Troubles With BBS CPI - II

Flaws in CPI calculation May prolong the bad situation.

Bangladesh Bureau of Statistics (BBS) provides this information about calculation of CPI.BBS prepares food and non food CPI for three groups :National ,Urban and Rural. CPIs for the three groups are classified further into twelve sections which include food,beverages, alcohol,housing,clothing transportation, recreation etc among other things.

Later two consumer baskets-- one for urban and another for rural---are derived from Household Income And Expenditure Survey(HIES) 2016-17,comprising of 383 items prepared for computation of CPI.An item's weight is prepared from its percentage share in the total expenditure on all items faced by a consumer.

[credit: BBS]

For data collection, BBS collects price data from 154 markets across the country. Among 154 markets, 90 markets are from urban and the rest are from the rural areas. Three price quotes for each item are collected from each market. Prices of 127 food items and 256 non-food items are collected. Another important thing to note is that rural and urban price data are collected on monthly basis. But data from Dhaka and Chattogram City Corporation areas are collected in every week.

Now some issues I would like to raise here for CPI calculation:

1. BBS could easily introduce two / four more groups(North-South or East,West,North,South) into the existing three groups of National ,Urban and Rural level. Average income and spending are different for different regions. Even the informal sector wage is different in these regions. Differences of income opportunities and consumption spending of these regions should be reflected in the CPI.
2. The 383 items do not reflect which one is tradable and which one is not. External sector has leverage on tradable items( i.e. food grain,cooking oil,fabrics etc). Changes in international prices and exchange rate variation influence prices of these commodities. On the other hand, nontradable items (i.e. housing, medicare,education,transportation, recreation etc) are often influenced by internal situation. This should be reflected in official reporting of inflation data. It will further dispel any policy ambiguity on inflation.
3. Data collection from 154 markets is not well balanced. Urban bias is more pronounced.Urban data are more recent than rural data. Urban consumption spending is different from rural consumption spending. CPI should remove this bias by allowing more rural markets into data collection process.
4. Jevons method is used for calculating CPI in Bangladesh. The other two formulae are Carli index and Detot index. But the problem with Jevons index is that it is deeply influenced by fall in prices. So when vegetables prices drop ,Jevons index is likely to produce a wider fall in overall CPI than as usual. In case of price fall,BBS can calculate CPI using Dutot index. Dutot index generally attaches more weight to expensive items and less weight to cheap items. So usual estimate of the CPI can be captured using Dutot index when there is a price fall ( See "Calculating Consumer Price Indices In Practice" by the IMF).
5. Calculating high level indices require individual item's weight from a base year,which is different and precedes the price reference period(p⁰). This weight is derived from Household Income And Expenditure Survey(HIES). BBS gets its weight from HIES 2016-17. Here comes the crucial thing : the more recent is the weight's base year ,the more pronounced is the variation in overall CPI from the variation of an item's CPI. So BBS needs to update the weights,based on more recent HIES survey. Though HIES survey is costly and time consuming, for the sake of greater macroeconomic stability regular HIES survey should be conducted in short intervals.

BBS inflation reporting is replete with bias and wider variation in some instances. A balanced,unbiased CPI reflecting just variation can provide true estimate of inflation. To attain that, more recent survey, representative data should be introduced.