Inflation Rate Understated

04/03/2008 15:08

The Consumer Council believes that the inflation rate of 7.4% reported by the RBF could be higher.

The high inflation rate in the current economic climate is making holes in the consumer’s pocket. High rates of inflation leads to decline in the value of money because we have to pay more and more for the same goods and services.

Unfortunately, the RBF and the Bureau of Statistics are still calculating the inflation rate using the old basket of goods and services which do not truly represent the current consumer spending.

Until today, the Fiji Islands Bureau of Statistics (FIBOS) calculated the Consumer Price Index (CPI) based on a consumer basket of goods and services from 1993. The consumer basket of goods and services refers to goods and services that are commonly purchased by consumers and the CPI measures the changes in the price of goods and services.

The last revision of the consumer basket of goods and services was done 14 years ago. The selection and weight of individual items in the basket of goods and services were based on Household Income and Expenditure Survey carried out in 1990-1991 are outdated. Choosing the goods and services to be monitored and how the goods and services should be weighted is done with the help of the household income survey, which establishes on what a typical household spends its money.

The current consumer basket of goods and services used by FIBOS affects the inflation analysis and forecast both technically and fundamentally. CPI is most widely used in the calculation of the inflation rate and purchasing power of our dollar.

It is therefore necessary to shift the reference period to a more recent base year in order for the CPI to become more accurately reflective of existing conditions. Since 1993, economic, social and technological changes have influenced consumers’ tastes and preferences and these, in effect, may have resulted in changes in the consumption patterns of the population.

The basket of goods used by FIBOS includes some items  which are now phased out due to change in technology such as video player, radio cassette to name a few. On the other hand it omits certain new items which are essential household expenditure in this day and age. The new items not reflected in the current basket of goods and services are the services of mobile phones,  second-hand motor vehicles,  new pharmaceuticals,  CD Players, digital camcorders, ipod, home theatre system, digital cameras, microwave, computers, courier charge, internet charges, pay TV channels, money transfer charges included in the basket of goods. Under stationery only two newspapers are shown.

The gradual change in the purchasing habits of households and the entry of new products in the market are the reasons to revise the basket regularly.  In principle, we can say that due to non revision of the consumer basket of goods and services, there is greater probability that the value of inflation is distorted. There is therefore an urgent need to revise the basket of goods and services to eliminate distortions.  This will lead to more effective policy intervention to address the issue high inflationary trend.