Representative Consumer Price Index for Sri Lanka: Lessons from India
CENTRAL BANK OF SRI LANKA
Representative
Consumer Price Index
for Sri Lanka:
Lessons from India
T M R P Yatigammana
V S B W Tennekoon
H W Thenuwara
OCCASIONAL PAPERS: NUMBER 67 - 2009
Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
Representative
Consumer Price Index
for Sri Lanka:
Lessons from India
T M R P Yatigammana
V S B W Tennekoon
H W Thenuwara
CENTRAL BANK OF SRI LANKA
Central Bank of Sri Lanka
Occasional Papers - No. 67 - 2009
The views presented in this paper are those
of the authors and do not necessarily indicate
the views of the Central Bank of Sri Lanka.
ISSN 1391-3832
Printed at the Central Bank Printing Press,
58, Sri Jayewardenepura Mawatha, Rajagiriya.
Published by the Central Bank of Sri Lanka,
Janadhipathi Mawatha, Colombo 1, Sri Lanka.
ii
Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
CONTENTS
Acknowledgement
v
Overview
1
1. Introduction
2
2. Measurement of Inflation in India
5
3. Wholesale Price index (WPI)
6
4. Consumer Price Indices in India
10
5. Measuring Inflation in Sri Lanka
18
6. Comparison of Compilation Procedures and
Methodologies of Price Indices Between
Sri Lanka and India
20
7. Suggestions and Recommendations
29
8. Conclusion
35
Central Bank of Sri Lanka
iii
Occasional Papers - No. 67 - 2009
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Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
Acknowledgement
At the outset, we wish to acknowledge the initiative taken by the
Governor, Central Bank of Sri Lanka, Mr. Ajith Nivard Cabraal, in
sending us to India to study the price index compilation practices
adopted by them, which directed us towards this publication. The
guidance and advice given by the two Deputy Governors, Mr. W A
Wijewardena and Dr. Ranee Jayamaha was most useful in carrying
out the study with a correct perspective. We are also grateful to the
Assistant Governor, Dr. H N Thenuwara, who personally assisted
us in finalizing the formalities of the tour, within a strict time
schedule. Our special appreciation goes to Director, Economic
Research, Dr. P N Weerasinghe, and Director, Statistics, Mr. S
Somapala, for their continuous encouragement and guidance.
The support extended by Deputy Director, Economic Research,
Mr. K D Ranasinghe, too is acknowledged with many thanks.
We must also thank the Director and the staff of the Training and
Secretariat Departments for arranging the required logistics within
a very short time period. Further, if not for the co-operation of the
staff of the Central Bank Printing Press, publishing this within a
short time schedule would not have been possible.
Senior Economic Advisor, Office of the Economic Advisor, New
Delhi, Mr. Tejinder Singh Lashchar, is remembered here with
immense gratitude for his kind acceptance of our request and
generously providing resources and staff in addition to arranging
visits to other institutions. The two Additional Economic Advisors,
Mr. M Senapati and Mr. S Sahu, as well as the Director WPI, Mr.
A K Sadhu, Deputy Director WPI, Mr. Kailash Sharma, Technical
Director, Mr. Sudhir Chandra, Deputy Director, Administration, Mr.
R Mukerjee and other staff willingly shared their expert knowledge
and experiences without any reservations. The warm welcome
and hospitality accorded to us at the Labour Bureau in Shimala
Central Bank of Sri Lanka
Occasional Papers - No. 67 - 2009
by the Director General, Mr. A S Ahluwalia, together with the two
Joint Directors, Mr. R K Gupta and Mr. Negi is also noted with
great gratitude. Our training on price indices would not have been
completed unless for the assistance provided by the Additional
Director General, Central Statistical Organization, Mr. Ramesh
Kolli and the two Directors, Dr. Bhupathi and Mr Naresh Kumar.
Our special thanks go to Mr. D C A Gunawardena, Director, Prices
and Wages division of the Department of Census and Statistics
for guiding us on the current practices adopted by the DCS in the
compilation of price indices in Sri Lanka. Finally, we also wish to
thank all our colleagues of the two Departments, Statistics and
Economic Research for extending their support in various ways.
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Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
Representative Consumer Price Index
for Sri Lanka: Lessons from India
Overview
Measuring inflation in Sri Lanka for the conduct of monetary policy
is a major concern of the Central Bank of Sri Lanka. In an effort to
introduce a more representative price index to measure inflation
in Sri Lanka, a team of Central Bank officers visited various
institutions responsible for compiling price indices in India. This
publication is the outcome of the visit which summarises the
compilation methods and procedures applied for price indices in
India and suggests the practices that can be adopted for Sri Lanka
to construct an improved price index.
In India, five price indices are compiled at national level including
a Wholesale Price Index (WPI) and four Consumer Price Indices
(CPIs), where the WPI is considered the official inflation measure. The four CPIs are, the CPI for Industrial Workers (CPI-IW),
the CPI for Agricultural Labourers (CPI-AL), the CPI for Rural Labourers (CPI-RL) and the CPI for Urban Non-Manual Employees
(CPI-UNME). These four price indices are mainly used for the determination of minimum wages applicable to respective classes of
employees.
Regular revision of price indices based on contemporaneous surveys is one of the good practices followed in India. The process of
revision is carried out by a diverse team of expertise representing
all relevant organisations.
One important difference in compiling price indices between India and Sri Lanka is how weights are applied. In Sri Lanka, average weights are applied across all regions while in India weights
for each region are assigned on the consumption patterns in that
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Occasional Papers - No. 67 - 2009
area. Another important aspect is accounting for seasonality. In
India, weights for seasonal vegetables and fruits etc. are changed
according to their availability during different periods. India also
ensures that purchases from fair prices shops are represented in
the index, in addition to the open market purchases, in order to
represent the true cost of living of the target population. The key
role played by the technology in the process of compiling price
indices in India also has to be highlighted.
Considering the efforts and time involved in the process of
revising a price index in India, it appears that the compilation of
a truly representative price index in Sri Lanka cannot be done
immediately. However, the work can be commenced on the
compilation of a sufficiently representative new price index with
the available resources and survey data, replacing the existing
highly outdated official index. Sri Lanka can incorporate most of
the procedures and practices applied in India. In the meantime,
all the prerequisites to revise the proposed new index have to
be commenced immediately. These prerequisites include starting
collection of price data of potential future consumption items,
developing necessary surveys and implementing technology
solutions.
1. Introduction
In January 2007, the Central Bank of Sri Lanka publicly announced
in its annual policy statement, “Road Map: Monetary and Financial
Sector Policies - 2007 and beyond”, the setting of tight targets
for monetary aggregates with the aim of achieving a single digit
inflation by the end of the year. The Central Bank has so far been
successful in achieving its announced monetary targets. The inflation, most frequently measured using the Colombo Consumers’
Price Index (CCPI) also moved along the projected path until mid
Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
20071. However, since mid 2007, particularly after the execution
of certain administrative price changes, the inflation measured on
the point-to-point change in the CCPI moved above the originally
projected path, raising concerns.
According to the widely used ‘Quantity equation’, the rate of
increase in price level has to be approximately equal to the rate
of increase in money supply over and above the rate of increase
in production. On that assumption, the Central Bank takes policy
measures from time to time to regulate the money supply, after
reviewing the movement of aggregate price level. However,
measuring inflation in Sri Lanka for the conduct of monetary policy
remains a major concern of the Central Bank of Sri Lanka, as
none of the available price indices in Sri Lanka are true measures
of the aggregate price level.
The CCPI, which is considered the official price index in Sri Lanka
is computed with reference to a 55 years old base, perhaps the
index in the world with the oldest base. The weights used in
CCPI are based on a Household Consumption Survey of 455
households in Colombo Municipality area in 1949/50. When an
index is computed using Laspeyres’ formula without revising its
base weights, base prices and market basket for a longer period,
the formula itself tends to overstate the price level. First, over
time, people tend to increase their consumption share of relatively
cheaper items, by reducing the consumption share of relatively
expensive items. Therefore, a fixed weighting structure usually
overstates the share of relatively expensive items. Second, when
the base prices are older, expenditure share of more expensive
items increase disproportionately with time, making the inflation
1/ At the time of writing this paper, the CCPI was the official measure of inflation in the country,
which however was revised subsequently with the base year of 2002. This revised CCPI
(Called CCPI(N)) introduced towards the end of 2007, was announced the official CPI of the
country , while the old CCPI was discontinued with effect from May, 2008. In addition, the
SLCPI too was ceased to be compiled since December 2007.
Central Bank of Sri Lanka
Occasional Papers - No. 67 - 2009
hyper-sensitive to the changes in prices of such items. This too
leads to overstate inflation. Third, over time, people add newly
introduced relatively cheaper commodities to their consumption
baskets, which reduce the shares of existing items. When the
basket is not timely revised, this impact is not captured again
leading to overstate the price level. Overall, when a price index is
not revised for decades, the price level shown by that index can
be significantly higher than the actual price level. Even apart from
this bias, the CCPI is not an indicator of national price level. It only
reflects the changes in price level in Colombo Municipality.
The issues related to the CCPI and the need to have a more
representative price index has been pointed out by the Central
Bank and other authorities since 1970s. In response, an alternative
price index, the Sri Lanka Consumer Price Index (SLCPI), was
introduced in 1997. The SLCPI is a representative index than the
CCPI in several respects. First, it’s geographical coverage spreads
across 20 districts of the country. Second, the weighting patterns
are based on lowest 80 per cent of the population by household
consumption, as against the coverage of working class population
(lowest income bracket) in the CCPI. However, the price data are
collected entirely from urban centres for compiling the SLCPI. The
SLCPI too has not been revised since commencing its compilation
in 1997. This situation has built up some consensus among the
policy makers in Sri Lanka including the Central Bank that the
country should move to a new representative price index now.
Technically, methods and procedures followed by different
countries for the compilation of price indices are similar. However,
the practices in price collection, data scrutinisation, and index
revision in each country depend to a large extent on the social
infrastructure of respective country. India is the closest neighbour
of Sri Lanka with many similarities in household habits. The growth
rates of monetary aggregates as well as the growth rates of GDP
in two countries are at somewhat comparable levels.
Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
The Central Bank of Sri Lanka was of the view that a thorough
study of the price indices compiled and used in India would
help Sri Lanka to design a more representative new price index.
Accordingly, a study team of three Central Bank officers visited
India during 20-28 August 2007 to study the compilation methods
and procedures of five national price indices used in India. The
team visited the Office of the Economic Advisor, New Delhi, the
Labour Bureau, Shimla and the Central Statistical Organisation,
New Delhi and met the key officers of respective organizations
responsible for the compilation of the WPI and four national CPIs
in India.
2. Measurement of Inflation in India
The WPI is considered the official inflation measure in India and
the monetary policy decisions of the Reserve Bank of India (RBI)
are largely based on the movements of the WPI. In addition to
the WPI, four CPIs (Table 1) are compiled at the national level, to
measure the cost of living of four specific categories of Indian population, namely CPI for Industrial Workers (CPI-IW), CPI for Agricultural Labourers (CPI-AL), CPI for Rural Labourers (CPI-RL)
and CPI for Urban Non-Manual Employees (CPI-UNME). These
price indices are mainly used for the determination of minimum
wages applicable to respective classes of employees. The RBI
too continuously monitors the movements of these four CPIs in
addition to the movement of the WPI.
There are three organisations involved in the process of compiling
price indices in India. The Office of the Economic Advisor (OEA),
under the Ministry of Trade and Commerce, located in New Delhi,
compiles the WPI. The Labour Bureau, under the Ministry of
Labour and Employment compiles the CPI-IW, CPI-AL and CPIRL at its office located in Shimla. The CPI-UNME is compiled by
Central Bank of Sri Lanka
Occasional Papers - No. 67 - 2009
Table 1 - Salient Features of Price Indices in India
WPI
CPI-IW
CPI-AL
CPI-RL
CPIUNME
Base year of
current series
1993-94
2001
1986-87
1986-87
1984-85
No. of
items in the
consumption
/ commodity
basket
435
120-160
260
260
146-135
No. of centres
/ villages
N/A
78 centres
600
villages
600
villages
59 Urban
centres
Broad
groups of
commodities
(Weekly)
78 centres
& all-India
(Monthly)
20 states
& all-India
(Monthly)
20 states
& all-India
(Monthly)
59 centres &
all-India
(Monthly)
2 weeks
1 month
3 weeks
3 weeks
3 weeks
Index
Index
released for
Time lag
the Central Statistical Organization (CSO) under the Ministry of
Statistics and Program Implementation (MOSPI), located in New
Delhi.
3. Wholesale Price index (WPI)
The current series of WPI with the base year of 1993/94
(replaced 1981-82 series) is released from April, 2002 covering
435 commodities. The sector wise break up of 435 commodities
include 98 primary articles (54 food articles, 25 non-food articles
and 19 minerals), 19 commodities under fuel, power, light and
lubricants category and 318 manufactured products.
Price collection
The OEA does not have its own price collectors. Neither does it
have any mandate by legislation to collect price data. However,
Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
the OEA has so far been able to collect price data with respect
to a wide spectrum of products from various official and unofficial
sources on a regular basis, with a comparatively lesser time lag.
Each week the OEA calls for 1,918 price quotations for 435
commodities, 4-5 quotations on average for each commodity. The
data collecting sources include both official and non official sources
such as Directorate of Economics and Statistics, District Statistical
Offices, Registrars of Co-operative Societies, other primary
agencies belonging to various Governments, various chambers of
commerce, trade associations, leading manufacturers and trade
associations. When the provisional WPI numbers are released
with a time lag of 2 weeks, the OEA receives approximately
40-45% of price quotations. Previous reported price data are
repeated in case of the items that price data are not available.
When the final WPI numbers are released after 2 months, the
OEA receives 80-85% of price quotations. At that point, price data
are freezed and any subsequent price information is updated only
in the forthcoming period. The OEA has a time schedule for calling
price quotations during the week. That way, the consistency of the
duration between two price quotations is maintained.
Scrutinising price data
Scrutinisation of price data is an important step in the compilation
process of the WPI. The current price quotations, when received,
are compared with the quotations of the previous week and previous month. In the case of the observance of significant variations with no acceptable reason being assigned by the source,
the source is referred back seeking a clarification in writing. If the
source does not confirm the accuracy of price data with an explanation for the variation, the previous price data is repeated until
such confirmation is received. Sometimes, the officials of the OEA
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Occasional Papers - No. 67 - 2009
are deputed to make personal visits to the data providing agencies to establish the facts. If a confirmation is not received until the
publishing of final WPI numbers, such price data is not used for
index compilation at all.
Compilation methodology
Laspeyres’ base-weighted formula is used to compile the WPI,
while following several steps before reaching the final WPI
(Figure1).
If at least one price quotation is received in respect of a certain
commodity, the commodity index for that item is calculated using
the actual data. However, if none of the quotations have been
received for a commodity, the index is estimated using past data.
When a particular item disappears due to off-season and price
information is not quoted, the weight of that item is distributed
within the sub group on pro-rata basis, which is called the weight
distribution mechanism.
IT system
The advanced IT system that has been developed by the National
Information Centre (NIC) of the government of India assists the
staff of the OEA to retain all the past price data, execute all complex data processing tasks and calculations and also to trace any
abnormalities in price movements. The software programme enables to capture the items with zero price quotations during the offseason months and automatically applies the weight distribution
mechanism.
Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
Figure 1
Price Relative (PR) for each price quotation of
a particular commodity
(PR = Current Price*100/Base Price)
Commodity Index
(Simple Arithmetic Mean of PRs)
Sub Group Index
(Weighted Average of Commodity Indices)
Group Index
(Weighted Arithmetic Average of Sub
Group Indices)
Major Group Index
(Weighted Average of Group Indices)
Overall WPI
(Weighted Average of Major Group Indices)
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Occasional Papers - No. 67 - 2009
Revision of the WPI
The OEA is in the process of revising the base period of the WPI
to 2000/2001 at present. With this revision the existing basket of
435 commodities is expected to be increased to 1,271 commodities. The number of price quotations is expected to be increased
to around 12,000. Most of the new commodities will be added to
the basket of manufactured items.
4. Consumer Price Indices in India
Overview
There are four CPIs released at national level in India covering
different employment groups. The main use of these CPIs is to
regulate the dearness allowance of the working class in addition
to fixation of minimum wages.
The CPI for Industrial Workers (CPI-IW), an important indicator
of retail price situation in India, compiled by the Labour Bureau,
measures the temporal change in retail prices of fixed consumption
basket of an average working class family relating to factories,
mines and plantations, railways, motor transport undertakings,
electricity generation and distribution establishments and ports
and docks. The All-India index together with 78 Centre indices for
each month is released on the last working day of the succeeding
month and the release of the current series on base 2001=100
was commenced with effect from January 2006.
The Labour Bureau compiles the CPIs for agricultural labourers
and rural labourers (CPI-AL and CPI-RL) and releases the AllIndia index together with 20 State indices for each month. The
current series on base July 1986 – June 1987=100 (agricultural
year) was released with effect from November 1995. Besides CPI
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Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
for agriculture labourers, CPI for rural labourers at All – India level
and for the 20 states were introduced for the first time with this
revision, with the same base year. Agricultural labour represents
about 60 per cent of rural labour and agricultural labour is a subset
within rural labour.
The CPI for urban non manual employees, compiled by the Central
Statistical Organisation (CSO) is primarily used as an indicator
of price movements related to the urban population in India. The
All-India index together with centre indices for 59 urban centres,
is released on the 25th of the succeeding month and the current
series on base of 1984- 1985=100 was introduced in November,
1987.
Price collection
The price collection exercise is given utmost care, and the prices
of each and every item is carefully scrutinised prior to being used
in index compilation. A large staff strength is utilised for this purpose, to ensure greater accuracy. Government employees are
utilized for price collection purpose in case of CPI-IW and the officers from the National Sample Survey Organisation (NSSO) are
utilized to collect prices for the other CPIs.
At the outset, a pilot survey is carried out to demarcate centre
boundaries and to determine other relevant logistics pertaining to
price collection, prior to the commencement of the main survey.
Based on its findings, areas with large concentration of population covered under each CPI and the markets frequented by them
are identified in consultation with government officers and representatives of employee organizations. Thereafter, representative
number of markets (CPI-IW – 261, CPI-AL & RL – 1461, CPIUNME – 1022) are selected through actual visits, ensuring the
regular availability of these items. Thus the selected markets are
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Occasional Papers - No. 67 - 2009
kept fixed throughout the life of the series. The setting up of price
collection process, fixation of specifications and the fixing up of
price collecting day and time are finalised in consultation with the
respective state governments. Initially, an exhaustive list of items,
including the new items that are most likely to be significant in
the new CPIs will be introduced. Once the items are finalised, the
non-significant items would be dropped from the price collection
schedules.
In relation to a particular item, the unit with which the majority of
transactions of the reference population take place is taken as the
price collecting unit of that item. Retail prices are collected on a
weekly, monthly, half yearly/yearly basis depending on the price
variability of the items. When a particular item is not available, the
same price is continued for a few months prior to replacing that
item.
Selection of shops
In respect of each selected item, 2 shops are selected in a given
market to obtain price quotations to capture inter-shop variations.
In addition, 2 more shops are selected as reserve shops as a
fallback option. Further, four ration shops are selected to capture
the prices of rationed items, provided such shops are available.
In addition, Consumer Co-operative stores, which too offer
subsidized prices are included in some cases. Retail mill shops,
whenever possible, are selected for clothing items. Co-operation
of the shopkeeper and predominance of retail transactions are
also looked into, in selecting shops.
Rationed items
In the case of rationed items, the weighted average of ration price
and open market price is used, the weights of which are based
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Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
on the relative quantities available in ration shops and the rest
of the requirement per family (i.e. off-take weights). Therefore, in
addition to the price, the available quantities per family from each
ration shop are reported for each centre/village. In the case of CPIUNME, the off take weights are revised once every six months.
The shop level weights are averaged to get market level weights
and thereby obtain weighted price for each rationed item for a
given market. These are then averaged to get centre/village
weighted prices.
In case of an item supplied free to the entire reference population,
zero price is used, whereas if only a proportion is eligible, a
weighted average price based on the proportion is used. If an item
is free during base period and remains free, its price relative is
kept at 100.
Seasonal items
Pricing of seasonal items is limited to the months in which they are
available, which is determined by studying the prices over a period. This is mostly common in fruits and vegetables. The weight of
such an item is distributed among other items in the corresponding section/subgroup during the months of off season. Hence, the
weighting pattern varies from month to month in vegetable and
fruit groups. This method is applied in the case of other items
too, whenever prices are not available, though a pre determined
weight structure has not been prepared.
House Rent Survey
The housing group index is revised in January and July of each
year, based on the housing survey conducted in six monthly
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Occasional Papers - No. 67 - 2009
rounds, on a sub sample of houses covered in the main survey.
The weighted average of three separate indices compiled for rented, rent free and self owned houses, is taken as the housing index
for each centre, the weights of which are the respective proportion
of families in each housing category. Expenditure on minor repairs
by the workers is also considered in compiling the rent index.
Scrutinising price data
The price schedules are scrutinised at several levels to enhance
the reliability and accuracy of prices sent from the field. Where the
government employees are involved, the work of the price collector
who is posted locally is supervised by the price supervisor, who
works on part time basis in lieu of an honorarium. Price Supervisor
in charge of a group of markets, pay visits to selected markets on
the price collecting day and furnishes detailed reports to Labour
Bureau every month. Price collection work of an entire state is
overlooked by the state co-ordinator, while the Labour Bureau
officers of the regional/sub regional branches carryout price audit
work on a regular basis. On the other hand, where the NSSO
officers are involved, price collection is supervised by an Assistant
Superintendent once in 3 weeks and by a Superintendent once
a month. In addition, a regional Assistant Director conducts field
checks once every quarter.
The prices collected are examined thoroughly for any inter-shop,
inter-market and inter-period variations at the headquarters and
are referred back to the field for discrepancies, if any, and rectified
accordingly, or sometimes by visits to the field. Moreover, prices
are adjusted for quality and quantity variations in respect of base
period specifications.
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Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
The prices are compared with the previous period prices for unusual fluctuations in consideration to pre determined tolerance levels. For example, under CPI-UNME the tolerance levels are:
Seasonal items > 50 % (+ or -)
Non seasonal items > 10% (+ or -)
If these variations are not confirmed by the field, the price of the
previous period is repeated. All methodological issues relating to
utilisation of prices are invariably decided in consultation with the
TAC.
IT system
Advanced IT systems are used in the processing of price
information and CPI compilations. These systems are capable of
handling more than 2 lakhs of records each month and stores
about 10 years of data in the system. The software programs used
are robust and dynamic and hence give the flexibility required by
the users to a great extent.
Weighting diagrams and index methodologies
The weights for CPIs are derived using consumption expenditure
of the reference population covered, in the Family Living Surveys
for CPI- IW and CPI-UNME and Household Consumer Expenditure
Enquiries for CPI-AL and CPI-RL conducted by respective
organizations. The definitions used for Industrial Worker, NonManual Worker, Agricultural and Rural Labour in corresponding
surveys are given in Annex I. The weights at All-India level, in
respect of groups/ sub groups of items of goods and services are
given in Table 2 below.
Central Bank of Sri Lanka
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Occasional Papers - No. 67 - 2009
Table 2 - Weighting Diagrams of the CPIs
Index
CPI - IW
Base : 1982
CPI-AL
Base : 1986-87
CPI-RL
Base : 1986-87
CPI-UNME
Base : 1984-85
Food, Beverages
and Tobacco
60.15
72.94
70.74
47.13
Fuel and Light
6.28
8.35
7.90
5.48
Housing
8.67
-
-
16.41
Clothing and
Footwear
8.54
6.98
9.76
7.03
Miscellaneous
16.36
11.73
11.87
23.95
Total
100.00
100.00
100.00
100.00
Group
In addition to All-India level weights, the center specific weights in
case of CPI-IW and CPI-UNME and state specific weights for CPIAL and CPI-RL are derived from the respective surveys in respect
of groups/ sub groups of items of goods and services, which are
used for compilation of center wise and state wise indices.
The Index numbers are compiled using Laspeyres’ Index formula
(Refer Annex I for technical note on Index formula). In case of
CPIs for industrial workers and urban non-manual workers for
each center, the index is compiled firstly at sub-group level, then
at group level and general Index level, which is called the center
index. In order to compile an average All-India index, the center
indices are combined using centre weights [Wi] (Figure 2). The
center weights are the ratios of total consumption expenditure of
estimated number of families allocated to a centre in the state to
the sum of all such expenditure over all centres in the country.
The state level price Relatives (PRs) are calculated by weighting
the zonal level PRs which are arrived at by averaging the village
wise PRs for each item for compiling CPI-AL and CPI- RL. Then
16
Central Bank of Sri Lanka
Representative Consumer Price Index for Sri Lanka: Lessons from India
Figure 2
Sub group Index
Group Index
Centre_1 Index
Centre_2 Index
Centre Index
.......
Centre_N Index
W2
W1
All-India Index
WN
the state index is calculated following three steps as sub group,
group and general level as described in the previous case.
Once the index compilation is completed, all the indices are scrutinized for unusual fluctuations. For example, in CPI-UNME when
the index is higher or lower than 3 index points over the previous month, the items which caused the fluctuations are identified.
Thereafter, all the price quotations of these items are referred to
the field for confirmation. Revision of CPIs
India conducts Income and Expenditure surveys once in every 10
years. However, due to various reasons, the base year revision
takes place even far in between, approximately at twenty yearly
intervals, most of the time. The survey period or a period not so
distant, for which reliable price data is available, is chosen as the
base period. The revision process is conducted following a comprehensive work plan and price data collection commences prior
to commencement of the survey including new items which will
most likely to be significant items in the baskets. Accordingly, the
revised index series is compiled for a period preceding the new
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Occasional Papers - No. 67 - 2009
base year, and thereafter the linking factors are constructed to arrive at the new series based on the old index.
The technical details are examined by a sub group of TAC, members from the NSSO, Labour Bureau, CSO, RBI, several ministries, advisors and academics and the methodology of the new
series is approved by the TAC. Thereafter, series of consultations
take place with various user groups such as employee and employer representatives and state authorities at different stages.
The deliberations on the issue of the new series are conducted
with the participation of representatives from each central trade
union and the employers’ organizations. The active involvement
of these agencies ensures transparency and wider acceptance.
5. Measuring Inflation in Sri Lanka
There are two major Consumer Price Indices which are compiled
and published monthly by the Department of Census and Statistics,
namely the Colombo Consumers’ Price Index (CCPI) and the Sri
Lanka Consumers’ Price Index (SLCPI). In addition to these two,
Central Bank of Sri Lanka also compiles four regional consumer
price indices (Anuradhapura, Matale, Matara and Western
Province) and one district consumer price index for the district of
Colombo as well as Wholesale Price Index (WPI) to measure the
price changes in the primary market2. However, we mainly deal
with the two consumer price indices compiled by the Department
of Census and Statistics, in this section.
In Sri Lanka, the CCPI has remained the official price index, which
was constituted as per the provisions of Wages Board Ordinance
of 1941, and is used to determine the cost of living allowance
2/ Subsequent to writing this paper, the regional and district price indices compiled by the
CBSL were discontinued during the second half of 2007.
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Representative Consumer Price Index for Sri Lanka: Lessons from India
payable to government servants, plantation workers and workers
in other industries covered by the said legislation. The CCPI is
based on the spending patterns of the working class households,
within the Colombo Municipal area with 1952 as the base year. The
weight structure was based on average household expenditure
of a sample of 455 working class households ascertained at the
Colombo Family Budget Survey of 1949-50 and the base year
was revalued at annual average prices of 1952. The expenditure
classification was based on the Central Product Classification.
The geographical coverage for price collection is the Colombo
municipality (7 centers).
The Sri Lanka Consumers’ Price Index (SLCPI) is based on the
spending patterns (Household Income and Expenditure Survey
1995/96) of the lowest 80 per cent of households ranked according
to monthly expenditure in the entire country excluding the Northern and Eastern provinces, with 1995 -1997 as the base period.
The survey covered about 20,000 households and over 16,000
sample households fell into the lowest 80 per cent category. The
classification basis used was Classification of Individual Consumption by Purpose (COICOP) that was introduced by the UN
System of National Accounts in 1993. The geographical coverage
for price collection was widened to 20 districts, except districts in
the Northern Province (Jaffna, Mannar, Vavuniya, Mullaitivu and
Kilinochchi) (34 centers).
The CCPI uses a basket of 187 items while SLCPI consists of 174
consumer items. The price data collection is done by the officers
in the Department of Census and Statistics of Colombo and the
statistical officers in the district offices.
The base period weighting diagrams of two indices are given in
Table 3.
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Occasional Papers - No. 67 - 2009
Table 3 - Weighting Diagrams of the CCPI and SLCPI
CCPI
SLCPI
Group
%
Group
%
Food
61.9
Food, Beverages and Tobacco
71.2
Clothing
9.4
Clothing and Footwear
Fuel and Light
4.3
Housing, Water, Electricity, Gas and
Other Fuels
Rent
5.7
Furnishing, Household Equipment and
Routine Maintenance of the House
2.1
Health
2.4
Transport
2.9
Leisure, Entertainment and Culture
0.8
Education
1.3
Miscellaneous Goods and Services
2.1
Miscellaneous
Total
18.7
100.0
Total
4.1
13.1
100.0
The two indices use the Laspeyres’ formula which are compiled
using Excel spreadsheets.
Of the two indices, the monthly CCPI is released on the last working day of each month and the SLCPI is released after a gap of
around one month.
6. Comparison of Compilation Procedures and
Methodologies of Price Indices Between Sri Lanka and
India
Involvement of an advisory body
There is a Technical Advisory Committee (TAC) in India, which is
entrusted with the task of reviewing all the technical, compilation
and price collection matters pertaining to the CPIs and the WPI.
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Representative Consumer Price Index for Sri Lanka: Lessons from India
The committee represents professionals from various government
institutions including ministries, universities and Labour unions
who have acquired relevant technical knowledge and experience
on the subject. This is a good practice to be followed in Sri Lanka
also, where current involvement regarding the technical issues of
the official consumer price index is limited basically to the Department of Census and Statistics.
IT system
The use of an advanced IT system in India for data processing
and index compilation procedures enables them to store a large
volume of past data records, protect the confidentiality of price
data, carry out advanced data validation checks, identify items with
no data records for off-season months and to make adjustments
for seasonality etc. The excel spread sheets used in Sri Lanka for
data processing and index compilation are capable of handling
only a limited number of operations and does not offer required
flexibility to deal with advanced techniques as used in India.
Adjustment for seasonality
Seasonality of prices for certain food commodities such as
vegetables, fruits, fresh fish is a common phenomena both in Sri
Lanka and India. It is well known that for off-season months, the
consumption of such particular seasonal commodities becomes
lower or sometimes negligible in response to the very high prices
of those items in the markets due to the very low supply or non
availability. Hence, the use of those prices combined with the
original base weights to compile the index will abnormally increase
the expenditure of such items in the off season months compared
to the normal expenditure pattern. However, the actual expenditure
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Occasional Papers - No. 67 - 2009
spent by an average household will be lower or zero for such
particular items during these months due to lower consumption
or not having the item in response to seasonality and they tend to
consume something else which are more available in the markets.
Hence the quantity consumed of off seasoned items will not be the
same as in other months, in contrast to the assumption of a fixed
quantity consumed over time in the Laspeyres’ formula of index
compilation. However, in contrast to the situation in Sri Lanka,
this is prevented by the weight distribution mechanism adopted in
India for off season months.
When a particular commodity disappears from the market and the
price is not quoted, its weight is distributed over the remaining items
in the concerned sub group on pro-rata basis under the weight
distribution mechanism. Therefore, for the sub groups with those
items, the weighting patterns change every month depending upon
the availability. This mechanism directly responds to the changes in
consumption pattern in line with the actual behaviour of households
in relation to relative prices. Accordingly, sudden price fluctuations
due to off-season will not appear in the index while neutralising the
effect of seasonality. Therefore, the index series becomes smooth
avoiding peaks and toughs over time. The software package used
to compile the price indices in India supports such sophisticated
mechanisms without making much effort.
In Sri Lanka, the CCPI is compiled using an Excel spreadsheet
while following the chain rule. Therefore, it does not support
the undertaking of weight changes on a monthly basis as in the
case of India and hence it is compiled with the limitation to use
the base period weights in each and every month irrespective
of seasonality. As a result of the non availability of an accepted
mechanism to adjust for seasonality, even when there are
changes in consumption of certain items due to off-season, the
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Representative Consumer Price Index for Sri Lanka: Lessons from India
reported prices for the fixed basket have to be used irrespective
of the magnitude of the market price. This creates a situation
of higher price fluctuations than the normal pattern resulting in
a lesser degree of smoothness of the CCPI over time. This has
become a critical issue for monetary policy decision making based
on inflation as measured by the CCPI.
Changing the base period
It is a common practice to use the Laspeyres’ formula for compiling
price indices. However, it has been found that Laspeyres’ formula
when used for an index series for a longer period will result in
upward bias in the index due to the assumption of fixed quantities
consumed over a period of time. This could lead to dominance
of the index by a few items which have relatively higher price
increases compared to others. For an example, the expenditure for
vegetables increased to 21 per cent (of the total basket value) in
July, 2007 from around 5.9 per cent from the base period of 1952,
due to high price volatilities in vegetables over a period of more
than five decades with weights being kept fixed during the period.
Therefore, changes in consumption pattern over time necessitate
revision of weighting diagrams at relatively short intervals to the
extent possible. Accordingly, in India family budget enquiries are
generally conducted after an interval of 10 years for the purpose
of revising the base period.
The interval of 10 years to conduct a family budget enquiry and a
revision of base weight diagrams is however not a good practice
compared to other developed countries, which do more frequently
such as in 5 year time periods or sometimes yearly. However, in
Sri Lanka, such a practice has not been followed in respect of the
official index of the CCPI from its commencement and as a result
it has now become “disreputably outdated”.
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The relatively longer time period for family budget enquiries in
India would have attributed to the high cost of the surveys and
relatively large geographical coverage need to be covered under
the surveys. In contrast to this, Sri Lanka conducts Household
Income and Expenditure Surveys (HIES) and Consumer Finances
and Socio Economic Surveys (CFS) at 5 year intervals, which
collect households’ expenditures that can be used to revise the
base period weighting diagrams of the CCPI on a timely basis.
Selection of markets and shops for regular price
collection for compilation of CPIs
Besides the weighting diagram, the other important element in
compilation of a CPI relates to prices in respect of individual items
consumed by the reference population considered in constructing
the weighting diagram. Prior to commencement of regular price
data collection, market surveys are conducted in India to identify
the areas of the targeted population (reference population) covered
in each CPI and retail markets catering to them. In selecting
representative markets due regard is given to various types of
markets such as specialized market, general important market etc.
for different commodity groups and also their popularity among the
covered population. Thereafter, these markets are visited to verify
the availability of various items being consumed by the targeted
population on a regular basis. The markets once selected are not
changed in the life of an index series to maintain comparability of
current prices with base prices.
Compared to the practice in India, Sri Lanka does not conduct any
market surveys to select the price collection centres. At present,
price data are collected from seven market centres (Colombo
City - Pettah, Maradana, Borella, Dematagoda, Grandpass,
Kirillapona & Wellawatte) for compilation of the CCPI. However,
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Representative Consumer Price Index for Sri Lanka: Lessons from India
the popularity of those market centres among the reference
population of the CCPI (lowest 40 per cent of households, ranked
by their monthly income, within the Colombo municipal area) is
hardly established.
After selection of market centres, at least two shops are selected
from each of the selected markets for regular price collection. In
addition, two more reserve shops are selected so that prices could
be collected from these shops in case if goods are not available
with selected shops. However, this concept of reserve shops is
not applied in the CCPI price collection procedure and the data
collector finds out any other shop/outlet to obtain prices for any
item which is not available in the regular price collection shop/
outlet.
The selection of two or more shops in the procedure of price data
collection followed in India for each of the items in the price schedule allows the capturing of shop to shop variations of the same
market. Similar to this practice, price data for some items are collected from more than one shop in each market centre under the
CCPI price data collection system also.
Utilization of rationed/regulated/co-operative prices in
the CPIs
India has a mechanism to regulate the supply in the open market
for certain key consumer items such as rice, wheat, sugar and
kerosene. Also in certain market centres, there are some rationed
prices. When applying the price data to the CPIs, India utilises
a weighted average price after making adjustments for rationed/
regulated/co-operative prices instead of just applying the open
market prices. For this purpose, India conducts off-take surveys
to estimate proportionate expenditure on purchases from the
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Occasional Papers - No. 67 - 2009
respective sources of supply and calculates an off-take ratio
which reflects the proportion of total requirement of a household
of a particular item met through rationed/regulated/co-operative
price shops. Therefore, even though the prices have risen, the
availability of rationed/regulated/co-operative supplies by the
Government at lower prices allows to contain the price increases,
which could otherwise have actually reflected a high price increase
in the CPIs.
In contrast to the above mechanism applied in India, Sri Lanka uses
only open market prices in compilation of the CCPI. No mechanism
has been adopted to estimate the quantities purchased from the
co-operative or budget shops and then to estimate a weighted
average of co-operative or budget price and the open market
price. Accordingly, even though Sri Lanka provides a certain price
relief through co-operative or budget shops, it is hardly captured
in the index.
Ensuring the reliability and accuracy of price data
For price data collected for CPIs in India, 3 tier price supervisions
are conducted. First, by the middle level officers of the same
department to which the price collectors belong, secondly,
the officers from regional offices of Labour Bureau and thirdly
at the headquarters. At the headquarters, all the price data
received is thoroughly scrutinized and inconsistencies, if any, are
referred back to the field for verification. Accordingly, the price
data collectors at the initial stage and their first supervisors are
totally independent of the officers who belong to the responsible
institutions for compiling the CPIs. However, in Sri Lanka, price
data is collected by the officers of the Department of Census and
Statistics which itself is the authorized body to compile the CCPI.
The supervision is also done by the officers of the Department of
Census and Statistics.
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Movements in the House Rent sub index
The house rent sub index of the CPIs compiled in India is moved
on half yearly basis, where as the house rent sub index of the
CCPI in Sri Lanka has been kept fixed from its inception. As a
result, the base period expenditure share of around 5.7 per
cent for house rent in the CCPI has followed a diminishing trend
over time registering a share of less than 0.2 per cent of total
expenditure in the CCPI basket by July, 2007. This is due to the
non-existence of contemporaneous house rent enquiries to draw
changes in the house rent price data and not using any proxy
to move the price relatives related to house rent. In comparison,
India conducts house rent enquiries at six month intervals for the
purpose of moving the house rent sub index in the respective CPIs
with the updated market rates.
Compilation of CPIs
The four CPIs compiled in India first compile the centre indices
and combine them using a centre weight in order to compile the
All-India index. The centre indices are more sensitive to the price
changes within the centre and therefore the changes within the
centre indices are critically analysed before finalizing the All-India
index and index scrutinisation mechanism is applied, if necessary.
Also, the centre-wise index compilation procedure enables to
identify changes in the price levels in each centre separately and
the causal factors related to such changes. Accordingly, India finds
out any supply gluts or deficiencies that exist within a centre and
then make arrangements to cushion the situation immediately.
Sri Lanka also collects price data from 7 market centres covering
the Colombo municipality for compilation of the CCPI. However,
the procedure of adopting the simple average of 7 market prices
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Occasional Papers - No. 67 - 2009
hardly supports to identify price changes at market centre level
at a glance. Also, there can be differences in the consumption
patterns within the centres, which are not captured under the
current compilation procedure of the CCPI. The proportions of
expenditure shares of the 7 centres could not have been equal at
the time of weight diagram construction, however the compilation
procedure of simple average price mechanism inherently assumes
the equal proportion of expenditure shares from 7 centres. In
contrast to this, the procedure followed by India allocates centre
weights based on the total consumption expenditure of estimated
number of families for each centre, while taking into consideration
the differences in consumption patterns at centre level and hence
producing a more representative All-India index on average.
Effects of international prices on the CPIs
The composition of item baskets selected in the Price Indices in
India and Sri Lanka have significant differences. The CCPI used in
Sri Lanka consists of both domestically produced (around 78 per
cent) and imported items (around 22 per cent), while item baskets
of the CPIs and WPI in India entirely consist of domestically
produced items. Eventhough the petroleum products are included
in the baskets, the price revisions have no direct relationships
with the price changes of crude oil in the international market
that frequently take place. The prices of petroleum products are
adjusted through the local taxes which are also different from state
to state. Also as explained in the previous sections, the availability
of an adjustment mechanism to apply a weighted average price
for regulated supplies has a positive effect on curtailing the price
increases of certain petroleum products such as kerosene, which
contributes to reduce the effect of international price hikes in the
domestic markets of India. Accordingly, movements of the WPI or
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Representative Consumer Price Index for Sri Lanka: Lessons from India
CPIs in India do not reflect any international price shocks at all,
while the movements of the CCPI in Sri Lanka frequently respond
to the price changes in the international market considerably.
This is reflected in the continuously increasing trend observed in
the imports group sub index of the CCPI, which has shown an
increase of around 30 per cent by July, 2007 on a point to point
basis.
7. Suggestions and Recommendations
In view of the recent developments and deficiencies of the existing
CPIs, the foremost need of the country is to develop a realistic
measure of inflation, targeting monetary policy at the earliest
possible. However, compiling a comprehensive price index that
the country needs may require about 2 – 3 years as it involves
collecting new series of price data, training price collectors,
conducting further surveys and reaching consensus with various
stakeholders of the economy. The possibility of using the new
index as a Cost of Living Index (COLI) directly or with adjustments
should also be looked into. Based on the findings of the study visit,
which had been already discussed in the previous sections, the
team would like to suggest the following that can be followed in
compiling a representative CPI for Sri Lanka.
Form a committee on index compilation
Similar to the TAC of India, a committee comprising of many stakeholders with the necessary technical know-how should be formed
for approving methodological, technical and logistical arrangements of price index compilation. The committee may comprise of
about 10 members representing the following institutions :
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• Department of Census and Statistics (DCS)
• Central Bank of Sri Lanka
• Finance Ministry
• Ministry of Trade and Commerce
• Ministry of Agriculture
• Labour Department
• Academic Institutions
Sub-committees should be formed to examine technical and logistical details and make recommendations to the committee, based
on their findings. The final weighting diagrams, price collection
machinery and certain other methodological issues such as base
year selection and its revision should be referred to the TAC for
approval.
Determine the scope of the CPI
A composite index at national level is suggested which should be a
weighted average of several indices at region/income group level.
The best alternative should be adopted after a careful analysis of
the possible bases for developing separate indices forming the
pillars of the ultimate country wide index. These bases are;
(a) Geographical boundaries
It has been observed that regional disparities exist within the
country, with respect to consumption behaviour, life styles,
poverty levels and also price behaviour. Hence, separate indices
could be developed at provincial level deriving weighting diagrams
for each of the provinces and thereby work out the national CPI
by assigning weights to each province based on the relative
household expenditure per month.
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(b) Urban/Rural/Estate
Regions with a higher concentration of urbanised locations than
others show a consumption behaviour different to that of the
others and also in those regions with high incidence of poverty.
Here too, separate indices could be developed for each of the
three sectors.
(c) Income group
The population could be broadly grouped into three categories
based on their income level, i.e. poor, middle income and the
affluent. Poor are known to exhibit distinct consumption patterns.
The feasibility of compiling indices for different employment
categories seem to be too far fetched, given the inadequate
sample size. The Household Expenditure and Income Survey
(HIES) covers less than 1 per cent of the households of the
country and due to resource constraints it may not be feasible to
increase the sample size significantly. In this context, one option
would be to take a sub level index (i.e. either Western Province,
urban or middle income group) for wage indexation purposes by
carefully considering its suitability in terms of majority of the type
of employment covered within the sub sample and the practical
implications thereon.
Designing an Income and Expenditure Survey
Ideally a survey should be in place with this specific purpose in
mind, and the sample selection of households for enumeration
should reflect the basis of compiling sub level indices. However,
due to resource constraints the index compilation too is based
on the HIES conducted by the DCS which has varied objectives.
However to minimize biases, sample should be drawn based on
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Occasional Papers - No. 67 - 2009
the distribution of the population according to the basis of index
categorization from each province. For example, the distribution of
population in urban/rural/estate in each province or the distribution
of population among income groups in each province.
Conducting a House Rent Survey
Based on a sub sample of households from the main survey reflecting the type of housing category (owned, rental or rent free)
or the dwelling type (the number of rooms) distribution the rent
information could be collected once every six months. This could
be used to compile a housing index and move the rent component
in the relevant sub index. If implemented, this will be a substantial
improvement from the present practice, where rent is fixed in the
CCPI leading to distortions of the index.
Price collection
(a) At the outset, a market survey should be carried out to identify
markets/shops and the unit of price collection of each item frequented by the target population at each centre. This should
be done as a pilot survey prior to the main survey. A pilot survey should be designed immediately considering the expenditure patterns as revealed by the HIES 2006/07 after identifying the target population, with a view to revise the current
series in future. This series could be revised with the base
year of 2009 provided a stable price series be available by
then. The revised index series could be released by 2010-11.
Thereafter, the market survey should commence prior to the
main survey which is scheduled to be conducted by 2011/12.
(b) In addition to the normal shops, one or two reserve shops
should be identified at each market and co-operative shops/
budget shops too should be included for price collection.
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Further, the possibility of calculating off-take weights through
surveys should be examined and if possible, the prices should
reflect the partial impact of budget prices for the appropriate
population. Any subsidy given by the government has to
be accounted for. For eg: if a certain percent of the total
consumption of kerosene by a target group is purchased at
subsidized rate, the applicable price should be the weighted
average of the subsidized price and the open market price.
The same principle has to be applied in case of concessional
season tickets for transportation or any free goods supplied to
Samurdhi recipients.
Price supervision/scrutinisation
It is advisable to appoint outsiders as price collectors (i.e. investigators), ideally those in government service or teachers by paying
them an honorarium. However, the supervision of their work could
be done by regional statistical officers of the DCS who should
submit reports each month. In addition, supervision at the DCS
Head Office too should be carried out at least quarterly by paying
visits to the fields.
All the price schedules should be carefully examined prior to data
entry at the Head Office, for any unusual fluctuations and should
be referred to the field for confirmation.
Development of a reliable software programme
An advanced software programme should be in place facilitating
dynamic operations in a user friendly environment with high data
storage and retrieving capacity. Hence, it is imperative to develop
a sophisticated computer system capable of handling complex operations from data entry/data validation, accounting for seasonalCentral Bank of Sri Lanka
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ity/missing items etc. to final index compilation, while generating
required reports. Further, the programme should support network
operations which would enhance the overall efficiency. In this connection, an appropriate software should be developed, if possible
with the consultation of a relevant partly. The Office of Economic
Advisor (OEA) expressed their willingness to provide consultation
in developing a software in our country at the discussions. Revision of base year
The base year of the new index should be revised, at least once
every five years and the selection of the base year should be
done on the approval of the committee. Hence, the new CPI
series currently being compiled by the DCS based on the latest
HIES 2002 with a base of 2002 = 100 can be revised with base
2009 = 100, and thereafter updated to base 2013 = 100 and once
every five years from there onwards.
The linking factors between the new series and the old series,
calculated using an appropriate method, either ratio or arithmetic
method too should be published with the new series.
Further, prior to accepting the revised index officially, all the user
groups including the trade unions should be consulted to obtain
their comments.
Date of releasing the monthly index
The possibility of releasing the index at the end of the each month
should be examined considering the time constraints involved in
compiling a comprehensive index covering the entire country, the
release of either a provisional number at the end of each month
subject to subsequent release of the actual number with some
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Representative Consumer Price Index for Sri Lanka: Lessons from India
lag or release of the final number at once with an appropriate lag
could be considered.
8. Conclusion
The Colombo Consumers’ Price Index (CCPI), being the official
cost of living index in Sri Lanka, was primarily constructed for
wage indexation and designing cost of living allowances. It is also
used as the general measure of inflation in the country so that
inflation, and in general, price information being a key variable in
economic decision making in any country, the CCPI is used for
policy formulation and monetary policy purposes and also to draw
international comparisons. However, due to the inadequacies of
the CCPI, which had already been discussed at different forums,
there is an immediate need to replace the CCPI with a more
representative price index for achieving its primary objectives.
Based on the experience gained from India, it is recommended
that a composite national level CPI comprising of several indices
representing different segments of the society or geographical
regions be developed for monetary policy purposes for Sri Lanka.
A measure of core inflation could be used to assess demand driven
inflation, which is more appropriate for monetary policy decisions3.
In addition, this would enable the comparison of price behaviour
across different regions of the country, or to analyse the impact
of price changes on different segments of the population. These
revelations could be used in various economic decision making
processes.
3/ The inflation after being adjusted for transitory components is known
as the core inflation or underlying inflation.
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Appendix I
The definitions used for reference populations in each
CPI in India
For Working Class Family Living Survey (WCFLS) conducted during 1981-82, a working class family was defined as one (i) which
was located within the centre, (ii) which had at least one member
working as manual worker in an establishment in any of the seven
sectors of employment covered viz. factories , mines, plantations,
ports and docks, public motor transport undertakings, electricity
generating and distributing establishments and railways; and (iii)
which derived 50 per cent or more of its income during the calendar month preceding the day of enquiry through any manual
work.
An agricultural labour/rural labour household is considered as
one which derived 50 per cent or more of its income from gainful
employment on occupations of one or more of its members as
agriculture/rural labour. A person is considered engaged in
agricultural occupations in the capacity of a wage paid manual
labour, whether paid in cash or kind or both;
(i) farming
(ii) dairy farming
(iii) production of any horticultural commodity
(iv) raising of livestock, bees or poultry
(v) any practice performed on a farm as incidental to or in
conjunction with farm operations (including forestry and
timbering) and the operation for market and delivery to storage
or to market or to carriage for transportation to market of farm
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produce. Carriage for transportation refers to the first stage of
the transport from farm to the first place of disposal. Working
in fisheries was excluded from agricultural labour.
A person who does manual work in return for wages in cash or
kind or partly in kind (excluding exchange labour) is a wage paid
manual labour. Persons who are self-employed doing manual work
are not treated as wage paid manual labour. People living in rural
areas and engaged in manual labour by working in agricultural
and/or non agricultural occupations in return for wage paid either
in cash or in kind (excluding exchange labour) are considered as
rural labour. Thus, rural labour includes both agricultural labourers
and other labourers as well.
An urban non-manual employee / household is defined as a
household which derives 50 per cent or more of its income from
employment in non-manual and non-agricultural sector, during
the coverage of 1982/83 Middle Class Family Living Survey (MCFLS).
Laspeyres formula
Laspeyres introduced this index formula in 1871. In case of
calculating the price index, assuming that for individual item i,
price at the base period to be pi0, at the observation period to be
pit, and quantity at the base period to be qi0, the following equation
is called “Laspeyres formula”.
∑ pitqi0
i
∑ pi0qi0
....................... (1)
i
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where, denominator and numerator are total expenditures for all
items, at the base and the observation period, respectively, assuming that consumers purchase the same amount of commodities both at the base period and the observation period. In this
formula, quantities are fixed at the base period.
For practical use, eq.(1) is transformed as follows;
p
∑ pi0it wi0
i
∑ wi0
(w i0 = p i0 q i0 ) ........... (2)
i
This is weighted average of price ratios of each item, weighted by
expenditures at the base period.
38
Central Bank of Sri Lanka