Measuring inflation is a tricky job. Controlling it is trickier. No government can come up with inflation data that is believable for all. And inflation cannot be checked effectively if the mechanism used for measuring it suffers from structural flaws.

But efforts must be made to record changes in the actual cost of living of various groups of people. This, in turn, should make the job of monitoring and containing inflation a bit easier.

In Pakistan, three indices are used to calculate inflation: Wholesale Price Index (WPI), Sensitive Price Index (SPI) and Consumer Price Index (CPI). Because of its broader coverage of the items of use and the number of markets from where the prices are collected, CPI is believed to be the main index. As such, the change in CPI becomes an indicator of the inflation that affects all of us. WPI indicates the change in wholesale prices which affects businesses and industries. And SPI that covers a limited number of essential items of daily use including food and fuel can be termed as the inflation for the poor.

In their fight against poverty our economic managers need to know a bit more precisely, how inflation is affecting the poor people. But they use CPI to evaluate the impact of inflation on the cost of living of the poor and the rich alike. The reason why they do not use the SPI for this purpose is that the basket of items for calculating SPI is too small although it includes most essential food and fuel items that the poorest people consume.

Perhaps Pakistan needs to develop two separate CPIs—one for the urban centres and the other for the rural areas. And it needs to use different basket of items for calculating the two CPIs. The list of goods and services that would form the basket for each CPI might naturally differ. And more importantly different weightages can be assigned to some of the items that could be common in both baskets depending upon the varying volumes and frequency of their use by the rural and the urban people. In India, there are four measures of CPI including the CPI for Industrial Workers and the CPIs for agricultural labourers, rural labourers and urban non-manual employees.

This helps the Indian policy makers monitor the change in the cost of living of various groups of people more precisely and use it as input for developing well-targeted policy responses to both broader and sectoral economic issues.

In Pakistan, the base-year being used for calculating price indices is 2000-01. Officials of the Federal Bureau of Statistics say 2010-11 may be used as the new base-year in future making the price indices more representative. They admit the efficacy of changing the base-year twice during a decade but give no hint if this practice would be adopted. During 1970s Pakistan twice changed the base year for computing price indices on five-yearly basis but from 1980-81 it discontinued this tradition.

Using a fresh base-year for calculating price indices twice a decade is expected to make them more representative of the actual change in the cost of living. Besides, in this fast-globalising world with faster changes taking place in technology and industry more frequent revisit to the base-year would make it easier to include or exclude certain items of daily use from different indices or change their weightage—where and when it becomes necessary.

Pakistanis started using cellular phones since early 1990s but the 374-item CPI does not take into account the expense people make on purchase or use of these phones. Similarly our dieting habits have changed considerably in the last 20 years and even the poor urban people now consume cheap junk food routinely. Yet the CPI does not cover items of fast food. On the other hand, the use of bicycles and sponge sleepers of a particular brand of 1970s that are still there in CPI have lost much of their relevance, at least for the urban people.

Obviously there is a need for making changes in the number and types of items and their assigned weightage. Bifurcation of CPI on the urban rural divide—whether we call them CPI for industrial workers and CPI for rural workers or give them any other names—can make this task a lot easier.

Restructuring SPI seems in order for the base-year used for it also remains unchanged as 2000-01. And the items of goods in its basket require changes. Some need substation while others need outright deletion or their weightages to be reduced while several new items deserve inclusion to make it more representative. For example, the 53-item basket of SPI does not have a single item of healthcare although even the poor people have to spend some money on medicines every month. Without including medicines into its basket of goods we cannot call SPI a representative Sensitive Price Index.

Our price indices not only need a new base-year or change in the basket of goods and items they also require improvement in collection and analysis of market prices. Currently, prices are collected from 71 markets of 35 cities for calculating CPI whereas price data from 53 markets of 17 cities is collected for computing SPI.

Major cities like Karachi and Lahore keep expanding fast which makes it necessary to survey more markets in such cities for price collection. In addition, the selection of the markets for price surveys should be done in a way to obtain a representative average of price change during computational frequency of a price index.

Common experience suggests this is perhaps not done properly—particularly with regard to prices of essential items. More importantly, whereas the Federal Bureau of Statistics (FBS) claims that price collectors do visit markets for price collection under a well-defined schedule shopkeepers shrug off their shoulders in ignorance when asked about it.

Bifurcation of CPI on the lines of urban rural divide and restructuring of SPI is desirable for another reason. It is expected to help the government and the central bank as well businesses to analyse more precisely the impact of international prices on domestic price-line and respond more responsibly to developments in global markets.

For instance, rural people may not be hit as hard as urban people are when international fuel oil prices increase. The reason is rural workers particularly those working on farms spend much less on transport than industrial workers do. Similarly, people living in the areas where exportable fruits and vegetables are produced but sent to nearby towns or cities due to lack of local storage facilities may have to pay more for them than the urbanites after the production season is over.

Fighting inflation with conventional monetary policy anchored on monetary aggregates has its own limitations. The State Bank of Pakistan has been using intellectual inputs to weigh the pros and cons of inflation-targeting for achieving a sustainable price-stability. There are many pre-requisites for this including enhanced fiscal discipline. Restructuring of price indices can be helpful in this regard.

By: Mohiuddin Aazim