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FEWS NET Washington

1717 H St NW

Washington DC 20006

info@fews.net

FEWS NET is a USAID-funded activity. This publication was authored by Abdoul Murekezi. The authors' views

expressed in this publication do not necessarily reflect the view of the United States Agency for International

Development or the United States Government.

www.fews.net Adjusting Prices for Inflation and Creating Price Indices

FEWS NET Markets Guidance, No 3

May 2009

INTRODUCTION

poor

Therelationshipbetweenthepriceoffoodand

otherbasicgoodsand householdbudget.Consequently, consumerpricesoffoodareprobably of pricesthatarefoundinthe understandtheimplicationsonfoodsecurity.

1. Anintroductiontoconceptsandtermsrelatedtoprices,inflation,priceindicesandpriceadjustment;

2. Anillustrationofhowpriceanalysesreliantonrealornominalpricescanyield

significantlydifferentconclusions;

3. Anunderstandingofwhyandwhen(forwhatpurposes)pricesshouldbeadjusted

4. Anunderstandingofhowtoadjustprices;and

5. Anillustrationofhowvariouspriceindicesarecalculatedandinterpreted.TABLEOFCONTENTS

Whataretheimplicationsofinflationfor

Howdoyouadjustpriceswhenyouhavea

Whyisthedistinctionbetweennominaland

DifferenttypesofConsumerPriceIndices.9

Computingandinterpretingthegeneral

Choosingtheappropriateindexfor

analysis

AnnexA:SelectsourcesofCPIdata.........21

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

INFLATION,PRICE,ANDPURCHASINGPOWER

otherfooditems,drinks,fueland and morequicklythanwagesorincome.AFEWS upwardwhatthey theeffectsofinflation.

Acomparisonbetweentherise

averagepoorhousehold'sbudget,this couldimplythatinflationishavinga householdstoshiftwhenthe overthe compounding-ifyoudoubletheinflationrate

Whatisprice?

PriceͲisthecostorvalueofagoodor

serviceexpressedinmonetaryterms.

Prices,inthepurestsense,indicatevalue

thathasbeenaddedtoaparticular commodity.

Pricesignalscancarryinformation

aboutthecostofproduction, transportation,storage,perceptions anddesiresas wellas,insome instances,distortions.

Apricerepresentsanagreement

betweenabuyerandsellerarrived atthroughanegotiatedprocess.

Theprevailingpriceatagivenlevel

orstageofthemarket(e.g.,farm gate,wholesale,retail)represents thenegotiatedequilibriumpoint reachedbetweenbuyersandsellers atthatstageinthemarket.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

3 Figure 1: Retail prices for millet without inflation and with 10% and 20% inflation

Source:Chopak,C.FEWS,1998

incomeandwiththat

2007comparedtoDecember2006as

ricedidnotriseasmuchaswheatflour. 1 .Theconsumermayevenpurchasemore nominalpricesissmallerthantherate ofinflation. 1 basketcanalsobe madeupfromhypotheticalquantitiescreated.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

4 1. vulnerablefarmers.

2. Howtheobservedpricesmaybeaffectingthepurchasingpowerofconsumersandfarmerswhorelyonthemarket

3. Howtheobservedpricesmaybeaffectingfoodavailability,themarginsoftradersandtheirincentivestoengagein

trade.

HOWDOYOUADJUSTPRICESWHENYOU

HAVEAMEASUREOFINFLATION?

thatispaid market. allowyoutocomparetheexchange powerofacurrency. percent.

REALPRICE

currentyear =(CPI baseyear /CPI currentyear )*nominalprice currentyear realpricesusingthefollowingformula:

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

5 comparisonwiththebase

RWFinJune2008and220RWFinJanuary2009,how

suggestthatmaizeisbecomingscarceinthe yearbefore?Howcanhigh heretobeJanuary

Table 1: Nominal and real prices of maize

PeriodNominalprices

InflationrateRealprices

January2008150.00base150.00

June2008200.0038%148.00

January2009220.0057%140.00

foodsecurityimplications. becomeworseoffasaresultofthe

Figure2.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

6 Figure 2: Changes in maize nominal and real prices over time in Rwanda moreexpensivethaninJanuary2008. Figure 3: Real and nominal maize price comparison for Lusaka analystcan

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

7 becomeworseoff.

LIMITATIONSOFUSINGREALPRICESINANALYSIS

of theextentoffood needinthemarket.Inotherwords,thereal lookingatchangesinreal picture.

Realprices

afirststepindetermining

SOMEPOTENTIALCAUSESOFINFLATION

Thepriceofany

allcausesofinflationand

1. Productionshortfalls

Forlocallyproducedgoods,the

leadto prices.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

2. Effectsofinputmarkets

andinducing otherinputsthatneedtobetransportedto

3. Governmentpolicies

isnotnormallythe orpoliticallyactiveurbangroups.In targetingthe poorandfoodinsecurehouseholds. andservices(orgoods rises the

4. Internationaltradeandtradebarriers

consumers.Theeffectswere mitigatefoodinsecuritythrough

Africaduetoimportrestrictions

2 prices. 2

Jayne et al., (2008). The 2008/09 Food Price and Food Security Situation in Eastern and southern Africa: Implications for Immediate and

Longer run responses.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

DIFFERENTTYPESOFCONSUMERPRICEINDICES

CPIcompiledinclude:

(1)ConsumerPriceIndex arehighly foodis Table 2: Trends in the different CPI indices measured in South Africa, 2001-2002

2001andFebruary2002

February

2001

January

2002

February

2002

CPI(metropolitanareas)

CoreCPI

CPIF

CPI(excludingfoodpriceindex)104.1

104.4
102.4

104.1109.0

110.7
113.9

107.7110.4

111.4
114.8

110.2+6.3

+7.5 +12.1 +4.8

Source:StatsSA,2002a

pricesrosemorequicklyor inCPIF. have incomegroup.

Statisticaloffices

CPIsareoftencompiledtoadjustwagesto

ministriesoffinanceand informationforFEWSNETcountries.

Inplaceswherethistype

(CPI).

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

COMPUTINGTHEFOODPRICEINDEX

computingofafoodpriceindexareasfollows:

1. Identifycommoditiesandweightsfortheconsumerfoodbasket

serviceor computedorderivenewindicesbasedon whattherepresentativeneedstoanalyze. similarcategories. asrice. Table 3: Weights of commodities consumed by Rwandan households in 2001

CommodityBudgetshare

Rice1.10%Cookingbanana4.21%

Maize1.99%Tomatoes1.36%

Sorghum2.46%Onions0.53%

Powdermaize1.46%Eggplants0.58%

Cassava5.08%Carrots0.11%

Sweetpotatoes15.97%Cabbage0.76%

Whitepotatoes8.45%Meat1.59%

Cassavaflower1.97%Fish0.41%

Soy0.46%Freshmilk0.43%

Peanuts0.53%Eggs0.18%

Driedbeans13.59%Bananabeer1.49%

Peas0.17%Sorghumbeer1.14%

Fruitbanana0.50%Palmoil1.72%

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

2. Computeaveragepricesofthecommoditiesthatformtheconsumerfoodbasket

upcomingmonths.For provinceofRwandabuymaize

Table4.

Table 4: Consumption of maize average prices in Southern province of Rwanda*

Butare105

Nyanza110

Gikongoro120

Gitarama115

Averageforprovince112.5

120+115)/4=112.5

3. Determinationofthepricereferenceperiod

•PricereferenceperiodͲisthe period,however,itshould becauseof characterizedbyeconomicconditionsthatare period.

Thepriceanalystmustchoosetheseperiodsin

oneofthetypesofreferenceperiod. prices.Thesepriceswillformthepricesofthe

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

12 Table 5: Computation of maize prices in the reference period

CapitalCity127

East116

North103

South113

West112

Nationalaverageprices114

116+103+113+112)/5

=114.

4. Calculationofthepricerelative(Pr)

periodforwhichthevalueoftheindex

PRICERELATIVEofmaizeinDecember2000=

relativelymoreexpensiveintheSouthern

January2001.

5. Calculationofthefoodpriceindex

oflivingapproach. period.Thisfixed 3 .Thisistheapproachthatthis

Thecostoflivingindexisanindexthat

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

13 maybeexpectedtochangethequantitiesthey

Tomeasurethecost

oftheirincome.

5.2Preferredpriceindex

referredtoasthe thatrequireanupdateofthe collected.Theideaofcontinuously timelyand consistentmanner.

LASPEYRESFOODPRICEINDEX=100*(єw

Pr)/єw

n wherew n thefivecommoditiesacrossprovinces

September1999.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

Table 6: Computation of the food price indices

ProvincesCommoditiesBudget

September1999

FoodpriceindexinSeptember1999

UsingtheLaspeyresformula

CAPITAL

*0.781+0.2*1.193)/1=103.7

Beans0.2001.200

Sweet potatoes0.2001.042

Cassava0.2000.781

Meat0.2001.193

*0.779+0.2*1.065)/1=91.3

Beans0.2001.017

Sweet potatoes0.2000.904

Cassava0.2000.779

Meat0.2001.065

0.65+0.2*1.021)/1=79.7

Beans0.2001.017

Sweet potatoes0.2000.500

Cassava0.2000.650

Meat0.2001.021

*0.59+0.2*1.124)/1=84.2

Beans0.2001.101

Sweet potatoes0.2000.715

Cassava0.2000.590

Meat0.2001.124

*0.457+0.2*1.145)/1=72.76

Beans0.2000.988

Sweet potatoes0.2000.378

Cassava0.2000.457

Meat0.2001.145

budgetshareofagood includingall sameformula,table7

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

Table 7: Values of the monthly food price index across provinces in Rwanda for selected months and years

East101.6190.59117.94116.34100.1477.38

North83.5372.99105.46102.2794.5778.04

West75.9567.75103.23104.9194.4180.40

South95.2083.86126.21112.03104.7192.84

INTREPRETINGTHEFOODPRICEINDEX

the makeuseofthefoodpriceindexto illustrate national tothecostofbuyingthe specific thebasketcosts3.23percentmoreinthatmonth compared response. inRwanda.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

16 Figure 4: Food price indices by locations and time in Rwanda (Jan 2001=100) possibletoidentify foodpriceindices. price more guidanceispresentingasimplewayof wereused.Generallythough, givesthesourcesofchangeinthe consumerpriceindexinTanzania.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

17 Table 8: Sources of change in the National Consumer Price Index (NCPI) in Tanzania, 1972-1989

1972Ͳ19791980Ͳ1989

Food45.465.8

ClothingandFootwear16.39.5

Transport9.33.9

Fuel,Light,andWater8.49.1

BeveragesandTobacco7.63.2

FurnitureandUtensils5.02.3

TOTALOFSIXITEMS92.093.5

Source:Doriye,J.1990

consumerbasket.Fromallthe index.

Laspeyresformula.

Table 9: Selected non-food price indices across time and provinces East

97.3096.50102.0197.9896.8797.67

Capital

124.69123.88132.64134.25131.09128.59

North

91.5090.8896.4397.5098.2497.81

West

98.1597.53102.3998.4598.5597.18

South

97.6297.04102.86100.5097.19100.01

representation ofTable9.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

18 Figure 5: Non-food price indices by locations and time in Rwanda (Jan 2001=100) higherinthecapitalcity.In Both

Thenextexampleillustrateshowto

computetheconsumerpriceindex. andtable9,howcan

Table10showshowthe

CPIiscomputedforthisexample.

Table 10: Computation of the consumer price indices using food and non-food price indices

PROVINCESFoodpriceindicesin

September1999

Nonfoodpriceindices

inSeptember1999

ConsumerpriceindicesinSeptember1999

CHOOSINGTHEAPPROPRIATEINDEXFORANALYSIS

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

19 securityanalysis? example,iffoodsecurityandearlywarning timehasbeenminor. and andaccesstofoodformarket-dependent households. theirlevelofincome,their

CONCLUSIONS

inflationintoaccount.The inrealandnominalpricescanlead populations'accesstofood.Thechoiceof differentgeographic facingdifferentprices.

[PDF] [PDF] Adjusting Prices for Inflation and Creating Price Indices

FEWS NET Washington

1717 H St NW

Washington DC 20006

Development or the United States Government.

FEWS NET Markets Guidance, No 3

May 2009

INTRODUCTION

Therelationshipbetweenthepriceoffoodand

1. Anintroductiontoconceptsandtermsrelatedtoprices,inflation,priceindicesandpriceadjustment;

2. Anillustrationofhowpriceanalysesreliantonrealornominalpricescanyield

3. Anunderstandingofwhyandwhen(forwhatpurposes)pricesshouldbeadjusted

4. Anunderstandingofhowtoadjustprices;and

5. Anillustrationofhowvariouspriceindicesarecalculatedandinterpreted.TABLEOFCONTENTS

Whataretheimplicationsofinflationfor

Howdoyouadjustpriceswhenyouhavea

Whyisthedistinctionbetweennominaland

DifferenttypesofConsumerPriceIndices.9

Computingandinterpretingthegeneral

Choosingtheappropriateindexfor

AnnexA:SelectsourcesofCPIdata.........21

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

INFLATION,PRICE,ANDPURCHASINGPOWER

Acomparisonbetweentherise

Whatisprice?

PriceͲisthecostorvalueofagoodor

Prices,inthepurestsense,indicatevalue

Pricesignalscancarryinformation

Apricerepresentsanagreement

Theprevailingpriceatagivenlevel

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

Source:Chopak,C.FEWS,1998

2007comparedtoDecember2006as

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

2. Howtheobservedpricesmaybeaffectingthepurchasingpowerofconsumersandfarmerswhorelyonthemarket

3. Howtheobservedpricesmaybeaffectingfoodavailability,themarginsoftradersandtheirincentivestoengagein

HOWDOYOUADJUSTPRICESWHENYOU

HAVEAMEASUREOFINFLATION?

REALPRICE

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

RWFinJune2008and220RWFinJanuary2009,how

Table 1: Nominal and real prices of maize

PeriodNominalprices

InflationrateRealprices

January2008150.00base150.00

June2008200.0038%148.00

January2009220.0057%140.00

Figure2.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

LIMITATIONSOFUSINGREALPRICESINANALYSIS

Realprices

SOMEPOTENTIALCAUSESOFINFLATION

Thepriceofany

1. Productionshortfalls

Forlocallyproducedgoods,the

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

2. Effectsofinputmarkets

3. Governmentpolicies

4. Internationaltradeandtradebarriers

Africaduetoimportrestrictions

Longer run responses.

FEWS NET Markets Guidance, No. 3 May 2009

Famine Early Warning Systems Network

DIFFERENTTYPESOFCONSUMERPRICEINDICES

CPIcompiledinclude:

2001andFebruary2002

February

January

February

CPI(metropolitanareas)

CoreCPI

CPI(excludingfoodpriceindex)104.1