How inflation is measured

ABDALLA F. HASSAN | Business Monthly | April 2003

The most common measure of inflation is the Consumer Price Index (CPI), which reflects movements in prices over time and across regions. Egypt’s index looks at a representative “basket” of goods, giving average prices in Cairo, Alexandria, Aswan and other communities, as well as for the country as a whole.

 

The Central Agency for Public Mobilization and Statistics (CAPMAS) is charged with compiling Egypt’s CPI figures. CAPMAS calculates the official inflation rate by periodically tallying the price changes for a typical basket of goods and services used by Egyptian consumers.

 

“The methodology that is used is very close to the methodology used in other developing countries,” said Ahmed Galal, executive director of the Egyptian Center for Economic Studies. “There may be some deficiencies, but they are not significant.”

 

Inaccuracies are likely to occur in identifying the typical basket, assigning relative weights to each item, selecting the stores where prices are collected and adding new items to the basket. 

 

Subsidies help control inflation—not just in practice, but on paper, too. The government’s inflation indicator includes items like bread or the rent for a flat, which are rarely subject to change. 

 

The CPI assumes housing costs to be fixed, only allowing for changes in maintenance and utility charges. This is problematic, according to Galal. “Rents in Egypt are fixed, but there are also buildings where rents go up rather quickly—the ones outside rent control,” he pointed out.

 

Consequently, as Cairo University economics professor Ahmed Farouk Ghoneim asserted, “Inflation is not going to show up in the indicators to the same extent that it does in reality.”

 

But despite the CPI’s shortcomings, other estimates of inflation are merely guesses. “No one has a different number than this, and not everyone can do it, because it takes an army [of researchers] to do it,” Galal said. “It’s very hard for anyone to verify what the number is and come up with a solid, defensible number.”

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