Oran Hall | Making the Consumer Price Index relevant

The Consumer Price Index, CPI, measures the price movements of a given quantity of consumer goods and services purchased by the typical private household. The quantity of items in this ‘basket’ is kept constant, but in order to remain relevant, it is necessary to update it to reflect the current spending habits of the population.

What is included in the basket is determined by the Household Expenditure Survey (HES), which is conducted by the Statistical Institute of Jamaica, and the CPI is important because it is a tool used to calculate inflation, which is the increase in the general level of prices in the economy.

The current CPI is based on the HES conducted in 2017, the previous one being done in 2004-2005. The classifications used, 13 in the former and 12 in the latter, apply the Classification of Individual Consumption According to Purpose System, which accounts for the changes in the divisions in the CPI, which will appear later in this column.

The HES is used to determine the general pattern of expenditure in the economy. The data are used to determine the goods and services in the CPI basket for which prices are to be collected and the weight of each item based on its relative importance to total expenditure.

Generally, prices are collected on a monthly basis, but there are variations. The variations include twice monthly collections for items with volatile prices, for example, petroleum and agricultural products, and quarterly collections for items like school fees. Prices are generally collected over a period of 12 months, the advantage being that seasonal expenditure patterns throughout the year are captured.

Prices are collected from outlets across all 14 parishes of Jamaica in the commercial districts where the majority of households shop. The outlets include grocery stores, markets, clothing stores, furniture and appliance stores, garages, doctors’ offices, dentists’ offices, law offices, insurance companies, and beauty and barber salons.

Statin uses the acquisition approach to compile the CPI, that is, it measures what it costs to acquire a good or service in a particular period without regard to whether it was used in that period.

The CPI excludes several items that feature in the lives of residents. Among them are charitable donations like offerings, contributions to pension plans, consumer savings and investments, income taxes, and expenditures related to life insurance premiums and financial services.

It does, however, include price data for labour rates, telephone and electricity charges, education and hospital fees, which it collects from the appropriate authorities.

Although the 2017 survey covered about 12,500 households, the CPI only focuses on the expenditure patterns of low- to middle-income households and thus excludes the expenditure patterns of upper income households.

Although the CPI does not reflect changes in the tastes and preferences of individual consumers, or changes in living standards due to changes in income levels, with new products and services being introduced, and others being used more or less than before, or none at all, it becomes necessary periodically to make adjustments to the basket of goods and services used in compiling the CPI.

The table shows the weight structure of the CPI, expressed as percentages based on the HES of 2004-2005 and 2017.

Based on the 2017 HES, some changes were made to the divisions of the CPI. Communication was changed to Information and Communication to better reflect household’s use of information and communication technology. To effect this, some goods and services were removed to it from the reaction and culture category, which was re-named ‘recreation, sport and culture’ to better reflect the coverage of the division. Additionally, the category of miscellaneous goods and services was divided into two divisions: ‘insurance and financial services’, and ‘personal care, social protection and miscellaneous goods and services’.

When the CPI weights coming out of the 2017 HES are compared with those coming out of the HES of 2004-2005, as published in Statin’s The Revised Consumer Price Index (CPI) 2020 (Technical Note), most are down, but there was a significant increase in the housing, water, electricity, gas, and other fuels category from 12.8 per cent to 17.8 per cent. Food and non-alcoholic beverages, though down marginally, remained by far the division with the highest weight at 35.8 per cent. This is not surprising. Another highly weighted division is transport at 11.2 per cent compared to 12.8 per cent previously.

The HES is a very comprehensive exercise. The 2017 exercise covered approximately 12,500 households and collected more than 10,000 individual price quotations monthly for the 318 commodities in the basket used in computing the CPI with its very important weight structure.

Regular HES exercises are vital to a CPI that is relevant considering its critical role in measuring inflation.

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