5
2009-10 to 2010-11 2.7 74.9 51.1 27.3 18.4 13.9 18
2006-07 to 2010-11 116.7 141.4 143.3 128.3 87.5 72.2 93.1
2007-08 to 2010-11 63.6 159.1 55.8 160.5 64.5 53.7 64.1

26. Food Prices are critical for Food
Security, hunger and poverty

27. Food price inflation is the most
regressive of all taxes—it hurts the poor
the most.

28. Asian Bank 2008 simulation estimates for
Pakistan……….
• 10% increase in food prices = additional 7.05
million poor people
20% increase in food prices = 14.67 million
additional poor people
• 30% increase in food prices = 21.96 million
poor people

29. Nearly half the Population of Pakistan was
declared Food Insecure in 2008 after the food
price hike!!!
“Currently 77 million people, almost half the
population, is food insecure in Pakistan - daily
calorie intake below the minimum recommended
level”
-Report of the Prime Minister’s Task Force on Food Security (2008)
The situation in 2011 is more urgent
Pakistan is amongst the 26 countries having
serious/alarming levels of hunger (2011 GHI -
IFPRI)

30. “Food policy dilemma” - promoting high
prices for producers or low prices for
consumers?
• Market interventions are not costless – and can
result in substantial government subsidies and
efficiency losses
• There is a mismatch between objectives
(producer and consumer price levels and stability,
availability of grain for distribution programs,
minimum stock levels, etc.) and policy
instruments (procurement and sales prices, levels
of government imports, etc.)

31. Wheat is central to Food Security in
Pakistan
• Wheat accounts for over 55 percent of total caloric
consumption
• Poor households spend 24 percent of food expenditure
on wheat
• 26 percent of total households produce wheat and 97
percent households consume wheat.
• Among the wheat producers
– 21.6 percent are the net buyers
– 18 percent are the net seller of wheat
• An increase in wheat price benefits only the net sellers
of wheat
Source: HIES 2010-11

32. Careful, Unbiased and Accurate
recording and reporting of
consumer price movements is
essential for ensuring policies to
promote the welfare of the people

33. Recommendations
• Revise and update the methodology for
Constructing the CPI to
– Reflect the actual (higher) weights of the Food
Expenditures
– Reflect the Rural Sector weights and prices
• HIES Categories are not according to the
classification of individual consumption according
to purpose (COICOP) – which is followed by the
Family Budget Surveys – make these consistent
• Test for and continuously remove the potential
biases that can exist in calculating the CPI

34. Key References
• GOP (2012). Methodology of price collection and computing price
indices. Pakistan Bureau of Statistics. March 2012.
http://www.pbs.gov.pk/content/methodology-0
• Government of India (2010). Manual on Consumer Price Index 2010.
Ministry of Statistics and Programme Implementation. Central
Statistics Office, New Delhi. www.mospi.gov.in
• Government of Pakistan (2012). Economic Survey 2010-12. Ministry of
Finance. Islamabad.
• Pakistan Bureau of Statistics (2007-08). Household Integrated
Economic Survey 2007-08.
• UN (2009). Practical guide to producing Consumer Prices Indices.
ECE/CES/STAT/NONE/2009/2.
www.unece.org/stats/publications/Practical_Guide_to_Producing_CPI
.pdf
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