The challenge of measuring inflation

Mr Arif, a lower-middle-class citizen, decided to visit his local market to purchase essential goods for his family. To his dismay, he discovered that the prices of almost all necessities had gone up by a staggering 30 to 50 percent. This sudden spike in prices left Mr Arif perplexed and worried about the increasing burden on his already strained budget.

To make matters more bewildering, official data showed only 9.63 percent increase in the Consumer Price Index (CPI). This vast discrepancy between Mr Arif's real-life experience and the reported inflation figures raised a troubling question: Was the CPI truly reflecting the economic reality?

Inflation, a crucial economic indicator, profoundly impacts people's lives and influences the policies of governments and central banks. In Bangladesh, as in many countries, the CPI serves as the primary tool for measuring inflation. However, a closer examination of the CPI basket reveals significant issues that may be masking the true inflationary picture in the country.

One of the primary issues with Bangladesh's CPI is the base year, which was recently updated, but still relies on data from the household income and expenditure survey of 2016. This means that the goods and services included in the CPI basket, as well as their respective weights, have not been updated for nearly eight years. In a rapidly changing economic landscape, these infrequent updates raise serious concerns about the relevance and accuracy of the CPI.

In contrast to major economies like Japan, the US and the UK, which frequently revise their CPI baskets, Bangladesh has not kept pace with the need for updates. Failure to capture shifts in expenditure patterns can lead to the CPI becoming increasingly disconnected from reality.

The CPI basket in Bangladesh assigns a significantly higher weight to food items, with rice alone contributing 25.93 percent to food inflation. While it is crucial to monitor food prices, the over-reliance on food inflation may not accurately represent the changing dynamics of the economy. As the country's economy evolves, people's consumption habits diversify, leading to a larger proportion of their spending on non-food items like housing, education, healthcare, and transportation.

There is also a disconnect between global and local pricing. Despite significant price reductions in international markets for commodities such as wheat, coconut oil, and soybean oil, these benefits are not fully passed on to consumers in Bangladesh. Certain companies may be profiting disproportionately, taking advantage of the disparity between international and domestic prices. This not only distorts the local cost of living but also raises concerns about market fairness and transparency.

Government-controlled prices for essential goods (eggs, potatoes, onions, soybean oil, LPG and other commodities) significantly differ from market realities. The official CPI calculation relies on these controlled prices, leading to a distorted inflation picture. Inaccurate Inflation can have significant consequences for both the government and people. If the CPI does not reflect the actual spending habits of the population, these policies may fail to address the real economic challenges faced by the citizens.

In conclusion, Bangladesh's CPI, with its outdated sub-base year and overemphasis on food items, fails to provide a holistic perspective on inflation. As the economy evolves and consumption patterns change, it is imperative that the CPI basket and methodology keep pace with these transformations. Ignoring this issue risks undermining the effectiveness of economic policies and social welfare programmes, ultimately affecting the well-being of the people.

The author is first assistant vice-president of City Bank Capital Resources Ltd