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INFLATION INDICES DIVERGE According to traditional indicators, the national inflation rate jumped from 3.7 percent in 2002 to 10.1 percent in 2003. Most casual observers, meanwhile, are expecting the numbers for 2004 to be no less shocking, as general commodity prices, in the wake of 2003’s currency devaluation, have continued to rise. Some observers are suggesting, however, that the two indices historically employed to track the inflation rate – the consumer price index (CPI) and the wholesale price index (WPI) – are less than entirely accurate. “In the last few years, the government has made an effort through its monetary policy to concentrate on inflation targeting, but it needs a more accurate measure of inflation in order to do so,” said Hany Farahat, an economic analyst at the Ministry of Investment. Inflation is usually measured by tracking the price changes of a basket of essential commodities, all of which are assigned different weights. Fluctuations in these prices are then averaged to determine an overall rate of inflation. The endeavor is more art than science, though, as the rate will depend to a large degree on the weights given to particular index constituents. In Egypt, the CPI and the WPI are the two longest-established gauges of inflation. Both utilize the same formula – the Laspeyres index – and have historically reflected similar movement, rising and falling in tandem. “Since the 1960s, the behavior of the two indicators has nearly always reflected the same trends,” explained one local economist. Yet despite their similarities, say observers, the two indicators have diverged dramatically in recent years. In 2003, after currency devaluation forced the issue, consumer prices increased an average of 4.2 percent. Wholesale prices, however, shot up by an average of 14.3 percent. Most observers attribute the divergence to the simple fact that the CPI and WPI cover different baskets of goods. The CPI, for example, is based on the retail prices paid by consumers, as obtained by a household survey administered by the Central Agency for Public Mobilization & Statistics (CAPMAS). Therefore, the CPI has a large non-variable component, with over 50 percent of its basket consisting of subsidized goods. The WPI, by contrast, tracks wholesale prices, and is comprised mainly of non-subsidized manufacturing and agricultural goods. “The CPI hasn’t truly reflected inflation rates, because it hasn’t sufficiently covered all products. Instead, it’s concentrated on a less diversified bundle – weights assigned to products have concentrated on subsidized goods, or those subject to price controls,” said Farahat. “In comparison, the WPI is biased against imported products, which are much more volatile and subject to changes in international prices or exchange rate devaluation.” A recent study by the Egyptian Center for Economic Studies (ECES) reached similar conclusions. The report, “Why did consumer and wholesale prices diverge in Egypt recently?”, explained that the two indices’ different concentrations have led to contrasting reactions following fluctuations in the exchange rate or subsidy schemes. For example, the large number of tradable goods included in the WPI’s basket made that index more susceptible to the recent fall of the exchange rate than the CPI, which includes a large number of subsidized constituents, the prices of which were not subject to change. CAPMAS recently revised the CPI, upgrading the index’s base year from FY 1995-96 to FY 1999-00, in keeping with its system of re-basing every five years. While the update will undoubtedly improve the accuracy of the index, ongoing inclusion of subsidized goods will likely keep inflation understated. “The former CPI definitely underestimated the inflation rate in Egypt, but it may be too early to judge the current [updated] index,” said Farahat. “We will have to wait to see the trend that emerges from the annual change in the index to make a fair assessment.” For the last several years, countries around the globe have been trying to find new ways to gauge inflation. In India, for example, economists are trying to get a more precise fix on inflation by launching a “producer price index,” or PPI, alongside, or in place of, the WPI. The index measures the costs of a basket of inputs purchased by a “typical firm.” In countries such as Brazil and Poland, meanwhile, additional variables – including commodity prices, financial markets and “real” economic activity – are being integrated into novel systems for targeting inflation. In Egypt, the CPI and WPI seem likely to remain the primary indices for tracking price increases, at least for the time being. CAPMAS officials, however, have reportedly been discussing ways of improving the methodologies of both indices. Rona Shedid, financial analyst at local brokerage HC Investment & Securities, suggested that, in the meantime, the weights of subsidized goods within the indices – particularly within the CPI – should be adjusted downward. “Because they’re important commodities, you can’t eliminate them altogether,” she said. “But their weights should be reduced.”
Lynne Elassy |
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