Monthly CPI a must to check inflation

(AFP)  

 

 

The UAE must adopt a monthly consumer price index (CPI) to accurately monitor and control inflation, economists have urged.

 
Inflation is currently calculated on an annual basis, but the methodology used is outdated, according to Nasser Saidi, chief economist at the Dubai International Finance Centre (DIFC).

Saidi said: “There is consensus among economists and observers that the measurement of inflation, and in particular the CPI in the UAE, suffers from methodological problems and is not reliable as an accurate and timely measure. A major reason is the existing CPI is based on outdated household budget surveys conducted in Abu Dhabi in 1997 to 1998, which no longer reflects expenditure patterns.”

Changing demographic patterns and the availability of new goods and services have rendered the current CPI survey inadequate, but its biggest flaw concerns rents, said Saidi. The rent weighting, which comprises only 34 per cent of overall CPI, is based on a 1994 census, which means many believe real inflation is underestimated in official figures.

Experts from the region and beyond have echoed Saidi’s comments, with Mohsin Khan, International Monetary Fund (IMF) Director for the Middle East and Central Asia, critical of the CPI formula.

“If rents are the main driving factor of inflation then inflation is being underestimated, including by us,” said Khan. He has also warned the UAE lags behind most developed countries, and said he was surprised at the UAE’s shortcomings, claiming that Yemen is more advanced in terms of monitoring inflation.

With official statistics considered inaccurate, estimates of UAE inflation vary widely, with some economists saying real inflation is running as high at 20 per cent, while others claiming it is half this projected figure.

Saidi said: “Like other modern economies the UAE must have a monthly CPI, which will help authorities monitor and control inflation, while businesses and markets have a reliable measure of the movements in the price level.”

In response to these criticisms, the UAE Ministry of Economy is conducting a new national household expenditure survey with assistance from the IMF.

The survey will span the 12 months beginning April 2007 and will provide the source data for CPI weights, with a new CPI expected to be published in May 2008. “This will be an important improvement in the UAE’s statistics,” said Saidi.

Until then, businesses are likely to rely on estimates from bank and financial institutions for inflation data.

“Inflation indices throughout the GCC have their problems,” said Richard Fox, Fitch Ratings Head of Middle East and Africa Sovereign Ratings. “A lot of items in the basket are subsidised, and the sample is often out of date and/or not representative. Inflation is probably understated, but the authorities probably have enough information to know whether it’s rising or falling.”

A Reuters poll of 12 regional economists this month showed the UAE inflation is expected to reach 10.1 per cent this year, up from the 2006 figure of 9.3 per cent, which was the highest rise in 19 years.
 
Inflation is expected to ease in 2008 to 8.9 per cent, the poll revealed.
 
“The 2006 inflation level was more realistic,” said Monica Malik, EFG Hermes senior economist. “However, one factor that could result in the underestimation in the official figure is partly a result of the different spending patterns of the populations and therefore the weighting of the CPI basket.”

A report by Abu Dhabi’s Truth Economic Consultants claims the dirham’s purchasing power fell 40 per cent between 2004 and 2006. Its study The Expected Inflation and Its Economic and Social Consequences forecasted a 14 per cent increase in prices this year.
 
Prices of commodities and services will rise because of the declining dirham, falling interest rates, salary rises, as well as ballooning fuel and rent costs.

Truth has urged the Ministry of Economy to increase its supervision and control and form a committee to monitor and publish data.
 
 
 
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