Single-digit inflation and the cost of living dichotomy in Ghana

The Institute of Economic Affairs (IEA) at the weekend called for a review of the Ghana Statistical Services (GSS) methodology used in calculating inflation figures.

“GSS needs to review its system, especially if it is widely believed that the existing methodology is outdated and that it does not fully represent current expenditure patterns.”

Dr. J. K. Kwakye, IEA Senior Economist stated in a research document on: “Single-digit inflation and the cost of living dichotomy in Ghana.”

In what appeared to be a subtle attempt to professionally shield the GSS from the current mountain of criticisms from a section of the public on its methodology in arriving at single-digit inflation rates, IEA said: “We do not expect that GSS would manipulate the data in order to achieve inflation figures that suit any particular constituency or constituencies, as that would be professionally unethical.

“We want to believe that GSS applies the same methodology all the time in calculating its inflation figures

According to Dr. Kwakye some people have tried to compare what they see to be much higher movements in the prices of some of the items in the Consumer Price Index (CPI) basket with the rate of inflation compiled by GSS and have argued that the GSS might be understating the true rate of inflation.

He said the way to validate GSS’s inflation estimates would be to start from the raw data collected for the 242 items.

Current CPI Basket and Weights base year 2002 on 12 out of 242 items indicates that food and non-alcoholic beverages was rated 44.91 per cent; alcoholic beverages, tobacco 2.23 per cent; clothing and footwear 11.29 per cent; housing, water, electricity, gas and others 6.98 per cent; and furnishings, household equipment 7.83 per cent.

The rest are health 4.33 per cent; transport 6.21 per cent; communications 0.31 per cent; recreation and culture 3.04 per cent; education 1.60 per cent; hotels, cafes and restaurants 8.28 per cent; and miscellaneous goods and services 2.99 per cent.

Dr. Kwakye said the 12-item aggregated form of the CPI basket with the composite items and their relative weights, one can argue about what need to be in the basket and what need not be in as well as about the relative weights given to individual items.

“In fact, one may even go down to the entire 242 items in the CPI basket in making these arguments. The decision as to what has to change in terms of the individual items or their weights should be informed by the changing patterns of consumer spending in Ghana.

“For example, one may argue about the appropriateness of giving Communications a weight of only 0.31 per cent if it is believed that this does not truly represent its relative importance in consumers’ spending,” he stated.

Dr. Kwakye therefore suggested a constructive engagement with the GSS in a debate to bring about any deserved changes.

The GSS currently measures inflation by using a basket comprising 242 consumer goods and services. The base year for computing the inflation figures is 2002.

The GSS periodically collects price data on the 242 items. The primary data is collected mostly in non-standardized units, which are then standardized by GSS. The individual items in the CPI basket have weights based on the last consumer spending survey.

The weighted prices are converted into indices with 2002 as the base year.

The average price index for all the 242 items is used to compute the rate of change of the index or inflation over a period of time—a month, quarter, or year—by comparing with previously-calculated indices.
It would be recalled that the opposition New Patriotic Party's vice presidential candidate first raised concerns about the GSS inflation measurement. The GSS dismissed his assertion but within days the IMF delegation to Ghana confirmed his assertion and tasked the GSS to recalculate the inflation figures from January 2011 as well as increase the number of items in the CPI basket from 242 to 275.