CONSUMER PRICE INDEX: MUCH TALKED ABOUT BUT LEAST UNDERSTOOD

The following notes have been copied from the Dept Of Statistics web site. Do you notice any anomaly in the "basket" of goods and services used to represent the average pattern of purchases? Refer to answer at the bottom of this posting please, for answer.

Technical Note On Consumer Price Index A. Introduction The Consumer Price Index (CPI) measures the percentage change through time in the cost of purchasing a constant “basket” of goods and services representing the average pattern of purchases made by a particular population group in a specified time period. The “basket” is of an unchanging or equivalent quantity and quality of goods and services, consisting of items for which there are continually measurable market prices over time. Changes in the costs of items in the basket are therefore due only to “pure” price movements, i.e. price movements that are not associated with changes in the quality and / or quantity of the set of consumer goods and services in the basket. This “basket” covers a wide range of goods and services, classified according to the United Nations “Classification of Individual Consumption According to Purpose (COICOP)” in the following twelve groups: • Food and Non-alcoholic beverages • Alcoholic beverages and tobacco • Clothing and footwear • Housing, water, electricity, gas and other fuels • Furnishings, household equipment & routine household maintenance • Health • Transport • Communication • Recreation services & culture • Education • Restaurants & hotels • Misc. goods & services The Consumer Price Index for each region measures price changes from one time period to another within the specific region. Thus, while regional CPI show the movements of prices over time in each region they do not indicate price level differences between regions. Malaysia’s index is a composite index, weighted by regional expenditure weights of three regional indices computed separately for Peninsular Malaysia, Sabah and Sarawak. B. Coverage Commencing in January 2006, the weights used in the calculation of the CPI are based on the pattern of expenditure obtained from the Household Expenditure Survey conducted from June 2004 to May 2005. Based on the 2000 Population and Housing Census results, the number of price collection centres were increased from 116 to 135 which were made up of 87 urban centres and 48 rural centres. These comprise of 98 collection centres in Peninsular Malaysia, 19 collection centres in Sabah and 18 collection centres in Sarawak. C. Prices The prices used in the calculation of the CPI are retail prices irrespective of whether they are described as regular or special inclusive of all sales and excise taxes applicable to individual commodities. The prices are collected each month during a fixed time period. Prices are collected on a monthly basis for all items except for perishable food items where the collection is done on weekly basis. Rent at value is an exception where the prices are collected once in a quarter. The selection of outlets in which prices are to be collected is purposive (other than for rents) with the sample designed to cover outlets with high sales turnover. Prices of 460 items are used in the computation and these are obtained from about 20,000 retail outlets in Peninsular Malaysia, 2,200 outlets in Sabah and 2,400 outlets in Sarawak. D. Weights The weights used in the calculation of the Consumer Price Index are periodically updated. This procedure is necessary to ensure that the weights reflect changes in consumer expenditure pattern thereby maintaining the relevancy of the index. Annex 1 shows the comparison of the 2000 and 2005 expenditure weights used in the Consumer Price Index by major components for Malaysia. E. Time Base Consumer Price Index for Malaysia is expressed in terms of 2005 = 100. The 2005 base year became effective with the release of the January 2006 index. The basket of goods and services as well as the base period for the CPI, is revised approximately every 5 years to take into account the changes in household spending pattern. F. Rate of Change A rate of change representative of movement in prices may be derived in several ways. The current method of calculating CPI uses three measures of changes, i.e the percentage change between any given month and the same month a year ago (year-on-year); the current month over previous month (month-on-month) and the percentage change between annual average for the specific current year to the same fixed period on the previous year. The following example illustrates the computation of index point and percentage changes Index Point Change Consumer Price Index Less previous index 125.4 124.3 Percentage Change Index point difference divided by the previous index, multiplied by one hundred Equal to 1.1 125.4 – 124.3 = ----------------- x 100 124.3 = 0.9% G. Reconstructed Indices The average indices for the three years series from 2003 to 2005 shown in the respective tables 3, 4 and 5 in the current publication (2005=100) were reconstructed historically to reflect the introduction of the new “Classification of Individual Consumption According to Purpose (COICOP)” as compared to “Classification of Households Goods and Services (CHGS)” used in the previous years. With the release of the January 2006 index, the regional index (Malaysia, Peninsular Malaysia, Sabah and Sarawak) is computed based on the urban and rural regional indices using the respective regional composite weight. Answer: In the "basket" of goods and services, purchase of petrol, diesel and cooking gas have been omitted purposely or inadvertently. As we all know, the spiralling cost of petrol, diesel and cooking gas has multiplying effect and compounding effect on the cost of purhases of other goods and services. So, please take it with a grain of salt when THEY say "CPI has remained stable or has gone up by 0.5 percent".