Module B1 Session 6

Session 6. Consumer Price Indices – an

example of a regular statistical product

Learning objectives
At the end of this session the students will be able to

 describe the CPI, and its uses

 discuss some of the issues that affect the compilation and calculation of the CPI
 calculate the inflation rate
 find the latest national data
 explain how it is compiled

Introduction
Consumer price indices (CPIs) are important indicators of how economies are performing,
especially in relation to the value of money. The indices are used in many ways by
governments, central banks, businesses, and society in general. CPIs are designed to show
the impact of changes in prices on people’s expenditure. They can have a strong influence
on interest rates, wage rates, tax thresholds and the value of contracts, among other things.

CPIs measure the change in the general level of prices charged for goods and services
bought by households and individuals for the purpose of consumption. The indices
represent the average change in prices across a wide range of consumer purchases. This is
achieved through the careful recording, every month, of the prices of a typical selection of
products in markets, shops and other outlets across the country.

Shopping basket

A good way of thinking about the CPI is to imagine a large ‘shopping basket’ full of
commodities on which people typically spend their money. The basket will include services
as well as goods (for example, bus fares). The content of the basket is kept fixed but, as
the prices of individual products vary, so does the total cost of the basket. The CPI, as a
measure of that total cost, only measures price changes. If people spend more because
they buy more goods, this does not affect the index. The amounts of the various items in
the basket are chosen to reflect their importance in the typical household budget.

Exercise 1
Make a list of important items that might be included in the shopping basket.

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Scoring:

 for an item that everyone thought of, no points

 for an item not everyone thought of, score one point for each other
person that did not think of it
 for an item not acceptable in a sensible list, minus five points!

What does a consumer price index look like?

Here is an example from Malawi:

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The consumer price index (national)

Beverage Clothing & Household Misc- Inflation

Food &Tobacco Footwear Housing operation Transport ellaneous All Items Rate (%)

Weight 58.1 5.9 8.5 12.1 4.1 5.1 6.2 100

2000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

2001 117.6 131.0 130.5 132.9 129.3 129.5 122.1 122.7 22.7
2002 136.4 136.7 152.7 156.6 143.8 143.9 134.4 140.8 14.8
2003 143.6 165.8 166.8 180.0 172.9 172.1 148.3 154.3 9.6
2004 154.4 196.5 179.5 211.7 218.3 202.8 169.1 172.0 11.5
2005 181.0 240.6 192.8 236.9 269.0 230.1 182.6 198.5 15.4
2006 209.1 273.5 208.8 266.9 313.5 261.6 197.5 226.1 13.9

2006 Jan 216.4 262.2 201.2 257.5 308.1 251.4 188.7 226.6 16.7
Feb 228.7 262.7 205.4 259.8 308.5 251.7 189.7 234.5 17.1
Mar 227.7 264.0 205.4 260.4 309.6 251.7 193.4 234.4 16.6
Apr 220.0 265.0 205.6 259.9 309.6 252.0 193.6 229.9 16.1
May 211.8 266.8 207.0 260.6 310.1 255.1 195.3 225.8 15.8
June 198.3 267.3 207.4 261.4 310.3 256.3 196.3 218.2 15.3
July 193.7 268.4 208.1 266.6 312.1 258.2 197.7 216.6 14.9
Aug 184.2 273.3 208.4 268.0 312.7 261.6 198.5 211.8 12.0
Sep 199.0 285.0 213.4 274.4 318.5 274.7 202.7 223.5 11.6
Oct 200.9 285.4 213.6 274.9 318.6 275.3 203.1 224.7 11.0
Nov 210.3 288.0 215.0 277.0 321.9 275.8 205.1 230.9 10.5
Dec 218.3 293.8 215.0 282.1 321.9 275.8 205.6 236.6 10.1

2007 Jan 237.4 296.3 216.0 283.6 323.6 278.5 206.4 248.4 9.6
Feb 249.4 296.6 218.2 284.1 329.5 281.2 207.6 256.0 9.2
Mar 246.5 297.2 218.5 285.0 330.3 281.9 207.7 254.6 8.6
Apr 237.3 297.3 218.8 284.5 330.6 282.0 207.9 249.2 8.4
May 227.0 297.7 219.3 285.5 331.2 283.4 209.1 243.7 7.9
June 211.8 298.6 219.3 284.8 332.9 284.3 209.4 234.9 7.7

Notes: 1. Annual figures are calculated using the average of the monthly indices for the year compared to the average for the previous year

Source: http://www.nso.malawi.net/

The overall CPI is shown in the last-but-one column of this table. It is often known as the
“all items” index. The “inflation rate” is shown in the last column, and shows the
percentage change in the CPI compared with the same period a year earlier.

The overall inflation rate for June 2007 is calculated as follows

 take the CPI figure for June 2007 (234.9)

 divide this by the CPI figure for June 2006 (218.2, result 1.077)
 subtract 1 (0.077) and express the result as a percentage (7.7%).

The previous columns show seven main categories of goods and services which
households buy. So you can work out the inflation rate for each category.

Exercise 2
A) Calculate the percentage changes between June 2006 and June 2007 for each category

Category per cent

Food

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Beverage &Tobacco
Clothing & Footwear
Housing
Household operation
Transport
Miscellaneous
All Items 7.7%

B) Calculate the overall percentage change in prices between March 2007 and June 2007

Questions for discussion

 In which category did prices increase the most between June 2006 and June 2007?
 The inflation rate was lower in June 2007 (7.7%) than it was in June 2006. Does
this mean prices are going down?
 In which complete year did prices increase the least overall?
 What does a negative percentage change mean?
 Which category is mainly responsible for the fall in prices between March and June
 Could the CPI ever be less than 100 in any period?
 Could the CPI ever be zero?

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How is the CPI compiled?

Collecting the prices

Once the items in the shopping basket have been selected, the prices of the items are
collected every month from a number of markets, shops and other outlets, usually in urban
centres, throughout the country. The price of some products (such as the cost of a mobile
phone call) may be obtained centrally.

This is an example of a form used in Zimbabwe to collect the prices of fresh fruit and
vegetables in supermarkets. It provides for three visits to the outlet during the month.

Section 4 Geo Code

Name of outlet………….……….……………..……………...…………..…………Outlet code

Physical address……………………………………..……………….……………………………..……….…………………………………
Fresh fruits and vegetables (Supermarkets) Contact person…………..…………………..….………

Item Item name Item Description

Code & Specification Price Pcode Price Pcode Price Pcode

10611 Apples Per kg

10612 Bananas Per kg

10613 Mangoes Per kg

10614 Oranges Per kg

10615 Pine apples Per kg

10711 Green beans Per kg

10712 Cabbages Per kg

10713 Okra Per kg

10714 Carrots Per kg

10715 Onions Per kg

10716 Rape/Covo/Chomoulier Per kg

10717 Tomatoes Per kg

10718 Cucumber Per kg

10719 Potatoes Per 2kg

Name (Print)……………………………………………………………………………………Date …………………………………………….

Name (Print)……………………………………………………………………………………Date …………………………………………….

Name (Print)……………………………………………………………………………………Date …………………………………………….

It is important that the index calculations are based on ‘like for like’ comparisons of prices
for each of the items in the basket. In other words, the price of the very same item should
be obtained each time. This is often easier said than done.

It is no good getting the price of a bar of soap weighing 200 grams one month and then
getting the price of a bar of soap weighing 100 grams the next month. And soap can vary
in quality, so it must be the very same product each time. When it comes to markets, even
the time of day or day of the week can have an important influence on the price. These
variations should be avoided as far as possible, as they reduce the accuracy of the index.

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However, inevitably, some brands or varieties of particular products may cease to be

available and new ones take over. This is particularly common among products such as
clothing or electronic goods.

When particular products do disappear, care is needed to ensure that replacements are of
broadly comparable quality so that price comparisons are not distorted. If this is not
possible, special procedures have to be used to take account of the change in quality.

Weighting

We spend more on some things than others, so we would expect a ten per cent increase in
the price of cereal products (such as maize meal) to have a much bigger impact on the CPI
than a similar rise in the price of shoes, say, which we buy only occasionally. For this
reason the components of the index are ‘weighted’. These weights are not to be confused
with how much items weigh in kilograms. They are based on expenditures measured in
terms of money. The weighting ensures that the CPI reflects the importance of the various
items in the average shopping basket.

While the precise methods may vary from country to country, the weights for the CPI are
mainly derived from surveys of household expenditure. In this kind of survey, which
usually lasts a whole year, a sample is selected of several thousand households from all over
the country. Enumerators record the spending of the household members over a period of
two weeks or a month. Details may also be recorded of major purchases made within the
previous twelve months.

Calculating the index

The first task is to enter the data into the computer processing system and to check that
the recorded changes in prices are within expected limits. (In some countries, this is done
in the field, using hand-held computers.) Errors can easily occur for a number of reasons.
Some errors may not affect the results much, but others can have a big effect, making the
CPI misleading. Care is needed to identify and correct them. On the other hand,
sometimes prices may actually change in an unexpected way, so it is important that such eal
changes are reflected in the CPI.

After the prices for a particular item have been entered and checked, the processing can
begin. Prices of the individual goods and services in the index are compared to their levels
in an earlier (base) period. The results are elementary indicators called ‘price relatives’.
These are the building blocks used to produce the index, but may also be useful in their
own right.

The price relatives are then combined using a special mathematical formula involving the
weights described above. The formula is used to produce indices for groups of products
(such as the seven major categories used in Malawi) as well as the “all items” index that
measures the overall average price change.

Presenting the results

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Finally, CPIs have to be published, so that users can use them! Some important users want
to know as soon as possible what the latest figures are. Most countries follow
internationally accepted best practice by releasing the results on a specific day each month.
The date is published in advance, so that users know when to expect the figures to become
available.

The figures are usually presented in the form of a “press release” or similar document.
This document will usually contain some description in words of the latest figures as well
as a table and perhaps a chart. The same information should be available on the website of
the National Statistics Office.

Further information

Information about the methods used in your particular country should be available. If you
cannot find them locally, try the IMF’s GDDS (or SDDS) website:

http://dsbb.imf.org/Applications/web/gdds/gddshome/

or, more specifically,

http://dsbb.imf.org/Applications/web/gdds/gddscategorycountrypage/?strcat=PCPI0&s
trcatname=Consumer%20price%20index

Coverage and related issues

The coverage of the CPI in SADC countries may differ to some extent. In some cases the
index will be country wide, covering rural as well as urban areas. In others, it may cover
selected urban centres only (or even just the capital city). It could be very expensive to
collect prices in rural areas as well as in urban centres. But, although the level of prices in
rural areas may differ from those in urban areas, research suggests it is reasonable to
suppose that the movement or change in prices will be very similar in neighbouring areas.

However, the expenditure patterns of people living in rural areas are likely to be quite
different from those of urban people, so it makes a difference which are included in the
weighting. Another issue is whether the weights should include the value of food that
people grow for themselves as well as what they buy.

Some countries may produce separate indices for specific populations (eg rural and urban),
and some may do so for the different regions of the country. Economists wishing to
analyse the trends and sources of inflation may be interested in indices that exclude certain
items, such as food, that fluctuate in a different way, so some countries publish special
indices of this kind.

Exercise 3

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Obtain a copy of the latest CPI statistics for your country. Also get hold of a description
of the methods used to compile it.

I am a local businessman with access to the internet. I review the pay of my staff at this
time of year. I want to know by what percentage should I increase their pay so that they
can buy as much now with their wages as they could a year ago?

Write me a brief letter telling me (a) the answer to my question (b) how I can find the
answer easily for myself and (c) where I can find a short description of the methods used to
compile the CPI.

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