The planned revision of the base year on the consumer and sensitive price indices has generated a debate over how it can truly reflect the actual price movements in rural Pakistan.

The main concern about the re-basing exercise is that while expanding the scope of the family budget survey — the first practical step to the re-basing exercise — relevant agencies might ignore rural areas and focus mainly on urban areas. This was stated to have been done in the previous re-basing exercise as well.

How much reliable our inflation indices would be with 2015-16 as the new base year, instead of 2007-08, depends on many things including their ability to record actual food price changes in rural areas.

It is often assumed that food prices in villages remain lower than in cities and towns.But this may, or may not be the case. It depends on what constitutes the rural food basket, distance of rural markets from farms, gap between farm-gate and market prices, the composition of supply chain and how contagious are the inflationary expectations, says a central banker.

India and Bangladesh separately compute rural and urban inflation to get a realistic picture of national inflation because price movements in rural and urban areas have different dynamics, are affected differently by local factors and respond in varying degrees to inflationary expectations in the economy.

Central bankers say computing rural and urban price indices separately may also help in mapping and analysing the wage-price relationships, a key determinant of food prices in rural areas.

Over the last five years or so, the demand for processed food has increased in rural areas, thus changing the composition of the food basket of the rural population

Regardless of whether our policymakers keep the current structure of CPI and SPI, or they decide to have separate rural and urban inflation indices and combine them to get an integrated national index, the key question is how best we can capture the actual price changes in rural areas, particularly in food and beverages category and services used for calculating inflation.

“Even if the structural status quo remains, at least rural food price changes must be reflected accurately in the CPI, and especially in SPI, because people of lower income groups in rural areas spend the bulk of their monthly income on food,” says a former executive director of SBP.

In the last five years, food inflation measured through both wholesale price index and consumer price index has receded. From a peak of 14.3pc in FY10, WPI food inflation declined to 8pc in FY14 and then to 7pc in July-Jan FY15. Against this, CPI food inflation fell from 12.9pc in FY10 to 9pc in FY14 and then to 4.8pc in July-Jan FY15.

But compared to major cities, average prices of food items in smaller cities and towns continue to remain higher, city–wise prices compiled by Pakistan Bureau of Statistics reveal.

“In the absence of published price data breakdown to town, Tehsil and village levels, it is difficult to say if this trend uniformly journeys downwards, but chances are that it does, at least in the case of processed food items,” says a senior central banker.

One aspect of this phenomenon is that whereas supply in rural areas remains smooth of primary foods like wheat, rice, corn, sugar, pulses, vegetables, fruits and milk, the supply of processed food is often disrupted and remains costlier there.

Another aspect is that over the last five years or so, the demand for processed food has increased in rural areas, thus changing the composition of the food basket of the rural population. “So, without giving due weight to rural family budget survey in the price indices’ re-basing exercise, we won’t get a true picture of rural food inflation, what to talk about the overall rural inflation.”

Officials of Pakistan Bureau of Statistics say the Bureau is duty-bound to conduct the family budget survey in a professional manner dismissing fears that rural areas would be neglected in the survey. They say that a technical committee, composed of senior government officials, academia, researchers and journalists would oversee the entire process of the survey and point out any flaws in it including any misrepresentation of rural areas.

The composition of rural food basket and its weightage in overall basket of consumer items are two important things to watch during the re-basing of inflation indices.

During the last re-basing of inflation indices undertaken in 2007-08, similar concerns were raised by independent economists but those were brushed aside. This time, the re-basing process is coming under sharper criticism which may help preempt flaws in inflation monitoring.

But PBS officials say that even with the expansion in rural food basket the weightage assigned to food and beverages category of CPI’s entire basket of consumer items would not necessarily increase because of a possible post-re-basing change in the weightage of other categories of non-essential items, particularly in urban areas. “The issue can be addressed either through introduction of a separate rural consumer price index or through improvements in sensitive price index,” one of the officials told Dawn.

Published in Dawn, Economic & Business, March 2nd , 2015

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