Consumer Price index and Inflation

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Consumer Price index and Inflation

  • Consumer Price index and Inflation


    GENERAL
    To compute the Consumer Price Index (CPI) and the inflation rate, the Curaçao Bureau of Statistics (CBS) follows international statistical standards and methodologies developed by the International Labour Organisation (ILO), which is part of the United Nations (UN).

    CPI
    The CBS makes a monthly calculation of the Consumer Price Index or CPI, allowing for the calculation of a 12-month CPI running average.The inflation rate at any specific moment in time equals the difference between the CPI’s 12-month running average for that month and its 12-month running average for the same month of the year before. By definition, then, the rate of inflation represents the average consumer-price development of the previous 12 months.
     

    Inflation rates are usually given per calendar year. With the inflation rate of a number of consecutive calendar years, it is possible to calculate the average inflation rate for that given period.The rate of inflation as described here is an accurate representation of the long-term price development, which is why it is also the recommended indexing instrument for wages, salaries, social-security benefits, etc.

    The CPI serves as a standard of the average price paid by consumers for goods and services in a “market basket” (also known as a “commodity bundle”) that is balanced and in line with market conditions. Each month, the CBS collects approximately 5000 prices of market-basket goods and services and, based on these, calculates the monthly CPI. Then, a weighing factor is applied to these prices, based on their share in the overall, average expenditures of the consumers.


    MARKET BASKET OR COMMODITY BUNDLE

    The market basket of consumer goods represents the average consumer and, in principle, is completely revised once every five to ten years based on the data on consumer spending obtained from the Household Budget Survey (HBS). When necessary, interim adjustments are made to the basket, for instance if a store closes its doors or a particular product is no longer on the market.

    The market basket, balanced and in line with market conditions, is divided up into nine consumption categories that in turn are subdivided into product groups. Each product group, in turn, includes a number of different products. The consumption category “Housing,” for instance, comprises the product groups “housing costs,” “energy consumption,” “home maintenance and repairs,” “garden maintenance” and “water consumption.” In turn, the product group “energy consumption” can be subdivided into specific products: “cooking gas,” “electricity” and “other energy consumption (kerosene, etc.)”


    EXPENDITURE CATEGORIES
    The nine expenditure categories applied in calculating the CPI are “Food,” “Beverages and Smokers’ Requisites,” “Clothing and Footwear,” “Housing,”  “Furnishings and Household Goods,” “Healthcare,” “Transport and Communication,” “Recreation, Education and Culture” and “Other Goods and Services.”

    The results of the budget survey are used to put together a market basket that is balanced and in line with market conditions, and to determine the weighing factors, that is, the relative contribution of each expenditure category to the consumer’s total expenditures.

    In the last budget survey held, for 2004/2005, the expenditure categories “Housing,” “Transport and Communication,” “Food” and “Other Goods and Services” came out as the main expenditure categories, with market-basket shares of 31, 23, 12 and 12 percent respectively. The “Other Goods and Services” category comprises miscellaneous products and services not included in the eight other expenditure categories, such as “personal grooming” and “insurance.”

    The smaller expenditure categories are “Recreation, Education and Culture,” “Furnishings and Household Goods,” “Clothing and Footwear,” “Beverages and Smokers’ Requisites” and “Healthcare,” comprising 8, 7, 5, 2 and 1 percent of the market basket respectively.

    PRICE DEVELOPMENT
    The methodology applied to calculate the CPI and the inflation rate requires price developments to be interpreted as follows: When a price development shows either an increase or decrease in, for instance, 2015 compared to 2014, what this means is that the average consumer price level was higher or lower in 2015 compared to 2014; not that the decrease or increase in prices happened in 2015 per se.

    CONSUMER SPENDING
    One important basis used to calculate the CPI and the inflation rate is consumer spending. For purposes of the CPI and inflation methodology applied so far by the Curaçao CBS, consumer spending is defined as: spending carried out within the country of Curaçao by consumers living on Curaçao. By definition, spending by (foreign) tourists on our island and by Curaçao inhabitants abroad (including via Internet) are not included, which is why the terms “local marked” and “the local economy” are used in this context.

    In the budget survey, the spending patterns of private households are measured through a representative sample. This information can then be used to update the weighing factors for the products and services and for the expenditure categories in the CPI market basket.

    INFLATION DEFINED
    Inflation can be defined as a long-term economic process of general price-level increases resulting in a decrease in the purchasing power per unit of money and an increase in the cost of living. It may be caused by higher import costs, higher labor costs, higher other operational and/or production costs, the operation of demand and supply in the market (that is, the relative scarcity of products and goods), higher profit margins of businesses and a rise in the amount of currency in circulation.

    In a healthy, growing economy, a 2 percent inflation rate is considered ideal by economists in general. A too-high rate of inflation can be detrimental to consumer purchasing power, consumer confidence, the value of savings and the country’s competitive position with respect to other countries, and may lead to higher interest rates, thus blocking investments.

    Most governments try to keep annual inflation at or below the 2 to 3 percent level. Generally, an inflation rate around 2 percent is considered beneficial to the economy, given that low inflation rates stimulate consumers to buy goods and services, as postponing expenditures would mean their having to pay more for the same product. Additionally, low inflation rates make it more interesting for consumers and investors to borrow money, as in periods of low inflation, interest rates tend to be low too. Because of its positive effects on the economy, keeping inflation in check is an important part of the economic and monetary policies of governments and central banks worldwide.