Dr. Bawumia, the GSS, and Inflation

Sun, 31 Aug 2014 Source: Amegashie, J. Atsu

J. Atsu Amegashie

Department of Economics

University of Guelph


August 28, 2014

On August 21, 2014, Dr. Mahamudu Bawumia, a former deputy governor of the Bank of Ghana and the 2012 vice-presidential candidate of Ghana’s leading opposition party, alleged that the July 2014 inflation rate of 15.3% reported by the Ghana Statistical Service (GSS) was not credible. Referring to what he called our “collective experience”, he wrote:

“… a look at the reported inflation numbers suggests that something is not right. The rate of increase of prices in 2014 by our collective experience is clearly the highest in recent times, underpinned by the 40% depreciation of the exchange so far this year, increases in petroleum, utility and transportation prices, etc. The prices of most goods and services have virtually doubled and continue to increase daily.

This notwithstanding, the Ghana Statistical service data on inflation suggests that price increases in 2014 are slower than they were last year (2013). … Between January and July 2014 inflation increased by only 1.5% (13.8% to15.3%) after all the increases in petroleum, utilities and other prices we have witnessed. Almost every individual, household, business would tell you that prices are increasing much faster this year than has been observed in many years. So why is the Statistical Service data not capturing this?

… In January to July 2014 on the other hand petroleum prices have increased by some 48% along with other prices but the impact on inflation has been only1.5%. Something is not quite right and the GSS should take another look at the numbers and procedures to make sure they are capturing price developments adequately.” END OF QUOTE

Reacting to Dr. Bawumia’s allegation, Franklin Cudjoe of IMANI Ghana is reported to have said that if the NDC government’s agenda “… is to present incredulous, unbelievable data to the IMF (for a bailout), they better watch it because it’s going to come back and bite us.” (parenthesis mine). According to the head of the GSS, Dr. Philomena Nyarko, the former deputy governor “… was just picking items from the market and we don’t know which market he visited and computing and telling us that these are the inflation rates. You can’t do that kind of analysis. He should refrain from doing such analysis.”: http://www.citifmonline.com/2014/08/27/stop-making-unsubstantiated-allegations-gss-warns-bawumia/

Dr. Nii Moi Thompson, an economic advisor to the president, also rubbished Bawumia’s claim.

The purpose of this article is to shed some light on this debate and, in the process, inform and educate the general public.

The Consumer Price Index (CPI) measures the change over time in the general price level of consumer goods and services, with reference to the price level in a base year. More precisely, it is a measure of the cost of a basket of goods and services in a given period relative to the cost of the same basket of goods and services in a base year. The base year used by the GSS is 2012; the GSS used 2002 as the base year until it was changed in July 2013. The base year has an index of 100. According to the GSS, the CPI for July 2013 was 113.6 and the corresponding figure for July 2014 was 131.0. Given that the base year (2012) has a CPI of 100, this means that the cost of the basket of consumer goods and services was 31% and 13.6% higher in July 2014 and July 2013 than it was in 2012 (respectively).

The rate of inflation is then computed as the percentage change in the Consumer Price Index (CPI) over a twelve-month period. Therefore, the inflation rate of between July 2013 and July 2014 was (131 – 113.6)/113.6 = 0.153 = 15.3%. This means that the cost consumer goods and services in July 2014 was 15.3% higher than the cost in July 2013.

The GSS’ CPI is based on a basket of 242 consumer goods and services. It has two broad categories: (a) non-group, and (b) the food and non-alcoholic beverages group (hereafter the food group). The food group has a weight of 44.91% while the non-food group has a weight of 55.09%. The food group includes bread and cereals; meat; fish; milk, cheese and eggs; oil and fats; fruit; vegetables including potatoes and other products; sugar, jam, honey, syrups, chocolate and confectionary; food products; coffee, tea and cocoa; mineral water, soft drinks and juices. The non-food group includes alcoholic beverages; tobacco and narcotics; clothing and footwear; housing, water, electricity, gas and other; furnishings, household equipment etc; health; transport; communications; recreation and culture; education; hotels, cafés and restaurants; miscellaneous goods and services. Source: http://www.statsghana.gov.gh/docfiles/CPI%20Release_pdf/cpi_national_time_series_jan1970-sept2012.pdf

According to the GSS’ July 2014 CPI newsletter:

“The Food and non-alcoholic beverages group recorded a year-on-year inflation rate of 5.0 percent. … The non-food group recorded a year-on-year inflation rate of 23.1 percent in July 2014 … Two subgroups recorded year-on-year inflation rates higher than the group’s average rate of 23.1 percent). Housing, water, electricity, gas and other fuels recorded the highest rate of 62.0 percent followed by Transport with 38.3 percent.”

Therefore, the GSS’ computed rates of inflation for housing, water, electricity, gas and other fuels (62%) and transport (38.3%) are consistent with what Bawumia calls our “collective experience.” So why is the overall rate of inflation equal to 15.3%?

The food group, with a weight of 44.91% in the CPI, recorded an inflation rate of 5%. Within the non-food good, subgroups like health; clothing and footwear; recreation; furnishings, household equipment, and routine maintenance; communication, and hotels and restaurants, recorded inflation rates of 13%, 12.9%, 12.4%, 9.3%, 8.5%, and 5% respectively. These rates were much lower than the 62% and 38% rates recorded by the housing, water, electricity, gas, other fuels, and transport subgroups. The overall inflation rate for the non-food group was 23.1%. Therefore, it is possible that a weighted average of 5% for the food group and 23.1% for the non-food group could give a figure that is close to 15.3%. A simple calculation shows that

0.4491(5%) + 0.5509(23.1%) = 14.97%, which is approximately equal to 15% (see the appendices at the weblink below for a more detailed analysis).

Based on the preceding discussion, it is obvious that the driving force behind the GSS’ relatively low inflation rate of 15.3%, which appears to be at variance with what Dr. Bawumia calls our “collective experience”, is the very low inflation rate of 5% for food. Therefore, Dr. Bawumia’s allegation boils down to the following question: “is it credible that between July 2013 and July 2014, the price/cost of food increased by only 5%.”? In fact, according to the GSS, the price of vegetables fell by 6% between July 2013 and July 2014 and the price of fish increased by only 3.1% within the same period: http://www.statsghana.gov.gh/docfiles/new_CPI_pdfs/CPI_Newsletter%20July_2014.pdf

Vegetables and fish, components of the food group, have a combined weight of almost 23% while housing, water, electricity, gas other fuels, and transport, components of the non-food group, have a combined weight of 13%.

According to the GSS, the inflation rate in the Producer Price Index (PPI) was 33.1% in June 2014. This was much higher than (more than twice) the 15% rate recorded for the inflation rate in the CPI in June 2014. The PPI measures the average change over time in the prices received by domestic producers for the production of their goods and services. An item such as cement is not in the CPI because it not considered to be a consumer good. It is an input for a real estate developer (a producer) which should have an effect on consumer prices (i.e., rent and housing). The argument then is that the CPI indirectly captures changes in the prices of building materials because these changes ultimately have an effect on consumer goods. However, in a country like Ghana where many but not most people build houses for their own consumption and therefore buy building materials (like cement), one may argue that some component of these materials should be captured in the CPI with positive but small weights.

My gut feeling is that the 5% rate of inflation for food over the twelve-month period between July 2013 and July 2014 is too low. But this is only my gut feeling because I have not collected any data on food prices. The GSS must be commended for making its data publicly available. Kudos to the GSS! In the interest of more transparency, it should also upload a spreadsheet of the actual prices used in computing the CPI for a given month and make this data publicly available for X months (e.g., 3 months). Alternatively, it could do this for only the items in the food group, which has only 76 items. This proposal is not meant to impugn the integrity of GSS. Instead, it will cause people to be circumspect in criticizing the GSS.

In a companion appendix, I present a technical analysis at the following website: http://www.uoguelph.ca/~jamegash/Bawumia_vrs_GSS_Appendix.pdf

This technical analysis is intended to verify the internal consistency of the GSS’ computations. Based on my analysis, the GSS’ figures meet a basic test of internal consistency. This conclusion is a comment on the internal consistency of GSS' methodology. It is not a comment on the quality of the data used to compute the CPI. Therefore, as argued above, whether one believes the GSS’ figures depends on the answer to the following question: “is it credible that between July 2013 and July 2014, the cost (price) of food increased by only 5%.”? I will give the GSS the benefit of the doubt while urging it, as suggested above, to make the prices used in computing the CPI publicly available.

*J. Atsu Amegashie teaches Economics at the University of Guelph, Canada.

Columnist: Amegashie, J. Atsu