Why one shouldn't believe State Statistics Service estimates

Author : Yuriy Hryhorenko

Source : 112 Ukraine

An average Ukrainian may experience a cognitive dissonance when told that officially inflation has increased by 10% over the year, while food expenses in his family budget have increased by 20%, transport costs by 15%, and utility payments have increased 2 times. It seems that there is a contradiction in such statements
21:37, 12 November 2018

112 Agency

Inflation is not only one of key macro indicators of the country, but is also the main 'irritant' for Ukrainians; its constant growth means higher prices for food, utility payments, transport.

The key base information for calculating inflation is the structure of the population expenditures, consisting of the following groups: food and non-alcoholic beverages, alcoholic and tobacco products, clothing and footwear, utilities and fuel, transportation (maintenance of cars and public transport expenditures) hotels and restaurants, household items, household appliances and housing maintenance, recreation and culture, education and various goods and services. It takes into account not only essential items and services but also something that a person can't afford to use or buy: a car, a laptop, medicines, animal food and jewelry.

Seasonal fruits and vegetables, housing and utilities and energy carriers (regulated by the authorities and dependent on the world market situation and natural monopolies), certain types of services (railway transport and communications due to monopolistic pricing) and a number of food products (cereals, meat and milk, which are raw products or have a low level of processing) are not included in the calculation of inflation.

The calculation scheme is approximate as follows: the structure of consumption of household goods and services is established, data on prices for various goods and services in all regions are processed, then inflation is calculated for each product in each region, then for groups of goods and services, inflation in each region and total inflation.

The inflation index calculation, the procedure for collecting information on prices in Ukraine comply with European standards and are carried out according to international methodologies. According to Olena Sümak, Head of Strategy and Business Planning at Kreston GCG, the current method for calculating the consumer price index (CPI) in Ukraine is based on recommendations from the Organization for Economic Cooperation and Development, the Statistical Office of the European Union, and it takes into account the recommendations of the IMF, UN, World Bank and is adapted to the requirements of national legislation. The CPI is calculated by registering about 200 thousand prices and tariffs in 86 cities of the country. Within the framework of the study, the following macroregions are distinguished: Kyiv, Center (without Kyiv), Prydniprovsky, Podilsky, East, Black Sea, Donetsk, Polissya and Carpathian subregions.

The technique is constantly being improved due to changes in consumer preferences, the emergence of new types of consumer electronics or types of services. So, in the methodology of 2016, there were 328 positions of goods and services, whereas in 2015 - 335.

Foodstuffs have the largest share. If their prices increase, it will be noticeable. At the same time, each layer of the population will feel the nature of inflation differently, since goods and services in different price categories become more expensive with different dynamics.

The reduction of the expenditures on food and non-alcoholic beverages by 8.2 points in 2015 and 2016 looks very remarkable, as if Ukrainians had more money and began to spend it on other needs. At the same time, the structure of household spending has not changed: in 2010-2017 it varied about 50% (in Western countries this percentage varies within no more than 10-20%), that is, theoretically it was impossible to change the proportion. Of course, estimates of the proportion of these costs may actually be different, depending on the methodology and family income (for high-income households this percentage may be significantly less, and for low-income ones a little more), but the Statistics Service remains the only official source.

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Since the beginning of 2017, the State Statistics Service has changed the methodology for calculating the consumer price index. A new weight structure has been used - it is based on the SNA (System of National Accounts) data on household consumption expenditures for the country as a whole. Previously, the weight structure calculation was based on surveys of household living conditions. The weight structure was previously revised annually in June, but from 2017 the review will take place from January.

Also, the consumer set of goods and services was updated (usually this occurs every 5 years): were excluded goods and services with share less than 0.1% (19 positions), new goods (services) included - 8 positions, the share of food and non-alcoholic beverages decreased by more than 9 points, but the share of transport, household goods and health care increased. Despite the significant increase in the cost of utilities, their weight decreased. This is due to the increase in the number of households receiving subsidies, features of the new methodology, etc. On the other hand, any changes are dangerous because the data for different periods will not be comparable (with the previous period).

Inflation calculation problems

The problem of calculating inflation is that it is calculated based on the structure of household expenditures and the subsequent “weighting” of the level of price and tariff dynamics. Prices for essential goods, “secondary” goods and services, which a person may not use, are dropped into a common “hole”. That is, inflation consists of the price dynamics of hundreds of goods and services, some of which can become expensive, while others become cheaper. All this leads to "averaging", which does not benefit the objective reflection of the dynamics of consumer prices and tariffs. Everyone knows the expression “average temperature in a hospital”, which has become synonymous with the fact that the figures do not always reflect real processes, and the calculation of the official inflation rate is the very case. Although from the point of view of methodology, everything is mathematically grounded and official.

On the other hand, according to the director of the IBI-Rating rating agency, Olexiy Amfiteatrov, the methodology that the State Statistics Service is guided by allows reflecting the dynamics of prices for goods in an aggregated indicator and taking into account weighting factors. The method of calculating inflation should be comparable across countries, and also allow for smoothing seasonal fluctuations and taking into account consumption patterns (price trends for the most important groups of goods and services are analyzed, because it is impossible to take everything physically into account). If we analyze the growth by component, the representativeness of the data is much higher than for aggregated CPI or PPI (producer price index).

According to Oleksandr Okhrimenko, President of the Ukrainian Analytical Center, the main problem of the State Statistics Committee methodology for calculating inflation is the list of goods that are used. According to the State Statistics Service, when calculating the inflation index, a very large share in the structure of the inflation index is food, and among this are vegetables and cereals. Nobody argues that in Ukraine we consume a lot of vegetables, but the "passion" to calculate the prices of vegetables leads to incidents. When gasoline prices are rising, and potato prices are falling, the State Statistics Service concludes that prices in Ukraine are falling. At the same time, the Service has the right to change the shares in the structure of the inflation index. Very often, when a rise in prices for utilities is expected, the share of utility bills decreases and then increases after a rise.

"The current method of CPI calculation is often criticized in that the composition of the consumer basket, with the prices of goods and services, the norms and weights of goods and services, does not correspond to the actual consumption. Turning to world practice, according to the IMF survey (IFS World and Country Notes Yearbook 2018), the consumer basket in Poland consists of 1,400 goods and services, in the Netherlands  - more than 1,300, in the Czech Republic, Estonia, Germany, Great Britain -  700 and at the same time in the USA - 305, Canada - 177 ", says Olena Sumak.

At the same time, the key problem of the correctness of data is determining the norms of consumption. Ukraine distorts statistics on household income and consumption, which is associated with a high level of the shadow economy. There is a reason to assume that the structure of consumption, which is taken into account when calculating the level of inflation, differs from that in reality. For example, seasonal products are excluded from the structure of the consumer basket, and it is precisely during the season that a significant shift in demand occurs (especially among people with incomes below average).

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"The main problem of calculating inflation lies in the high shadowing of the Ukrainian economy. Thus, in the list of goods and services on which price surveys are carried out, you will not find such significant items of expenses of residents of the capital and major cities as rent for housing. The reason for this is the impossibility to collect objective and reliable information on rental rates ", - adds Serhiy Belyasov, a senior appraiser of Kreston GCG.

According to him, the massive concealment of income and expenditure affects the list of chosen households, which expenditure data are taken as a basis for the State Statistics Committee in the formation of the consumer basket. Thus, the structure of the consumer basket, calculated by the State Statistics Service, is characteristic of the less rich segments of the population than the general population and poorly reflects the structure of the richer part of the population.

The problem is that the nature of consumption varies among different segments of the population. And it's not just about income. From the point of view, for example, of a man or woman working in an office, consumption norms in the amount of one suit and a pair of men's trousers or two pairs of women's shoes and one dress per year will look ridiculous.

Also one of the main problems is the collection and processing of information on retail prices. Data on retail prices is collected in such a way that, as a result, the subjective factor plays a large role.

According to director of the Ukrainian Association of Retail Networks Suppliers, it seems that when calculating inflation, data are used with a delay of a month, that is, data for September take into account prices for August, for example, for non-food items. It should be noted that now the calculation methods are being adjusted in favor of the “improvement”, i.e. they are changed in part to show the economic situation in the country better than it actually is.

What to do?

Any methodology needs periodic updating and revision, since not only prices, but also consumer preferences change: what was popular 5-10 years ago may not be relevant at the moment.

As noted by Olena Sumak, the following factors can be noted as a problem of the existing methodology that requires improvement:

    When calculating the CPI, seasonal price adjustments are not taken into account, whereas this recommendation is provided by the International Labor Organization;
    The CPI does not provide for an assessment of the commodity items being analyzed in the context of origin (import or domestic production);
    In the calculation of the CPI, government subsidies are not taken into account, while the share of households receiving this preference shows a steady growth - from 7.8% in 2015 to 46.2% in 2017.

According to Oleksandr Okhrimenko, it is necessary to make a more adequate structure for calculating the inflation index, taking into account the actual practice of consumption of goods in Ukraine. At the same time, it is desirable to make this structure unchanged for at least 5 years, and also to improve the method of collecting information on current prices using new methods for analyzing prices in the public domain. In addition, if now average prices are taken for the base, then in the future it is necessary to take the median to exclude some deviations from the average.

For professionals and those who want to see the real price dynamics, there are alternative sources of information. The CPI from the State Statistics Service and statistics from the NBU are not the only sources of information on the change in consumer prices. Monitoring of prices for certain goods and services is carried out by various analytical and research companies, marketing agencies, and individual media. The aggregated data on sales volume and prices for individual products are also open.

A useful service is the Inflation Barometer, which automatically collects data from open sources (State Statistics, NBU, World Bank, Eurostat) and records the daily dynamics of prices for goods according to the largest online supermarkets. The information is also presented by regions. Consumer price indexes are updated every week. With the help of this online tool, you can choose the products that make up the dish, select the time period, and the program will show how the price of each ingredient has changed individually and for the whole dish.

In the meantime, the National Bank is struggling with inflation by keeping the discount rate at 18%. At the same time, the rise in prices for utilities, the devaluation of the hryvnia and the associated increase in the prices of food, transport, etc., creates solid prerequisites for inflation. As a result, the NBU revised its inflation forecast for 2018 upwards - from 8.9 to 10.1%. The reasons are the rise in world prices for energy and wheat, as well as more substantial than expected increase in wages in Ukraine.

No matter how correctly or incorrectly they consider inflation; the importance of this indicator does not diminish. Inflation is mentioned in the state budget, taken into account when indexing pensions, salaries and social benefits, business and investors are oriented towards it. Obviously, the official method of calculating inflation can and should be improved in terms of the actual cost structure and methods of collecting information, and despite the “averaging” of the rise in prices and tariffs (which leads to a “feeling” of decreasing in the cost of living), it was and remains the only possible and official version of the dynamics of consumer prices calculation.

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