Implications of New Colombo Consumer Price Index

With the New Colombo Consumer Price Index (CCPI(N)) coming into effect in December 2007, some critics believe by changing the sample, the new index would be less pro-poor.

It would also create a divergence between the cost of living (COL) and the cost of living allowance (COLA) for lower level workers.

According to Dr. Harsha De Silva, lead economist at Lirneasia, the lower level workers across Sri Lanka have a higher food component and by only taking the sample from metropolitan Colombo, the CCPI(N) weight food stood at 46.7% while the old index food weight was 68.3%.

At the 33rd Open Forum organized by the Centre for Poverty Analysis (CEPA) this week, Director at the Department of Census and Statistics (DCS), D.C.A. Gunawardena said the old index had a base year as far back as 1952 and was therefore outdated and obsolete.

It had a sample of 455 working class households and did not represent true changes in costs in line with the changing consumption patterns.

The CCPI(N) has 2002 as its base year and has a weighting pattern based on expenditure in all urban households in the Colombo district which takes into consideration all socio-economic groups.

There are 334 items categorized in 10 groups which include health, transport, food and non alcoholic beverages, communication, clothing and footwear, education, housing, water, electricity gas and other fuels.

The number of price collection centres have also been expanded from 7 to 12 which include Pettah, Maradana, Wellawatte, Dematagoda, Nugegoda and Kotte amongst others.

Gunawardena said that in the CCPI(N), the average monthly expenditure is Rs.17996.38 as opposed to Rs.202.04 with the old index. Similarly, the average household size in the new index is 4.5 persons as opposed to the old which was 5.8 persons.

He warned the public not to compare the two and added that the CCPI(N) puts inflation at a lower level.

De Silva said that by changing the sample, the index has gotten better but is 'not the best.' He also said that the CCPI(N) is in line with actual expenditures and reflects reality.

De Silva added that 'less volatility with the new index is better for investment planning.' However, in the Central Bank's Monetary Policy Road Map 2007, the old index forecasted inflation at 7.5% but with the CCPI(N), the actual inflation rate is 18.8%.

De Silva also said the sample in the CCPI(N) is less restrictive that before but should include all of Sri Lanka, not only Colombo.
As an alternative to the CCPI(N), he suggested that there be a 'purpose defined' consumer price index. (NG)