Oran Hall | How your ‘basket’ affects your pocket

It was usual, certainly when I lived in rural Jamaica, to see people in the markets and shops with their wicker baskets of different shapes and sizes as they shopped.

Today, a basket has a wider meaning, it being used to describe the set of goods and services used in measuring inflation locally and internationally.

People would put into their baskets the items they needed. The types of items varied as did the quantities. Today, instead of baskets at the shops and markets, we see shoppers pushing their trolleys in business places, where they are provided, then putting their purchases into bags, for example. As the types of items vary, so do the quantities – and the bill.

Then when prices change, the impact also varies, being largely determined by what each person buys and in what quantities. Each person is thus affected in a unique way.

In a sense, for the purpose of calculating inflation, we may say that there is one national ‘basket’ with many compartments or divisions. In this representational ‘basket’ are the goods and services that the typical Jamaican household purchases in Jamaica, but we bear in mind that each household – one person or a group of people living together who pool their resources for food and other necessities – is unique in terms of what it purchases and the combinations in which it does so.

Each item in the basket must have a price that must be linked to a particular quantity. For example, if the price of one kilogram of ‘Superior’ sugar, to coin a brand name, was $10 in January 2024, at any time in the future when the movement in the price of sugar is to be determined for the CPI, it has to be the price of one kilogram of the same ‘Superior’ sugar.

What is in the basket to be consumed by the household must also be important to it, meaning that it is a reflection of how it generally spends as measured, for example, by how much it spends on it.

There is an agency responsible for providing such data. It is the Statistical Institute of Jamaica, also known as Statin. According to the state news agency Jamaica Information Service, one of Statin’s main functions is “to collect, compile, analyse, abstract, and publish statistical information relating to the commercial, industrial, social, economic, and general activities and conditions of the people.”

Statin divides the national ‘basket’ into 13 compartments, which it calls divisions. These are broken into groups, which are divided into classes. Each division, group, and class is given a weight – expressed as a percentage – to reflect its relative importance in the “basket” and its impact on the overall CPI or consumer price index.

The CPI is a major index used to measure inflation by applying the following formula: CPI in the current period less the CPI in the previous period divided by the CPI in previous period, multiplied by 100. It measures the changes in the average price of a representative basket of goods and services the typical household uses or consumes.

Over the course of time, the spending patterns of households change due to new goods and services being introduced and others not being used at all or being used less often. This thus causes the composition of the representative basket to change.

In order to give a more accurate reflection of the spending habits of the typical household and to make the basket continue to be relevant, it is updated periodically. Statin uses data it collects in the Household Expenditure Survey to do the update.

The divisions of the CPI with the highest weights are food and non-alcoholic beverages (35.8 per cent); housing, water, electricity, gas, and other fuels (17.8 per cent); transport (11.2 per cent); and restaurants and accommodation services (6.7 per cent).

The significance of the weights is how they affect the level of change in the CPI, meaning, for example, that a four per cent increase in two items in different divisions would not affect the CPI and the household budget to the same degree. A four per cent increase in the price of food would have a greater impact on the index than a four per cent increase in the price of water.

Where people live tends to determine the composition of their ‘basket’ and how it changes, and this is reflected in reports on inflation, which tend to give figures for the three reporting regions, namely, the Greater Kingston Metropolitan Region, Other Urban Centres, and Rural Areas. The three regions are aggregated to produce the All Jamaica All Items CPI – the very important national index.

Ultimately, what goes into your basket – your trolley and the services you purchase – and in what proportion to your total spend, determine the effects of price changes on your pocket.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning finviser.jm@gmail.com