session 2: cost of living and inflation measurement in lebanon inaugural conference upgrading...

Session 2:

Cost of Living and

Inflation Measurement in Lebanon

Inaugural Conference

Upgrading Lebanon’s Economic Analytical CapacityLebanese Economic Association - International Development Research Centre

September 23, 2010, Crowne Plaza Hotel, Beirut

Rima Turk-Ariss, Ph.D.

Board Member,

LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 2

Outline

PART ONE: Background on Inflation

PART TWO: Inflation in Lebanon

PART THREE: Inflation Working Group


PART ONE:

BACKGROUND ON INFLATION


What is inflation?

A rise in the general level of prices of goods and services in an economy over a period of time.

Each unit of currency buys fewer goods and services.

decay in the purchasing power of individuals.


Why do Prices Rise?

• High inflation rates could be caused by an excessive growth in the money supply.

• Other causes are fluctuations in demand of goods and service and/or changes in available supplies of a product (scarcity).

• However, long sustained periods of inflation generally result from the money supply growing faster than the economy.


How Does Inflation Affect Us?• Implicit tax on income:

– Lowers the value of money and income (reduces real wages)

– Diminishes value of savings

• Affects fixed pension funds• Redistributes wealth, increasing the gap between rich and

poor • Affects government revenues and expenses, leaking into

the financial budget and fiscal deficit• Reduces real GDP growth• …


• High inflation rates hurt the economy, but…

• A low rate of inflation is also generally favored:– Low inflation reduces the severity of economic recessions

• The task of keeping the rate of inflation low and stable is usually given to the monetary authority Rule Versus discretionary policy debate: – Monetarists favor price stability and inflation targeting by the central

bank (objective of most central banks up till the global financial crisis) whereas Keynesians favor interventionist policy (e.g recent stimulus packages).

How Does Inflation Affect Us?


How do we measure inflation?• Price indexes are designed to track inflation by measuring

changes in price level or cost of living at a particular date. – Indexation is used as a reference in order to make policy as well as

firm decisions.

• A price index is used to aggregate detailed information on prices and quantities into scalar measures of their levels or their growth.– CPI: a measure of the average price paid by consumers for a

basket of consumer goods and services, – Other examples include PPI, Real Estate Price Index,

Export/Import price index, GDP deflator.


PART TWO:

INFLATION IN LEBANON


Inflation measures in Lebanon

Four main entities produce inflation measures for Lebanon:

– The Central Administration of Statistics (CAS).– The Ministry of Economy and Trade (MoET)– The International Monetary Fund (IMF) – The Chamber of Commerce and Industry in Beirut

(CCIB)– Consultation & Research Institute


Inflation measures in Lebanon• The Central Administration of Statistics (CAS) is the

principal national institution responsible for measuring inflation in Lebanon.

• CAS started tracking the price of consumer goods since December 1998. – It published a quarterly CPI since 1999 with the technical

assistance of IMF.

– In 2007, the CPI weights were updated using the 2004 Household Budget Survey. A new CPI began to be monthly issued as of March 2008.


• CAS compiles the monthly prices of 50,000 goods at 2,000 point of sales, grouping them into 12 time series.

• The weights used by CAS show the average household’s expenditures on goods and services, not taking into account the household’s size, income and social status. – Weights do not represent at all the expenditures of a typical

average household in Lebanon.



The CAS has started an initiative as of May 2008 to compile its data according to internationally accepted methods.

•The data coverage has been expanded to include the whole country and not just Beirut and its suburbs. •An attempt has been made to impute housing rents into the CPI.•CAS also has plans to produce a PPI




• In 2000, the MoET started issuing a consumer price index based on around 650 items from various supermarkets nationwide.– MOET index suffers from weighting that dates back to 1997,

supermarket misreporting, focusing on F&B mostly.

• In the Private sector:– Chamber of Commerce and Industry in Beirut (CCIB)

started a CPI in 1998, but discontinued it later.

– Consultations and Research Institute has published a monthly CPI since 1978.



• IMF publishes figures on inflation in Lebanon based mainly on figures that are estimated by the Central bank and IMF employees, and not using CAS or MOET figures.

• How do locally produced inflation measures correlate with the IMF figures?– We divide our analysis in pre and post 2007, following the

CAS change in inflation measurement


Annual Inflation Rate: 2004-2006

Source: Adapted from Dr. Jad Chaaban, "Doing the Sums: A new approach to calculating inflation in Lebanon", Lebanon Opportunities, March 2008


Cumulative Annual Inflation: 2004-2006

Source: Adapted from Jad Chaaban, "Doing the Sums: A new approach to calculating inflation in Lebanon", Lebanon Opportunities, March 2008.


Annual Inflation Rates: Post-2007

Source: Author’s calculations from CRI, CAS, & IMF data.


Monthly Inflation Rates: Post-2007

Source: Author’s calculations from CRI & CAS data.


Weights Applied

CRI ACSFood & Beverages 35.40% 22.00%

Clothing & Shoes 6.55% 6.20%Housing 6.49% 25.70%

Durable Consumer Goods 8.18% 3.90%Health 9.82% 6.80%Transport and Telecommunication 14.39% 17.10%

Education 12.45% 7.70%Leisure 2.70% 6.40%Personal Care & Other Products 4.02% 4.20%Source: Thibault CRUZET, Bilan de l’inflation au Liban au 1er semestre 2009, Ambassade de France.


What Do All These Figures Tell Us?

• There is evidence to suggest that current measures of inflation are conflicting.

• Hence the need to revise national price data.

• Why? Price shocks put the Lebanese economy in a vulnerable position, and as such any policies to tackle these price fluctuations must first be based on reliable nationwide data.


PART THREE:

INFLATION WORKING GROUP


Project Broad Objective

Build on recent advances on inflation measurement in Lebanon to construct a more comprehensive and robust inflation indicator for Lebanon.

– Price Monitoring and Revision of Data

Time Horizon: 2 years.


Specific Objectives

1) Undertake a critical revision of available price information in Lebanon, including public, private and international sources of information.

2) Establish new price statistics from available data, when feasible, such as export-import price indexes, real estate price indexes, and producer price indexes.

3) Develop a framework for price statistics to explain the links between various price indexes and between price indexes and other relevant economic statistics.


Working Group CompositionThe working group will comprise 6 members from the following organizations (mid and senior level civil servants) distributed as follows:

- CAS: 2 persons

- MoET: 1 person

- MoF: 1 person

- BdL: 2 persons


Working Group External Linkages

• The Working Group will be open to all interested organizations, both public and private, in addition to academia and international organizations, inviting them to participate in its work program.

• The Working Group activities are expected to receive wider exposure through discussion at relevant outreach meetings and regular communication with international experts and groups using electronic media such as the Internet.


Working Group Activities• Attend 3 courses, each for duration of 5 days:

- Statistical techniques for decision making

- Analytical writing skills for reports and public policy briefs

- Public economics principles and methodology.

• Advance on the production of outputs during 5 meetings in 2-day workshops each.

• Participate in 2 project retreats (each for 2 days), and in 3 public consultations and outreach events (each for 1 day).


Working Group Expected Output

1) Analytical report on inflation measurement in Lebanon– Theory of indexes

– Issues in inflation index construction

– Available price statistics in Lebanon

– Proposal for new price indexes

2) A National Price Monthly Monitoring Newsletter:– Information about the various price indexes used

– Trends in the evolution of prices

– Expected impacts of price movements on other economic

indicators in Lebanon


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session 2: cost of living and inflation measurement in lebanon inaugural conference upgrading...

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