Uleac cost of living and inflation measurement in lebanon part 1

Session 2:
Cost of Living and
Inflation Measurement in Lebanon
Inaugural Conference
Upgrading Lebanon’s Economic Analytical Capacity
Lebanese Economic Association - International Development Research Centre
September 23, 2010, Crowne Plaza Hotel, Beirut
Rima Turk-Ariss, Ph.D.
Board Member,

LEA-IDRC Inaugural Conference, Crown Plaza, Beirut, September 23, 2010 2
Outline
PART ONE: Background on Inflation
PART TWO: Inflation in Lebanon
PART THREE: Inflation Working Group

PART ONE:
BACKGROUND ON INFLATION

What is inflation?
A rise in the general level of prices of goods and
services in an economy over a period of time.
 Each unit of currency buys fewer goods and
services.
decay in the purchasing power of individuals.

Why do Prices Rise?
• High inflation rates could be caused by an
excessive growth in the money supply.
• Other causes are fluctuations in demand of goods
and service and/or changes in available supplies
of a product (scarcity).
• However, long sustained periods of inflation
generally result from the money supply growing
faster than the economy.

How Does Inflation Affect Us?
• Implicit tax on income:
– Lowers the value of money and income (reduces real wages)
– Diminishes value of savings
• Affects fixed pension funds
• Redistributes wealth, increasing the gap between rich
and poor
• Affects government revenues and expenses, leaking
into the financial budget and fiscal deficit
• Reduces real GDP growth
• …

• High inflation rates hurt the economy, but…
• A low rate of inflation is also generally favored:
– Low inflation reduces the severity of economic recessions
• The task of keeping the rate of inflation low and
stable is usually given to the monetary authority
 Rule Versus discretionary policy debate:
– Monetarists favor price stability and inflation targeting by the central
bank (objective of most central banks up till the global financial crisis)
whereas Keynesians favor interventionist policy (e.g recent stimulus
packages).
How Does Inflation Affect Us?

How do we measure inflation?
• Price indexes are designed to track inflation by measuring
changes in price level or cost of living at a particular date.
– Indexation is used as a reference in order to make policy as well
as firm decisions.
• A price index is used to aggregate detailed information on
prices and quantities into scalar measures of their levels
or their growth.
– CPI: a measure of the average price paid by consumers for a
basket of consumer goods and services,
– Other examples include PPI, Real Estate Price Index,
Export/Import price index, GDP deflator.

PART TWO:
INFLATION IN LEBANON

Inflation measures in Lebanon
Four main entities produce inflation measures
for Lebanon:
– The Central Administration of Statistics (CAS).
– The Ministry of Economy and Trade (MoET)
– The International Monetary Fund (IMF)
– The Chamber of Commerce and Industry in Beirut
(CCIB)
– Consultation & Research Institute

• The Central Administration of Statistics (CAS) is the
principal national institution responsible for measuring
inflation in Lebanon.
• CAS started tracking the price of consumer goods since
December 1998.
– It published a quarterly CPI since 1999 with the technical
assistance of IMF.
– In 2007, the CPI weights were updated using the 2004
Household Budget Survey. A new CPI began to be monthly
issued as of March 2008.

• CAS compiles the monthly prices of 50,000 goods at
2,000 point of sales, grouping them into 12 time series.
• The weights used by CAS show the average
household’s expenditures on goods and services, not
taking into account the household’s size, income and
social status.
– Weights do not represent at all the expenditures of a typical
average household in Lebanon.

The CAS has started an initiative as of May 2008 to
compile its data according to internationally accepted
methods.
•The data coverage has been expanded to include the
whole country and not just Beirut and its suburbs.
•An attempt has been made to impute housing rents into
the CPI.
•CAS also has plans to produce a PPI

• In 2000, the MoET started issuing a consumer price
index based on around 650 items from various
supermarkets nationwide.
– MOET index suffers from weighting that dates back to 1997,
supermarket misreporting, focusing on F&B mostly.
• In the Private sector:
– Chamber of Commerce and Industry in Beirut (CCIB)
started a CPI in 1998, but discontinued it later.
– Consultations and Research Institute has published a
monthly CPI since 1978.

• IMF publishes figures on inflation in Lebanon based
mainly on figures that are estimated by the Central
bank and IMF employees, and not using CAS or
MOET figures.
• How do locally produced inflation measures correlate
with the IMF figures?
– We divide our analysis in pre and post 2007, following the
CAS change in inflation measurement

Annual Inflation Rate: 2004-2006
Source: Adapted from Dr. Jad Chaaban, "Doing the Sums: A new approach to calculating inflation in Lebanon", Lebanon Opportunities, March 2008

Cumulative Annual Inflation: 2004-2006
Source: Adapted from Jad Chaaban, "Doing the Sums: A new approach to calculating inflation in Lebanon", Lebanon Opportunities, March 2008.

Annual Inflation Rates: Post-2007
Source: Author’s calculations from CRI, CAS, & IMF data.

Monthly Inflation Rates: Post-2007
Source: Author’s calculations from CRI & CAS data.

Weights Applied
CRI ACS
Food & Beverages 35.40% 22.00%
Clothing & Shoes 6.55% 6.20%
Housing 6.49% 25.70%
Durable Consumer Goods 8.18% 3.90%
Health 9.82% 6.80%
Transport and Telecommunication 14.39% 17.10%
Education 12.45% 7.70%
Leisure 2.70% 6.40%
Personal Care & Other Products 4.02% 4.20%
Source: Thibault CRUZET, Bilan de l’inflation au Liban au 1er
semestre 2009, Ambassade de France.

What Do All These Figures Tell Us?
• There is evidence to suggest that current measures
of inflation are conflicting.
• Hence the need to revise national price data.
• Why? Price shocks put the Lebanese economy in a
vulnerable position, and as such any policies to
tackle these price fluctuations must first be based
on reliable nationwide data.

PART THREE:
INFLATION WORKING GROUP

Project Broad Objective
Build on recent advances on inflation measurement in
Lebanon to construct a more comprehensive and
robust inflation indicator for Lebanon.
– Price Monitoring and Revision of Data
Time Horizon: 2 years.

Specific Objectives
1) Undertake a critical revision of available price
information in Lebanon, including public, private and
international sources of information.
2) Establish new price statistics from available data,
when feasible, such as export-import price indexes,
real estate price indexes, and producer price indexes.
3) Develop a framework for price statistics to explain
the links between various price indexes and between
price indexes and other relevant economic statistics.

Working Group Composition
The working group will comprise 6 members from the
following organizations (mid and senior level civil
servants) distributed as follows:
- CAS: 2 persons
- MoET: 1 person
- MoF: 1 person
- BdL: 2 persons

Working Group External Linkages
• The Working Group will be open to all interested
organizations, both public and private, in addition to
academia and international organizations, inviting
them to participate in its work program.
• The Working Group activities are expected to receive
wider exposure through discussion at relevant
outreach meetings and regular communication with
international experts and groups using electronic
media such as the Internet.

Working Group Activities
• Attend 3 courses, each for duration of 5 days:
- Statistical techniques for decision making
- Analytical writing skills for reports and public policy briefs
- Public economics principles and methodology.
• Advance on the production of outputs during 5
meetings in 2-day workshops each.
• Participate in 2 project retreats (each for 2 days), and
in 3 public consultations and outreach events (each for
1 day).

Working Group Expected Output
1) Analytical report on inflation measurement in Lebanon
– Theory of indexes
– Issues in inflation index construction
– Available price statistics in Lebanon
– Proposal for new price indexes
2) A National Price Monthly Monitoring Newsletter:
– Information about the various price indexes used
– Trends in the evolution of prices
– Expected impacts of price movements on other economic
indicators in Lebanon

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