How we could be underestimating real inflation

The National Statistical Bureau (NSB) has announced that the monthly inflation rate for April 2023 is 3.29%, but your uneasy gut feeling and that emptying feeling in your purse may tell you that the real inflation must be higher and your gut and purse may just be right.

The Bhutanese has found that the weightages given to commonly consumed goods and services may be flawed, and the large number of 314 commodities measured for a small economy and population may both end up suppressing the real inflation rate faced by people.

The Consumer Price Index (CPI) is calculated using 14 major items of consumption which further consists of 314 commodities divided among them.

Weightage problem

Each of the 14 major items are commonly consumed items and a weightage of 100 percent is divided among them which is basically the items and services on which people spend money like food and non-alcoholic beverages with 42.78% weightage, transport at 15.63% and etc.

However, a lot of the weightages does not make sense to an ordinary consumer. For example, this weightage system claims that people spend only 11.57% of their income on house rent, house utilities like power and water bills, household equipment and maintenance.

It is a known that fact that when it comes to house rent in cities like Thimphu and Phuentsholing which have the majority of rented accommodations people spend a minimum of around 30% of their income on rent going up to 50% and 60% of the total income.

The low weightage of 11.57% means that that even if rents go up sharply over the months and years then despite its massive impact on your purse it will not push up inflation much.

This apparent flaw in how your rent and utilities get such a low theoretical score is due to the fact that the CPI weightage is derived from the Bhutan Living Standard Survey (BLSS) of 2017 conducted every five years.

The flaw in the BLSS calculation of rent comes from the fact that since it is a living standard and consumption survey even if you are staying in your own home in the village not paying rent it comes up with possible rent you would be paying.

The BLSS 2017 says an estimated 63% of households in Bhutan own their dwellings and therefore pay no rent. These households were asked to impute (estimate in absence of real data) the rental value of their dwelling units, as were other households provided with free or subsidized housing by employers or other entities.

The more accurate way to do it would have been to survey representative and actual rent pay households in both urban and rural areas and then come up with an average.

However, the imputation guess work for the majority who do not pay rents actually ends up really pushing down the impact of rents on inflation data.

For example, as per the BLSS 2017 the average Bhutanese household size of 4.2 people has a monthly income of Nu 33,343 and of that spends only Nu 2,881.2 on rent per month. One can already see how imputation has distorted the rental data which is then used by the NSB to assign weightages.

The majority of rental accommodations are in urban areas and here the average rental is Nu 5,359.2 but the distortion occurs when the rural rental is calculated where a lot of imputation comes into pay and so the average rental there is calculated at Nu 1,638 per month for even those people who have their own homes.

Basic common sense would dictate that a two storey Bhutanese rural home should be worth more than Nu 1,638 per month but imputation does its magic. The low rural rent average then drives down the total national rent when combined with the urban data.

This means lower weightage of rent while calculating inflation even though in reality it is your highest expenditure after food.

This is why you end up wondering why inflation is so low when a large chunk of your income goes to rent and it is only going up.

Another example here is Transport with 15.63% expenditure which captures fuel, service charges for car wash, cost of some parts but it does not capture the reality that most Bhutanese buy cars on loan and so a major portion of their income almost equivalent to the rent in some cases goes to pay these car loans.

Even when it comes food and non-alcoholic beverages with 42.78% there are many who spend 50% or more of their income on food.

Communication which is mobile calls and internet data is put at 3.25% but many Bhutanese will know that in fact a much bigger chunk of their income goes into this.

Too much commodities

The other major problem is that there are too many commodities that the NSB measures which ends up pushing the inflation rate down when you average it out.

India a nation of 1.4 billion people with a huge and complex market economy, varied culture and habits and a huge variety in items consumed across the nation measures only 299 commodities to get its CPI.

Bhutan with a population of around 750,000 people, much smaller economy and largely homogenous society and consumption pattern measures 314 commodities.

The weightages for the 14 items are already flawed as shown above and when you include too many commodities under the items then it gets more flawed.

The problem is that when there are too many commodities measured then it can push down the inflation rate.

For example, most Bhutanese would spend money on essential food items, rent, transportation and other miscellaneous expenditure like data, junk food, entertainment etc.

If your expenses go up in the above areas, then it really hits your budget. However, when hundreds of items are added which you either don’t use or use rarely then it can distort and dampen the real impact of inflation.

A major problem here is that while weightages are given to the 14 major item heads there are no weightages given for the individual 314 items each so within each major item head they hold almost the same value.

For example, the 314 commodities include many things like sun screen, sanitary napkin, eye threading, facial, football boot, i-pill, florescent tube, Fuji pillow, Tibetan carpet, Shinja tea leaves, canned sardines, black forest cake etc which are not widely used.

So you may be worried about the growing price of pork or increasing rental but the stable price of soft drinks or facials and many not commonly used items will hide the real inflation impacting you when it is all averaged out to calculate inflation.

Even if there are items that you use at some point but not frequently then that too will add to the average to undermine real inflation.

Imported inflation and higher base

The problems with the above in calculating the real inflation rate in Bhutan comes out clearly when comparing Bhutan’s April 2023 inflation rate of 3.29% with India’s April 2023 inflation rate of 4.7%.

This is a strange anomaly as it is well known that a huge chunk of Bhutanese inflation is imported from India from essential items like rice and cooking oil to junk food and cars.

In fact, inflation in Bhutan should be higher as the commodity coming from India will have to bear transportation charges, loading and unloading, taxes, wholesaler’s margin and retailers margin and so it is much more expensive when it reaches here.

As an example the price of fruit in Thimphu is often double of what it is sold at in Jaigaon.

Related to the above example is also the fact that India’s inflation of 4.7% is on a much lower base or lower priced item and Bhutan’s 3.29% inflation rate is on a higher priced item.

For example, if the inflation for grapes in India is 4.7% then it would be for grapes costing INR 50 per kilogram (kg) where as Bhutan’s 3.29% inflation rate will be grapes costing Nu 100 per kg.

Often many people look at the inflation rate of Bhutan and compare it to other countries and think it is not too bad or even very stable, but the inflation rate for Bhutan is on products which are more expensive as they are mostly imported and take long distances to reach here.

Implications of inaccurate inflation data

The implication of not capturing the correct inflation data is not just about not reflecting the high cost of living in Bhutan but there are other impacts.

It has an impact on how we project our GDP calculation.

To get the real GDP the nominal GDP has to be discounted by the deflator and the deflator is closely dependent on inflation data.

So over a period of time our GDP looks much better than it really is when inflation is shown as being low.

Bhutan is scheduled to graduate from the Least Developed Country (LDC) status largely on the back of our GDP growth. Graduation will mean less grants and more expensive international loans as well as tougher trading conditions.

Real income is also calculated after adjusting for inflation so even our income looks high.

The lower inflation data will also lead policy makes to underestimate the economic pain that ordinary people are going through.

An earlier story by this paper that looked at a survey of 181 Bhutanese on why people are migrating found that the top and most frequently mentioned motives were income, opportunities, inflation, better living standard etc.

Similarly, while Bhutanese civil servants are paid higher than their counterparts in Bangladesh and Nepal the inflation rate in Bhutan does not capture how much more expensive things are in Bhutan.

Even when it comes to deciding government pay hikes in Bhutan an important data set is the inflation rate.

NSB clarifies

The Bhutanese talked to two NSB officials on the issues above. The officials said that the overall methodology they use is from the World Bank.

They accepted that the CPI items and weightages were derived from the BLSS survey.

They said that 20 statistical officers in 20 Dzongkhags collect the prices of the 314 commodities on a monthly basis.

The NSB officials said that while it is the decision of the NSB to go for 314 items they are also guided by the Classification of Individual Consumption According to Purpose (COICOP) published by the United Nation’s Statistics Division that gives the broad structure of classifications.

They officials said that while 3.29% inflation may look less it is built on the inflation rate of previous years.

An official said that Bhutan has more commodities than India because Bhutan is an import driven economy and so an imported item has to be shown separately from a domestic item like rice.

At the same time the NSB officials also said that they welcome critical feedback like this and they can use it in the future including looking at the basket of items revision.

They said that the CPI system in Bhutan is not perfect and there are areas where there can be improvements but at same time the CPI is also not perfectly developed in developed countries where there are issues.

A NSB official agreed that the CPI weightage for rental data was on the lower side, but said that is derived from the BLSS and its imputation.

Another NSB official said that to get better CPI data Bhutan needs to not only do an expenditure study like BLSS but it must also do a separate income study. However, this would be expensive.

The problem seems to be that while the NSB is technically correct and following the right methodologies prescribed by international experts it may not be working very well on the ground and so the NSB may need to come up with weightages and commodities that are more rooted to the Bhutanese ground realities.

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