UN­DER­STAND­ING THE CPI

Jamaica Gleaner - - CELEBRATING 70 YEARS OF PROVIDING STATISTICS -

THE CON­SUMER Price In­dex, com­monly re­ferred to as the CPI, mea­sures changes in the gen­eral level of prices of con­sumer goods and ser­vices pur­chased by pri­vate house­holds. It is the best eco­nomic in­stru­ment to use when de­ter­min­ing the ef­fect of changes in re­tail prices on house­hold bud­gets and ex­pen­di­ture. It is one of the most used of the sta­tis­ti­cal se­ries pro­duced by the Sta­tis­ti­cal In­sti­tute of Ja­maica (STATIN).

The CPI mea­sures changes in the prices of spec­i­fied items that peo­ple pur­chase. It mea­sures price move­ments of a given quan­tity of con­sumer goods and ser­vices. The goods and ser­vices in­cluded within the scope of the in­dex can be fig­u­ra­tively thought of as a ‘bas­ket’.

The bas­ket rep­re­sents a mix of con­sumer goods and ser­vices pur­chased by the typ­i­cal house­hold. No two house­holds are ex­actly alike in their spend­ing habits. Each house­hold pur­chases a dif­fer­ent com­bi­na­tion of goods and ser­vices for con­sump­tion. Gen­er­ally speak­ing, the CPI bas­ket in­cludes those goods and ser­vices which are im­por­tant in terms of the size of ex­pen­di­ture made on them by house­holds.

The items in the CPI bas­ket are based on in­for­ma­tion ob­tained from house­hold ex­pen­di­ture sur­veys (HES) un­der­taken by STATIN. Since the CPI as­sumes the pur­chase of a fixed ‘bas­ket’ of goods and ser­vices, it must be up­dated pe­ri­od­i­cally to en­sure its con­tin­ued rel­e­vance to the ac­tual spend­ing habits of the house­holds to which it re­lates. Rel­a­tive Im­por­tance of Items in the CPI bas­ket

The ex­pen­di­ture on all items in the bas­ket is summed to ob­tain a to­tal house­hold spend­ing. The amount spent on each item in the CPI bas­ket is com­pared to to­tal house­hold spend­ing to ob­tain the rel­a­tive im­por­tance or ‘weight’ of the items in the ‘bas­ket’. The 12 ma­jor di­vi­sions of the CPI each have rep­re­sen­ta­tive ‘di­vi­sion weights’. The weights, which in­di­cate the rel­a­tive im­por­tance of the items in the bas­ket, es­tab­lish the im­pact that a par­tic­u­lar price change will have on the over­all in­dex. For ex­am­ple, a five per cent rise in the price of elec­tric­ity would have a much greater im­pact on the house­hold bud­get than a five per cent in­crease in the price of news­pa­per. This is due to the fact that, in any given pe­riod, house­holds spend more on elec­tric­ity than they do on news­pa­pers.

In or­gan­is­ing the CPI ‘bas­ket’, the se­lected items of goods and ser­vices are grouped to­gether ac­cord­ing to var­i­ous cat­e­gories. All goods and ser­vices in the CPI bas­ket are di­vided into 12 ma­jor ex­pen­di­ture di­vi­sion that are based on a con­sump­tion clas­si­fi­ca­tion sys­tem de­vel­oped by the United Na­tions. The clas­si­fi­ca­tion sys­tem is the Clas­si­fi­ca­tion of In­di­vid­ual Con­sump­tion Ac­cord­ing to Pur­pose (COICOP), and the 12 broad ex­pen­di­ture di­vi­sions are:

Food and Non-al­co­holic Bev­er­ages

Al­co­holic Bev­er­ages and Tobacco Cloth­ing and Footwear Hous­ing, Water, Elec­tric­ity, Gas and Other Fu­els

Fur­nish­ings, House­hold Equip­ment and

Rou­tine House­hold Main­te­nance Health Trans­port Com­mu­ni­ca­tion Re­cre­ation and Cul­ture Ed­u­ca­tion Restau­rants and Ac­com­mo­da­tion Ser­vices

Mis­cel­la­neous Goods and Ser­vices

IIIIIThe COICOP clas­si­fi­ca­tion sys­tem breaks the 12 di­vi­sions into smaller groups of re­lated items, termed Groups. These Groups are fur­ther bro­ken down into ‘classes’, which are the com­bi­na­tion of sim­i­lar items. Price col­lec­tion

Price are col­lected from sev­eral re­tail out­lets from which house­holds do their shop­ping and also from var­i­ous busi­ness or­gan­i­sa­tions which pro­vide ser­vices to house­holds. Monthly, quar­terly and an­nual pric­ing sur­veys are car­ried out at out­lets such as gro­cery stores, cloth­ing and footwear stores, doc­tors, schools, among oth­ers.

Why is it that the CPI does not seem to move as much as one’s spend­ing?

First, ac­tual in­creases in the liv­ing ex­penses of fam­i­lies re­flect two move­ments

In­creases in the cost of goods and ser­vices pur­chased. Changes in life­style. The CPI as­sumes a fixed stan­dard of liv­ing as rep­re­sented by the fixed bas­ket. It there­fore does not mea­sure changes in liv­ing stan­dards. For ex­am­ple, if your mode of trans­porta­tion used to be by bus up to last year and it has changed be­cause you now have ac­quired a mo­tor ve­hi­cle, your trans­porta­tion ex­penses in the cur­rent year are ex­pected to in­crease as the cost of main­tain­ing a ve­hi­cle is more than the cost of the bus fares that were paid in the pre­vi­ous year.

This in­crease in your liv­ing ex­penses, there­fore, was not brought about by the in­crease in the cost of trans­porta­tion but was due to the fact that your liv­ing stan­dard has changed.

Se­cond, the in­dex is based on the av­er­age price of a num­ber of items com­bined. There­fore, a rise in the price of one item may be com­pen­sated by a fall in an­other.

Con­se­quently, the ef­fect of the price in­crease on the in­dex may not be marked. For ex­am­ple, a housewife con­fronted with a sud­den rise in the price of bread is con­cerned to find that there is only a small change in the in­dex for ‘Food’. This could be due to the fact that bread is only a small part of the to­tal num­ber of items used in the in­dex or it may be that de­creases in the price of other items com­pen­sated for the in­crease in the price of bread.

IIUSES OF THE CPI

1. De­ter­min­ing price changes be­tween spec­i­fied pe­ri­ods: * Mea­sur­ing a month-tomonth price change. * Mea­sur­ing a price change for a par­tic­u­lar pe­riod. 2. Us­ing the CPI as an eco­nomic tool: * A de­fla­tion tool. * An es­ca­la­tion tool. 3. De­ter­min­ing the pur­chas­ing power of money: * The buy­ing power of the Jamaican dol­lar changes over time as the prices of goods and ser­vices change. The CPI is used widely to de­ter­mine the amount of money that would be needed in the present to have the same pur­chas­ing power as an amount that was spec­i­fied in the past.

CON­TRIB­UTED

Trivia ques­tion ban­ner.

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