New price index to measure inflation

Gamini Warushamana

A new official consumer price index was launched by the Department of Census and Statistis replacing the Colombo Consumer Price Index. Director, Price and Wages of the DCS, D.S. Gunawardana said the new price index, the New Colombo Consumers' Price Index (CCPI(N)) is more realistic than the CCPI because it is based on the recent Household Income and Expenditure Survey (2002) that represents contemporaneous purchasing habits of the consumers.

A new official consumer price index was launched by the Department of Census and Statistis (DCS) replacing the Colombo Consumer Price Index (CCPI).

Director, Price and Wages of the DCS, D.S. Gunawardana said the new price index, the New Colombo Consumers' Price Index (CCPI(N)) is more realistic than the CCPI because it is based on the recent Household Income and Expenditure Survey (2002) that represents contemporaneous purchasing habits of the consumers.

The weighting pattern of the new index is based on the expenditure of all urban households (instead of working class households used in the CCPI) in the Colombo district.

The coverage of price collection has been widened to 12 centres in Pettah, Maradana, Wellawatte, Dematagoda, Grandpass, Borella, Kirulapone, Dehiwala, Kotte, Nugegoda, Kolonnawa and Ratmalana compared to the seven centres used for the CCPI. The new index addresses the main deficiencies of the CCPI.

The new index launched last week uses 2002 as the base year and will be released to the public on a monthly basis. The CCPI(N) will be used as the official index to measure inflation in Sri Lanka. The base weights of this index will be revised at five yearly intervals, Gunawardana said.

DCS has also compiled a separate index called "Core Inflation Index" based on the CCPI(N) to be used for monetary policy purposes.

The core inflation index will exclude those items covered under the Consumer Protection Act (wheat, milk powder and gas), National Transport Commission Act, Telecommunication Regulatory Commission Act and the Post Office Act and the items with some Government intervention in pricing, to obtain a measure of the underlying trend in inflation.

Gunawardana said the previous official price index CCPI had serious limitations. However, it was used as the official measure of inflation in Sri Lanka since 1953.

The CCPI is used for deflation of current value aggregates in national accounts, formulation of policy for the determination and evaluation of wages and other monetary incomes, indexation of wages, salaries and social security benefits and economic and social analysis.

An inappropriate index could give misleading signals for determining several policies, particularly monetary policy, and providing misleading assessments of economic performance and the social and economic impact of policies.

The CCPI having a base year as far back as 1952 was computed in accordance with the household consumption of the working class households within the Colombo Municipal area, as per the family budget survey of 1949/1950.

Further, the weight structure in the CCPI was based on the average household expenditure of a sample of 455 working class households in the Colombo City limits, enumerated in that survey.

Therefore the CCPI did not reflect the current consumption behaviour of the households, since it was based on an expenditure pattern that was five and a half decades old.

Although interim revisions and improvements had been made to the index from time to time over the years, such revisions had been somewhat limited and were on a ad-hoc basis, and did not address the inherent and obvious defects of the index, Gunawardana said.