Weight structure of new Colombo Consumers' Price Index

Consumer Price Indices ought to capture the general price level of all consumption goods and services available in a country.

However, since it is difficult to measure prices of all consumption goods and services, the methodology of estimating such Consumer Price Indices involves choosing a representative consumer enumerating his or her consumption habits, recording prices of goods and services consumed by the representative consumer and updating the consumer habits, periodically.

The Colombo Consumers' Price Index (CCPI), the widely used index to measure the general price level in Sri Lanka, came under heavy criticism due to several shortcomings. The index does not adequately represent consumption behaviour of all households, since it was based on consumption habits of working class families in 1952.

The weight structure of the CCPI was not revised to capture the changing consumer habits.

The Department of Census and Statistics (DCS) constructed the New Colombo Consumers' Price Index (CCPI (N) to overcome these shortcomings of the CCPI based on the consumer expenditure pattern as reflected by their latest Household Income and Expenditure Survey conducted in 2002.

According to this survey, the household consumption patterns have undergone substantial changes during the last 50 years, with the improvement in the income levels and also the changes in tastes and consumer preferences over time.

The most notable feature is that the share of expenditure on food had drastically fallen to 47 per cent from that of 68 per cent. In the old CCPI, the 'Housing Water, Electricity, Gas and Other Fuels' sub group was under-represented.

For example, it did not contain Liquefied Petroleum Gas (L.P. Gas) and the weight for electricity was insignificant. It also did not contain petrol and diesel, but gave a higher weight to kerosene.

The new index has included more utilities and furthermore has included greater weights on other services such as communication and education. Thus, the CCPI(N) is based on more representative consumer habits and a wider spectrum of goods and services.

It should also be noted that the new CPI excludes the 'Alcoholic Beverages, Tobacco and Narcotics' category. This category had a weight of around 1.8 per cent in the 2002 survey.

However, it was excluded from the CCPI(N) due to the fact that those items are subject to heavy taxation to discourage consumption. Inclusion of items with such heavy taxation distorts the resulting measure of consumer inflation.