The Consumer Price Index (CPI): What Is It?
The Consumer Price Index (CPI), generally
known as the cpi inflation rate, is thought to be the most widely used
indicator of overall inflation. It gauges changes in the cost of purchasing a
fixed basket of representative goods and services and, in general, depicts the
country’s inflation rate.
Pakistan’s CPI’s history
For the first time, the consumer price
index was calculated exclusively for industrial employees in the cities of
Lahore, Karachi, and Sialkot, using 1948–1949 as a base year. By enhancing and
extending its breadth and coverage in terms of goods, employee categories,
localities, and markets, CPI was made more representative over time. As a
result, the base years used to calculate the CPI series were 1959–1960,
1969–1970, 1975–1976, 1980–1981, and 2000–2001. At the moment, the base year
used to calculate the CPI is 2007-2008. The paragraphs that follow provide more
information on the method of index computation and the cpi inflation rate.
Coverage of cities and market selection
The current CPI series includes data from
40 urban areas in Pakistan in order to calculate the CPI inflation rate. 1 to
13 markets have been chosen, depending on the size of the city, from which the
prices are gathered. The markets were selected with the amount of sales in
mind, presuming that the bulk of consumers purchases goods from these markets.
There are 76 markets that are served across 40 cities. Following are the names
of the cities and the number of marketplaces in each city:
Income groups
The population under observation is consequently divided into different income quintiles because people’s
consumption habits rely on their degree of income. Following are the income
quintiles used in the CPI with base 2007-2008:
Basket of goods and services
The basket of goods and services that the
current CPI inflation rate includes 487 items from represents the people’s
preferences, routines, and customs. Based on findings from the Family Budget
Survey conducted in 2007–2008, this basket has been created. The twelve main
groupings make up the basket of goods and services. Below is a list of
commodities group weights:
Consumer pricing collection’s theoretical
underpinnings
Retail outlets and service providers are
collecting consumer prices for use in the CPI inflation rate calculation. These
are the prices at which consumers can purchase CPI products. In other words, the Pakistan
Bureau of Statistics (PBS) gathers market prices rather than lists or tags prices
established by manufacturers or various price-monitoring organizations.
The way and how often data is collected
PBS employees working out of 34
Regional/Field offices usually gather CPI inflation rate data on a monthly
basis. According to a predetermined schedule, they individually visit shops,
supermarkets, and other institutions to obtain pricing for the chosen items.
Schedules were created especially for the purpose report prices. The schedules’
contents include the name of the city, the item’s description, and the unit
price given by four separate retailers in the market. The following timeline
applies to the collection of CPI prices:
Supervision the gathering of price
data
The technical oversight of the work
performed by the price collectors is now the responsibility of one statistical
officer in each regional/field office. He must make sure that price collectors
understand the technical aspects of price collecting and are following the
rules set forth in this regard. He must visit the markets in order to conduct a
random pricing check for this reason. The pricing data gathered by the price
collectors are also field checked by the chief statistical officers of the
regional offices. To check the validity of the data, senior officers from the
head office also conduct unforeseen field inspections or visits.
Insertion of price information
At 34 Regional/Field Offices, data entry
software has been created and installed. This software has unique features like
comparisons with prior months, average and Centre average computations, and
more.
Editing/verification of price schedules
at the corporate level
To assure its accuracy, price data is
reviewed and examined at the headquarters. When there is a question or unusual
variance, the relevant price reporting Centre is contacted right away for
clarification.
Calculation of market, local, and
national average prices
Four estimates from various stores in a
market are gathered for each item. This market’s typical price is determined to
be the average of these four quotations. Each item’s city average price is
calculated by averaging its prices across all of the city’s chosen markets.
Thus, the average of all 40 cities included in the CPI inflation rate is used
to determine the national average price of an item.
Weights
Information about the expenditures of households
in various income levels, broken down by commodity, is provided via data
gathered through the Family Budget Survey. The findings of the Family Budget
Survey show the typical percentage of household spending on various goods for
each income category in each city. Weights are utilized in the CPI calculation
and refer to the average percentage spent on commodities and commodity
categories. Different income categories have different weights.
The formula used for the computation of the index
The formula provided below by Laspeyre is
used to calculate CPI.
An example of CPI computation
An example can be used to demonstrate how
the CPI is calculated. Let’s say we want to determine the pulse index for the
month of February 2012 the same is calculated as follows:
As per formula
The indexes for each income group are
calculated using the same process using their respective weights and prices.
Average prices from 40 cities and combined weights are used to create the
overall index to determine the cpi inflation rate.
IMF Inflation Model
According to an IMF working paper, the
empirical findings in this research demonstrate that monetary forces control
inflation in Pakistan. The main factors that explain inflation trends with a
lag of around a year are broad money expansion and private-sector credit
growth. The CPI and credit in the private sector are correlated throughout
time. Short-term inflation is affected by the wheat support price, but not
long-term inflation. The relative significance of monetary forces and
structuralist supply-side factors for inflation in Pakistan is examined in this
essay. The currency rate, standard monetary variables (money supply and credit
to the private sector), as well as the wheat support price as a supply-side
element that has drawn significant attention in Pakistan, are all included in a
stylized inflation model that is specified. Monthly estimates of the model are
made from January 1998 to June 2005. The findings show that recent inflation
has been mostly driven by monetary variables, with a lag of around a year.
The growth track record of Pakistan from
the 1970s emphasizes how damaging high and prolonged inflation is to grow.
Great inflation periods have often corresponded with periods of low growth,
whereas periods of high growth typically occur in low inflation environments. A
suitable inflation objective for Pakistan is 5 percent, taking into account the
empirical thresholds at which inflation hurts the economy and financial
development.
Policy recommendations
Therefore, price
stability ought to be the SBP’s main goal. The SBP should first and foremost concentrate
its efforts and policies on maintaining inflation or cpi inflation rate near
its objective of 5%. The SBP might theoretically target a level of the currency
rate as a nominal anchor to achieve macroeconomic stability. But doing so would
mean adopting the monetary policy of the anchor nation, which can result in
inflation that is not at the desired level. Additionally, the
exchange rate would no longer be available to buffer the local economy from the
effects of external shocks. The SBP has all the necessary tools to carry out
its own autonomous monetary policy in accordance with the requirements of the
domestic economy. The SBP’s strongest policy contribution to sustainable growth
will eventually be to maintain price stability. In the short term, there may
not be a trade-off between inflation and growth, but in the medium and long
terms, there very definitely is.
Various measures can be used to estimate
price stability such as the cpi inflation rate. Although the public understands
headline inflation better, it is sometimes asserted that monetary policy should
be more focused on core inflation. Core inflation, which is approximated as
nonfood, nonenergy, or the SBP’s trimmed mean definition, is a better indicator
of underlying inflation trends than headline inflation, given the volatility of
some CPI components, particularly food and energy prices. However, the general
public understands headline inflation better because it has an immediate impact
on households. When considered as a whole, core inflation is the ideal monetary
policy aim, especially over the medium term, but the SBP must also keep a close
eye on headline inflation.
Finally, monetary policy needs to look ahead in
order to hit its inflation goal. In Pakistan, the influence of the current
monetary situation on inflation is delayed by about 12 months. Twelve months
from now, the link between the expansion of private sector credit and inflation
appears to be quite constant. Additionally, there is a connection between
inflation in 12 months and the rise of broad money. As a result, the SBP should
formulate its monetary policy now with an eye on achieving its inflation goal
in about a year.
Hardship of Inflation
Inflationary conditions are felt not only
in underdeveloped countries but also in developed economies around the world.
Two recent studies found that people who own 401(k)s are increasingly borrowing
against their future savings to cover unforeseen expenses like funeral costs,
unplanned medical expenses, home purchases, post-secondary education or tuition
costs, payments to avoid eviction or foreclosure, or to repair unplanned
damage to a primary residence.
Vanguard, a financial services company,
used information from its 5 million retirement plan members to determine that
0.5% of account holders made hardship withdrawals in October, an all-time high
figure that was deemed “concerning.” This proportion is higher than 0.2% in October 2020 and 0.3% in October last year.
Fiona Greig, global head of investor
research and policy at Vanguard, said that the recent rise in households using
their employer-sponsored retirement plans “may be a symptom of some
deterioration in the financial health of the U.S. consumer.”
Adverse effects of withdrawal due to
difficulty
The following effects of withdrawing for
hardship, according to the IRS, must be taken into account:
- You cannot “payback” the
hardship distribution you get into your account; instead, it will permanently
diminish the amount you will have in the plan when you retire. - You will be required to pay income tax on
the previously untaxed retirement savings you receive as a hardship
distribution. - Unless you are 59 1/2 years old or are
exempt under one of the IRS’s around twelve other provisions, you might be
required to pay an additional 10% tax. - Following the hardship distribution, you might
not be allowed to make contributions to your 401(k) for six months.