WE appreciate the efforts of Dr Abdul Karim in analyzing the methodology of Consumer Price Index (CPI) in his article published in Economic and Business Review on February 19, 2007.

One major point discussed is that the baskets, the incomes and the prices being collected are those of the urban areas only. This is because of the fact that the required price quotations for 374 items for compilation of CPI are not available, as organised markets do not exit in the rural areas.

The paramount objective of the index is to measure inflation, changes of the prices over time. It can be rightly assumed that regardless of their different levels, the prices of commodities in rural areas increase in same relative amount as those in urban areas.

The concepts of CPI are dedicated to practical aspects of price collection more than to a sophisticated equilibrium of points of sales between various parts of the country. However, as recommended now by the expert group on price indices, the number of cities will be increased from 35 to 65 including a lot of smaller cities which serve as a market for customers of surrounding rural areas.

Publishing the prices in absolute terms (which, in fact, is a simple average) is not even common in international practice. Federal Bureau of Statistics ( FBS ) is providing prices along with indices only because of the need to interfere in pricing through demand and supply mechanism on markets of relevant commodities.

With regard to author’s demand that “commodity weights should be according to the consumption baskets of various income groups which are quite different”, the CPI concept does take care of it.

The author is also of the view that the “number of households covered by the sample of the index is only 40,706, which is less than one per cent “statistically insignificant” at 0.07 per cent of urban households”. He obviously means the sample size of the Family Budget Survey. The sampling error does not depend on the sampling ratio but on the absolute number of units, instead. The sample size adopted for the family budget survey is quite appropriate and in line with international practices.

The author further states that “first of all, the declaration of incomes is suspect”. Where does he know that from? In fact, the questionnaire of the Family Budget Survey even asks for incomes in kind.

The article refers to the weights utilized for CPI which are however, a fundamental misunderstanding of the concept of the CPI. First of all, the income groups as well as the weights have been those of the base year 2000-01. Like prices, the incomes meanwhile have increased a lot. The weights of the basket-commodities may also have changed over time. This is the reason to conduct a Family Budget Survey from time to time. Pakistan is preparing for a new Family Budget Survey in the next fiscal year. The weights will be adjusted then.

It follows that the calculations given by the author are obsolete. To use his words: It is “obviously preposterous” to calculate a value of consumption by applying prices of today and to benchmark it with incomes of the base year. The article demands a Producer Price Index (PPI). The author is right to do so. One of the benefits would be that, indeed, “cost push” impacts on inflation could be detected earlier than via CPI. But, of course, the CPI finally reflects all changes of prices including those induced by cost push.

It is not quite clear what is meant by the author’s hint on foreign trade accounts. First of all, “inflation” in exported goods would be highly appreciated as they indicate strong international competitiveness resulting in positive so-called terms-of-trade effects.

With regard to imports the picture is different: imports of foreign brands (if perceived better than domestic ones) may foster inflation but imports may also contribute to intensify competition on domestic markets and to keep prices low. The problem with the presently increasing imports is a matter of balance of payments and currency more than a matter of inflation. By the way: the “foreign trade accounts” can be captured as a share of GDP only if it is exports minus imports which for the last fiscal year stood at minus nine per cent of GDP.(not 33 per cent).

Muhammad Sardar Bhatti, Deputy Director General, Statistical Division, Islamabad.