uleac cost of living and inflation measurement in lebanon part 3
DESCRIPTION
For more information about the project, visit: http://leb-econ.org/site/upgrading-lebanons-economic-analytical-capacity/TRANSCRIPT
Upgrading Lebanon’s
Economic Analytical Capacity
Rima Turk Ariss, Ph.D.Lebanese American University
& Lebanese Economic Association
May 31, 2012
Background
• Following the end of the civil war, the first wages adjustment
process took place in 1996:
– A unique amendment in 2008 granted a lump sum increase of LBP
200,000 per month bringing the minimum wage up to LBP 500,000.
• Wages adjustment became one of the top priorities on the
public scene between Sep 2011 and Jan 2012.
– Adoption of the wage adjustment decree No. 7426 during the January
18, 2012 session of the Lebanese Cabinet.
• Still people feel there is a gap between the inflation
measurements and the reality of the increase in prices.
• Five lessons learned from the wages adjustment discussions.
Background
1. Lack of agreement on the magnitude and causes of
inflation– CAS and CRI provide different inflation rates.
– Are price rises attributed to imported inflation?
– Is inflation due to an increase in the prices of non-tradables? Clothing and
footwear? Transportation costs?
2. Revival of the Price Index Committee and expanding its
inclusiveness, despite not adopting its recommendations– Includes the Minister of Labor, representatives from economic
bodies, General Labor Confederation, Coordination Committee of
Syndicates, and from CAS & CPI.
– Has the official mandate to recommend wages adjustment in the country.
Background
3. Introduction of the social wage concept– Proposals aimed at including transportation expenses as an integral part of
the salary, as well as extending health coverage to all Lebanese citizens.
– Greater attention given to attempt reducing inequality gaps among the
Lebanese population and towards strengthening the social safety net.
4. Predominance of political considerations when
undertaking economic decisions– A total of six wages adjustment proposals were discussed and circulated.
– Lengthy discussions even threatened the unity of the Cabinet.
– Final consensual decision did not account for the PIC recommendations.
5. Absence of a robust framework to monitor price
increases and enforce compliance– Unfounded price increases hiked prior to and following the adjustment.
Consistency and Validity Checks
Monthly Inflation Rate Evolution: CAS vs. CRI
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-1
0
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1
CAS
CRI
`
Discrepancy: CAS vs. CRI
• CAS covers numerous points of sale from all over the
Lebanese territory whereas CRI figures are collected from
selected outlets in Beirut and its suburbs.
• CRI excludes the lowest and highest income category
from the CPI calculation compared to the comprehensive
coverage of CAS of all income group categories.
• CAS uses weights that are derived from the 2004
household survey whereas CRI extracts its weights from
the 1997 household survey because it questions some of
the findings of the 2004 survey.
Consumption Weights: CAS vs. CRIExpenditure Category CAS 1997
weights %
CAS 2004
weights %
CRI 1997
weights %
Food and non-alcoholic beverage 32.3 19.935.4
Tobacco and Alcohol 2.3 2.1
Clothing and Footwear 6.3 6.2 6.55
Housing 1.6 16.2 1.68
Water, Electricity 7.2 9.5 4.81
Furniture and Household Maintenance 7.9 3.9 8.18
Health Care 8.8 6.8 9.82
Transportation 9.8 12.314.39
Communication 1.5 4.8
Recreation 2 3.72.7
Restaurants and Hotels 3.4 2.7
Education 13.4 7.7 12.45
Other goods and services 3.5 4.2 4.02
Total 100 100 100
Consistency and Validity Checks 1
Yearly inflation rates: CRI, CAS and OECD Europe
-20
24
68
01jan2008 01jan2009 01jan2010 01jan2011 01jan2012
yearly CRI inflation yearly CAS inflation
yearly OECD Europe inflation
Consistency and Validity Checks 2
Yearly inflation rates: CRI, CAS and OECD U.S.
-20
24
68
01jan2008 01jan2009 01jan2010 01jan2011 01jan2012
yearly CRI inflation yearly CAS inflation
yearly OECD US inflation
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
FAO food inflation rate
IMF food inflation rate
CAS food inflation rate
Food component: CAS, IMF & FAO inflation rates
Consistency and Validity Checks 3
Food component: CRI, IMF & FAO inflation rates
Consistency and Validity Checks 4
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
FAO food inflation rate
IMF food inflation rate
CRI food inflation rate
Transportation component:
CAS vs. Ministry of Energy and Water Inflation rates
Consistency and Validity Checks 5
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
Ministry inflation rate
CAS inflation rate
Transportation component:
CRI vs. Ministry of Energy and Water Inflation rates
Consistency and Validity Checks 6
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
Ministry inflation rate
CRI inflation rate
Proposals for New Price Indices:
Food Imports Price Index
• Extract data on Lebanese agro-food commodities
and products imports between 2008 and 2011 from
the Lebanese Customs website
– Items selected correspond to two hs levels of the detailed
taxonomy of agro-food sections : 1 (hs1 between 1 and 4)
and 2 (hs2 between 1 and 24)
• Compute the unit price of imported goods per kilogram
and then derive an imports price index using a monthly
bugdet share weighted Laspeyres price index
Lebanese Food Imports CPI vs. IMF Food Component CPI
Consistency and Validity Checks 780
9010
011
012
013
0
01jan2008 01jan2009 01jan2010 01jan2011
IMF Food Component CPI Lebanese Food Imports CPI
CAS Food Component CPI vs. Lebanese Food Imports CPI
Consistency and Validity Checks 890
100
110
120
130
01jan2008 01jan2009 01jan2010 01jan2011
CAS Food Component CPI Lebanese Food Imports CPI
CRI Food Component CPI vs. Lebanese Food Imports CPI
Consistency and Validity Checks 990
100
110
120
130
01jan2008 01jan2009 01jan2010 01jan2011
CRI Food Component CPI Lebanese Food Imports CPI
Proposals for New Price Indices:
Real Estate Price Index
• Data on real estate prices is scarce in Lebanon and no
official entity collects such information
– Preparing a real estate price index is practically impossible.
• CAS imputes a rent component without disclosing the
methodology, and CRI ignores housing costs in its CPI.
• However, several Lebanese households typically spend
a large share of their income on housing expenses
– Failing to adequately capture these expenditures in the CPI
may cast doubts on the usefulness of the price index.
Real Estate Price Index:
Hedonic Price Estimation
• Real estate prices for new apartment listings are first
collected from Lebanon Opportunities, which publishes
new apartment listing regularly since 2009.
– Covers 5 geographical areas: Beirut and
suburbs, Baabda, Aley, Metn, and Kesrouan.
• Reported prices are not equilibrium prices but asked (or
demand) prices that are likely to be overstated by
sellers.
– However, changes in a constructed real estate index based on
asked prices also reflect changes in real estate conditions.
Hedonic Price Estimation:
Sample & Methodology
Time Period Number of Apartment Listings
Fall-Winter 2009 533
Winter-Spring 2010 580
Summer-Autumn 2010 505
Winter-Spring 2011 701
Summer-Autumn 2011 990
Winter-Spring 2012 1110
Each square meter of living space adds βt to the value of the house, parameters γt , δt , φt , and
ώt capture the location premium for apartments in different regions. εijt includes all other non-
size characteristics (number of parking spots, time to delivery, number of rooms…)
Empirical Results
RegionFall-Winter
2009
Winter-
Spring 2010
Summer-
Autumn 2010
Winter-
Spring 2011
Summer-
Autumn 2011
Winter-Spring
2012
Aley 1,017 1,196 1,278 1,354 1,504 1,496
Beirut 3,002 3,659 3,144 3,076 3,410 3,266
Metn 1,509 1,569 1,842 1,966 1,976 2,069
Baabda 1,758 1,946 1,860 2,037 2,306 2,468
Kesrouan 1,358 1,834 1,685 1,820 1,904 1,816
Region Winter-Spring
2010-2011
Summer-Autumn
2010-2011
Winter-Spring
2011-2012
Aley 13% 18% 10%
Beirut -16% 8% 6%
Metn 25% 7% 5%
Baabda 5% 24% 21%
Kesrouan -1% 13% 0%
Conclusions: Real Estate Price Index• Real estate prices peaked in the first quarter of 2010 for Beirut
and Kesrouan regions and decreased afterwards
– The first quarter of 2011 even witnessed a deflation in real estate prices.
• Prices in different regions do not move in the same direction:
– Prices in Baabda picked up over the past 2 years while Metn witnessed a
decrease in prices.
• In comparison, the corresponding housing CPI component
reported by CAS was reportedly unchanged at 111.2 over the
same period, pointing to no fluctuation in the rent price
imputation component.
– It appears that the CAS housing component might not be an adequate
reflection of households’ expenditures on this major component of the
goods basket.
Summary: Validity Checks• Strong positive correlation between domestic & international inflation rates
– Domestic inflation rates are more correlated with U.S. than E.U. inflation
rates, as expected in light of the peg of the Lebanese currency to the U.S.
dollar, and despite Europe being the major trading partner of Lebanon.
– However, local rates are always above comparative international rates.
• Food inflation rates are below comparative international rates and did not
correct downwards as international food prices declined recently.
• Transportation component of domestic inflation rates is less volatile than
global trends in fuel prices.
• Housing component of CPI does not capture the reality of housing costs.
• The above validity checks suggest that current CPI measures in Lebanon
may need to be revised either in terms of collecting a more representative
data sample or improving the methods involved in its calculation, as well as
conducting a more recent household budget survey to better reflect
household consumption patterns.