Business
NBS inflation figures don’t adequately capture consumers’ experience – Analysts
Researchers at the Analysts Data Services and Resources (ADSR) have pointed out that Nigeria’s inflation figures as released by the National Bureau of Statistics (NBS) may not adequately capture the experience of consumers due to a number of limitations in methodology.
The ADSR, a data and research company, in its quarterly report released in July 2022, noted that such factors as substitution bias, quality bias and new products bias, among others limit the ability of the NBS to adequately capture consumer experience.
It noted that while Nigeria’s inflation rate came in at the high value of 18.6% for June, 2022, even as the average price paid by consumers for goods and services has doubled in the last 5 years, which has has serious implications for citizens’ welfare, especially as wages, in most sectors, have not increased substantially over similar period, many citizens still wonder if their daily experiences in the market are adequately captured by the NBS in its report.
“Inflation is commonly measured as changes in the Consumer Price Index (CPI) which itself measures the prices of a representative basket of goods and services purchased by a typical household. Based on what is known as the Laspeyres index, CPI is computed by using fixed weights of quantity of goods and services derived from household surveys conducted in some periods in the past while prices are updated more frequently,” the report said.
“The inflation estimate for June appears as the highest after the 18.72% recorded in January 2017, making the current figure a 65-month high. The trend also shows that the three rates move in a similar direction with the urban inflation rate higher than rural in all the periods.
“Despite this high and rising inflation figures, many citizens still doubt if their experience of market prices is adequately captured. While some are of the view that they experience far higher price increase in recent times, others think otherwise.
“No doubt, the national statistical authority applies a robust methodology to the measurement of inflation in Nigeria; but the nature and pattern of commodities used in the computation as well as the assumptions inherent in their measurements will always, and everywhere, make inflation figures imprecise.
“The objective of this article is to discuss factors that may limit the usefulness of CPI as a true Cost of Living Index and therefore affect inflation figures, especially what consumers feel in reality. This problem is commonly referred to as CPI Bias in the literature; coming from substitution, quality change, new items and new outlets. Depending on their relative severity, the cumulative impact of these biases may lead to under- or over-estimation in inflation rate.
“Substitution bias: This problem occurs when consumers switch away from goods that have become relatively more expensive in the basket to cheaper ones, yet the benchmark basket still assumes consumer still behave in the old static manner. For instance, when prices of some forms of fuels increase, consumers will substitute them for alternative and more affordable energy sources, but CPI will typically assume consumers still behave in the current period as they did in the past.
“Quality bias: CPI does not adequately capture changes in the quality of commodities in the consumer basket; the computation continues to assume same quality for such goods many years after they might have changed. There are many items in Nigeria, e.g. groceries, which prices have not changed significantly in the past, but consumers have observed significant changes in their quality, such as tastes, packages, etc.
“New products bias: CPI also fails to capture products newly introduced into the market, as it maintains a constant basket of commodities for a period regardless of the emergence of new products.
“There are more and new consumer items now than in the past. For instance, products like mobile phones have improved significantly in terms functions and features in the last 10 years far beyond what CPI can easily capture.
“New outlets bias: When consumers change the outlets and locations where they purchase their goods and services, CPI may still be using the old outlets which may not mirror the new reality. In recent years, there are many big supermarkets that have opened outlets all over the country and as Nigerian consumers patronize them, it implies they are gradually moving towards VAT-paying sales outlets. E-commerce and online shopping are also new outlets that CPI may not adequately capture.
“Certain features of Nigeria’s CPI’s computation further aggravate the effects of these forms of bias. For instance, the consumer basket being used comprises 740 items which were surveyed since 2003/2004 and re-valued in 2009; with the urban and rural indices weighted with a constant population ratio of 0.455 and 0.545 respectively.
“However, many of the 740 items surveyed and weighted since 2009 would definitely have changed in terms of numbers, relative importance to consumer and in quality. Moreover, there are many more new items, or their variants, which consumers spend money on as well as in new shopping outlets, both physical and online. In addition to these well-established forms of bias, it is important to note that the CPI and the derived inflation rate are both average numbers, comprising several commodities, many of which are not consumed by the same consumer and also not in the same proportion.
“To partly address this, the national statistical authority often presents various forms of inflation rates to support the headline figures. For instance, values are presented for rural and urban areas, food and non-food items as well as for different states in the country.”
The report which analysed the relative weights of 12 consumption classifications in the June NBS report noted that items under food accounted for 53.2% of the Nigerian consumer basket weight and others are far less.
According to it, the 5-year average inflation rates vary across these consumption classifications. Specifically, Food and nonalcoholic beverages (16.92%), Clothing and footwear (12.8%),
Transport (12.23%), Health (11.81%) and Furnishings and household equipment maintenance (11.7%) top the list of baskets with highest average annual inflation; while Communication (7.59%), Housing water, electricity, gas and other fuel (9.59%), Recreation and culture (10.21%), Restaurants and hotels (10.26%), and Alcoholic beverages, tobacco and kola (11.03%) rank lowest.
“Consequently,” it said, “the inflation rate encountered by a consumer will vary depending on the proportion of expenditure that goes into food relative to other items, the specific food item consumed, locations and many other factors. In other words, different consumers will be exposed to different inflation rates depending on their characteristics; but the inflation rate often reported is an indicative figure averaged over several consumption items and the interaction of consumers and sales outlet distributed over many locations.
“For instance, deriving from the popular Engel’s Law that food’s budget share is inversely related to household real income, the rich are often seen to spend a lower proportion of their income on food than the poor, which can affect the rate of inflation they may face. This explains a situation where Nigeria allocates over half of the weights in its consumer basket to food and only 16% and 15% are allocated to food in the case of Canada and the US respectively.
“To deal with some of these problems, it is ideal that the survey of quantities used in deriving the items weight in the consumer basket is conducted at the same time as that of prices. However, because it is always difficult and costly to get the market baskets and weights reviewed on a monthly basis, the recommended option is to update the baskets used in generating the weights at least once every 4-5 years.”
The report recommended that going forward for the country’s statistical authority and users should note that Nigeria needs to update its consumer basket from what was done in 2009 to more recent years to reflect current realities and also keep to a minimum of a 5-year updating plan going forward.
According to it, many countries are now leveraging technology to obtain both quantity and price data from retail outlets. Nigeria needs to do likewise to make consumer basket, especially in certain locations, as dynamic as they should be.
It further said, “The urban (0.455) and rural (0.545) weights should be continuously updated, especially in the light of rural-urban migration of the country and the impact of insurgency and other crisis on rural activities.
“Development of new shopping outlets and platforms need to be duly recognised in obtaining prices and expenditure on items. Ecommerce and transactions via online platforms have changed consumers’ spending patterns in the last 10 years.
“Some countries also complement their CPI inflation with other indexes and Nigeria can learn from them. In addition to the CPI produced by the Bureau of Labor Statistics in the US, the Bureau of Economic Analysis also produces the Personal Consumption Expenditure (PCE). The PCE has more relevant items and more realistic weights which have made the Federal Reserves to choose it over CPI since 2000.
“Retail Price Index and Wholesale Price Index are other variants produced in countries such as UK, US and India; and Nigeria can learn from their relevance and approaches.
“Within what is currently available, users of CPI and inflation figures can adopt rates most suitable for their purpose and/or generate their own weights with which appropriate inflation rates can be computedo.”
Nigerian Economy to Grow by 3.44% in H1 2022
The report noted that the IMF in her July edition of the World Economic Outlook maintained Nigeria’s growth of 3.4% (majorly as a result of the increase in the global oil price) but global growth has been downgraded by 0.4 percentage points from 3.6% to 3.2%.
It said that although the Nigerian economy has been facing challenges such as insecurity affecting production of food items, high rate of inflation, rising debts, increase in the rate of oil theft which has been limiting her ability to take advantage of the increase in oil price, weak currency amid shortage of foreign exchange to meet demands to mention just a few, it is believed that the economy is gradually recovering from the COVID-19 pandemic shocks and has been recording positive growth since the fourth quarter of 2020.
“In 2022’Q1 the economy recorded a growth of 3.11% and our projection is that by the time the National Bureau of Statistics (NBS) releases the 2022’Q2 GDP figures the economy will grow by 3.71%, leading to an average growth of 3.44% in the first half of the year.
“This growth will be driven majorly by the non-oil sectors of the economy with the financial services sector taking the lead. Major drivers of our half year growth projection are Financial and Insurance (23.24%), Water supply sewage and waste management (13.22%), Information and communication (11.87%), Human Health and Social Services (5.91%) and the Manufacturing sector (5.89%) while the laggards are the Mining and Quarrying Sector (-25.89%), Transportation and Storage (-17.41%) and Electricity (-11.2%).
“This is a call to action for Nigeria on the need to diversify away from the oil sector which is more susceptible to global price shocks; and the economy’s continuous dependent on it is inimical. Adequate attention should be given to sectors such as manufacturing.
“Nigeria to Service Debt with 125.09% of Revenue in 2022’H1 The fiscal performance report which was presented by the Ministry of Finance, Budget and National Planning in the just-concluded public presentation of the 2023-2025 Medium Term Expenditure Framework (MTEF) shows that the amount used in servicing debt for the country is about 129.85% of the FGN retained revenue as against budget of 48.01% in the period January-April, 2022. Higher debt service-revenue ratio implies that the country is now borrowing, not just to implement project and pay salaries, but also to service its debt; this is very worrisome.
“The report further shows that the country’s deficit stood at N3.06 trillion at the end of April, 2022 as against the pro-rated projection of N2.07 trillion. So far, it is evident that the fiscal outcomes fall below the government’s projections.
“Based on the trend of what has happened so far in the year and observed Federal Account Allocation Committee (FAAC) distribution, we projected the fiscal outcomes for the first half of the year. Our projections show that revenue, expenditure and deficit will be N2.32 trillion, N6.83 trillion and N4.51 trillion respectively in the first half of the year.
“Further, oil to revenue, capital expenditure to total revenue, debt service to total expenditure and debt service to revenue are projected at 22.33%, 16.38%, 42.55% and 125.09% respectively for the first half of the year.
“A situation where the country spends more than it earns to service debt is grossly unsustainable and needs to be urgently reversed. Government needs to be innovative in generating revenue, efficient in spending and re-prioritize its spending pattern. Nigeria should strive hard to ensure efficiency in tax administration and collection, seek diversification from oil to generate multiple streams of revenue.
