CPD urges for new price index to make inflation estimate practical

A leading think-tank has suggested developing a new consumption basket for making inflation estimate more realistic and thus set an appropriate monetary target.

The Centre for Policy Dialogue (CPD) made the suggestion as it raised concern over authenticity of inflation and data integrity.

“A new consumption basket should be formulated for calculating Consumer Price Index (CPI) inflation, based on rigorous research as regards consumer behaviour and expenditure patterns,” said the CPD.

“All targets, projections, and plans in the monetary policy and the 8th Five-Year Plan should be revised in accordance with this new consumption basket for CPI and new base year for inflation,” it added.

The think-tank came up with the suggestions at a virtual media briefing on Tuesday morning, giving its reaction to the annual monetary policy statement (MPS). Bangladesh Bank announced the MPS last week.

A paper titled ‘CPD's Reaction on MPS FY2021-22: To what extent monetary policy meets the needs of the economy’ was presented there.

“Inflation targets should be practical, based on updated consumption basket,” it noted.

“Calculating CPI on a base year and consumption basket which is 16 years old appears to be naïve at best and manipulative at worst,” adds the CPD paper.

It expressed concern over authenticity of not only inflation but also other macroeconomic data.

“Unfortunately, lack of data integrity in recent years has seriously compromised the effectiveness of the government’s policies and the central bank’s directives, thus jeopardising the overall economic progress of the country,” observed the CPD.

It pointed out that as even the middle class struggle to make both ends meet, it seems unlikely that long-term inflation is declining.

“It is apprehended that actual inflation may be significantly higher than the reported values,” observed the think-tank.

In this connection, it mentioned that inflation during the pandemic slightly exceeded the monetary policy targets set in FY20 and FY21, ‘due to a host of factors such as sporadic shutdowns and lockdowns.’

“Prior to the pandemic years, inflation targets were met in FY15, FY16, FY17, and FY19, although in reality, the cost of living kept rising,” it observed.

MPS of FY22 sets an inflation target of 5.3 per cent.

“Data shows that the 12-month average food and non-food inflation rates have fluctuated in a cyclical pattern over the past several years,” said the CPD paper.

“However, it appears that the inflation rate has lost its relevance to the real world,” the CPD insisted.

 “The poor and low-income groups are increasingly finding it difficult to make ends meet in the face of dual blows from purchasing power erosion and income erosion,” it concluded.

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