New CCPI reflects actual inflation

by Gamini Warushamana

The new Colombo Consumer Price Index (CCPI (N)) introduced last week would not underestimate inflation in the country but reflect the actual inflation rate, said Director, Price and Wages of the Department of Census and Statistics (DCS) D. C. A. Gunawardana.

In November 2007, inflation was 19.3% measured by the new index but the figure was higher, 19.6% according to the CCPI, the earlier official consumer price index.

Gunawardana said that there will be a difference between the two but comparison of the two indices is meaningless. The changes are associated with price and quantity. In the new index, the quantities of all items have been changed. To compile the CCPI we used only 125 items but in CCPI (N) we use over 300 items. As the number of items increases the weights given to each item goes down.

The new index covers items that were excluded from the CCPI and this will also lead to a difference. For instance, for fuel and light the CCPI used kerosene and had given high weight. Electricity and gas were not in the basket used to compile the CCPI, but the new index has corrected all these and covers present consumer behaviour.

The scope of the CCPI (N) is wider and contains 10 groups and 83-subclasses as against five groups and 38-sub classes in the CCPI. In the new index the food ratio decreased to 46.7% from 68.3% while the non-food ratio increased to 53.3% from 31.7%.

Higher weights have been given to water, electricity, gas and other fuel category (18.29%), transport (9.47%), communication (4.42%) and health (4.18%) are important features of the new index.

A realistic new consumer price index was a long-felt need because the CCPI was over half a century old. The use of an obsolete index as the official consumer price index caused serious issues in economic policy making.

The compilation of a new price index or replacing the CCPI by several new price indices compiled by the DCS from time to time failed due to the objections from trade unions because the index is used for indexation of wages, salaries and social security benefits. Trade unions feared that any new price index would trim their wages, salaries and social security benefits.

Gunawardana said that the Consumers' Price Index serves a number of purposes and indexation of wages, salaries and social security benefits is only one. It is essential as an objective measure of the changes in the general level of prices and is a measure of inflation.

It is also used for deflation of current value aggregates in national accounts, for formulation of policy for the determination and evaluation of wages and other monetary incomes and for economic and social analysis.

An inappropriate index could give misleading signals for determining several policies, particularly monetary policy, and providing misleading assessments of economic performance and the social and economic impact of policies, he said.

The new index captures the present consumption pattern of the urban localities of the Colombo Municipal Council area and the weights cover all socio-economic groups, in urban areas of the Colombo District.

The total value of the base period expenditure in the CCPI (N) is Rs. 17,996.38 - about 88 times higher than the base market basket of Rs. 202 in the CCPI. A change in one index point in the CCPI (N) has a current expenditure value of Rs. 179.96 as compared to the corresponding Rs. 2.02 of the CCPI market basket.

CCPI (N) uses 2002 as the base year and the CCPI used 1952 as its base year.

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