Troubles With BBS CPI

Flaws in CPI calculation May prolong the bad situation.

February inflation data is out. Overall inflation declined to 9.32% from 9.94% in January. Food inflation for the first time reached to a single digit, shrinking to 9.27% from 10.72% in January. Prices of winter vegetables and import declaration of rices contributed greatly to the decline of overall prices. Govt has started procuring rice from various sources apart from the traditional importing countries. However, non-food inflation registered a slight increase in February, rose to 9.38% from 9.32% in January.

Many economists remain sceptics about the sustainability of drop in inflation in the coming months. They have valid reasons to remain so. What we are seeing now is the result of collective effort taken 3 months earlier in a bid to contain the inflation during the fasting month of Ramzan. Yet soybean oil, meat prices remain high. After Eid ,if this collective effort may dry up,a different scenario will prevail at the market. But I think the much hyped narrative of winter vegetables prices contributing to bringing down the price levels may turn out to be flawed perception upon closer scrutiny. Here comes the crucial question again: Are we calculating the CPI the correct way? Consumer Price Index computation assigns weights to individual items in case of calculation for multiple items. Here comes million dollar question: how do we assign the weight to individual items? Bangladesh Bureau of Statistics can answer that question to clarify lots of things. One simple approach may be based on importance. Now think of an individual consumer's monthly consumption basket. In this basket , carbs,cooking oil and proteins will get priority over vegetables. Goods that households have to buy (price inelastic demand) irrespective of price changes every month will not get the same priority as the winter vegetables enjoy. A consumer's spending behavior over months determines the priority. Now when vegetables prices drop, households definitely increase their consumption of vegetables but not to a great extent. A kilo of potato cost Tk 70 three months ago. With that price, one can now buy a kilo of potato as well as other vegetables in varied amounts. Without altering greatly one's monthly spendings on vegetables, one can increase his/ her consumption of vegetables. So vegetables' share in monthly spendings decides the importance consumer attaches to it. Then comes the question of spending behavior of different income groups and spendings in different regions. When BBS assigned the weight ,did it take into account these factors? I hope they did not randomly increase the weight of winter vegetables just to show the drop in inflation. If BBS did not randomly increase the weight of winter vegetables, then how did we construe that prices of winter vegetables bring down inflation when it occupies the lower rung in the consumption basket? This whole narrative of winter vegetables bringing down inflation is highly misleading. Just look at the formula of the CPI for multiple items:

CPI = (∑ _i=1ⁿ CPI_i x weight_i)/(∑_i=1ⁿweight_i)

Now think of just two items in the market: winter vegetables and rest of the items. Now looking at the sudden drop in prices of winter vegetables ,if you assign more weights to winter vegetables' CPI ,you will get higher drop in overall inflation. It is simple arithmetic. In this case , assignment of the weight is based on purely biased consideration. I just wanted to see winter vegetables is playing a role in overall inflation ,so I just raised the weights! Voilà! It is pretty similar to the incident of including laptop prices( a typical household here buys a computer/laptop once in every 10/12 years!) in consumer basket. BBS should come up with explanation how this weight on vegetables is determined. This whole thing also captures seasonal variation in the CPI. Now another crucial question arises: should seasonal variation in CPI be deemed important for long term trend? Three and half months later we are going to have Bakri Eid. Usually, meat prices remain low for two weeks after Bakri Eid. Based on this information ,if CPI registers a lower trend in inflation ,should we conclude lower meat prices bring down inflation?

BBS in the past involved in data engineering. Though this is an apolitical govt, some economic policies at the beginning indicated that it is following foot steps of its predecessor in some cases. So I am taking the inflation data produced by BBS with a dollop of salt. I hope and believe BBS has discarded past habit of data engineering. Only correct CPI calculation yields correct inflation data. And the right inflation data helps us setting the right interest rate. With flawed inflation data and interest rate, our economic recovery will only be delayed.