PBS details updated mechanism to calculate inflation – Pakistan

The Pakistan Bureau of Statistics (PBS) has published details of its new mechanism for mapping the Consumer Price Index (CPI).

CPI inflation is widely used to make policy and investment decisions, and can affect the course of central bank interest rates, as well as the future cost of long-term investments.

Previously, PBS had measured CPI inflation using prices of 487 items collected from 76 markets in 40 cities in Pakistan. The methodology on represented urban consumption with the exclusion of 62 percent of rural households.

After re-based on a new year, 2015-16, the PBS is now measuring the prices of 356 items in urban areas, as well as 244 items in rural areas. The number of products monitored in urban areas has increased from 89 to 94 under the new formula, while the number of urban markets included in the sample has been reduced to 68 of 76 to make way for 27 new markets in areas rural. The number of cities under the radar has also decreased to 35 of 40 in urban areas to make way for 27 new rural areas.

The board has chosen to monitor 11 markets in Karachi, five in Rawalpindi, four in Islamabad, seven in Lahore, three in Peshawar and two in Quetta, among other cities.

Highlights of the new base

Citizens have been divided into five categories according to monthly income. The less well-off class is defined as having monthly income of up to Rs18,000; the following slab receives monthly income between Rs18,001 to Rs23,000; the next slab is Rs23,001 to 30,000; the next slab is Rs30,001 to 45,000; and the final slab is Rs45,001 and above.

The old methodology had assigned equal weights to large and small cities. In the new base system, population weights have been introduced and cities will obtain weights according to the size of their population.

Contrary to the old system under which the arithmetic mean was used, a geometric mean is now used in the new system.

In the old methodology, income quintiles were used to calculate inflation. In the new system, consumption quintiles have been introduced to capture the pattern of real household consumption.

The previous methodology was also using slab-shaped electricity rates without taking into account taxes, surcharges and fuel price adjustment. In the new base, taxes and fuel price adjustments have been included to better determine electricity prices. Consumer weights have also been introduced in terms of slabs to calculate the quintile and the combined prices.

For the first time in the history of the PBS, the bureau will introduce an electronic transformation of data from end to end without human intervention.

In April of this year, the PBS Governing Council approved the new inflation reduction mechanism to map the consumption of products in urban and rural areas of the country.