Beware of wrong interpretation

PUBLISHED : Tuesday, 13 July, 1993, 12:00am
UPDATED : Tuesday, 13 July, 1993, 12:00am

INFLATION is a subject of common concern and the year-on-year rate of change of the Consumer Price Index (CPI) is an important indicator of inflation affecting consumers. In May 1993, the CPI increased by 8.5% over that in May 1992, and the inflation ratewas hence taken as 8.5%.

The CPI as a statistical measure is in fact not very simple, and if we are not careful, we may easily make mistakes in its interpretation or application.

Here are some examples illustrating a few of the more tricky issues.

Situation (a): If the CPI has increased from 130 in March last year to 140 in March this year, is it correct to say the inflation rate is 140 minus 130, i.e. 10%? No, it is not correct to say the index has increased by 10%. We should say there has been an increase of 10 index points. Otherwise, we can say there has been an increase of 7.7%. This letter figure is worked out as below: (140-130) / 130 x 100% = 7.7%.

Situation (b): You and your brother talk about how you spend your money. Your brother says prices have increased by about 12% over the year.

You, on the other hand, think there has been a 15% increase. Still the published CPI shows a 9.5% increase. Which of these figures is more reliable? Well, even if you have done some recording (say, by jotting down in your diary price information on your purchases), it is likely you did not record every item.

Probably only those with large price increases got recorded or remembered. This is natural because such increases often have a greater impact.

Then, it may be noted the increases relate only to your individual experience and may not represent that of the general situation in Hongkong.

The CPI, on the other hand, is supposed to relate to the general situation.

There is another factor we should be careful about: the difference between change in expenditure and change in price.

It might be that the items bought last year were not the same as those you bought this year. You might have upgraded the quality of the items purchased and made more purchases.

Hence, even though there is not much change in the general price level of goods and services, your expenditure will still increase.

To give a simple example: if you buy a pair of high quality sports shoes of a foreign brand to replace the pair you have, which is locally made, you certainly have to pay a lot more.

But the prices of the local brand as well as the foreign brand may not have gone up at all. More often than not, we spend more as a result of an improvement in the quality of our living! Situation (c): A company director wishes to study the impact of consumer prices on his managerial personnel, He finds there are three series of CPI figures, i.e. the CPI (A), the CPI (B) and the Hang Seng CPI. They cover 50%, 30% and 10% of households inHongkong respectively. Should he use the CPI (A) because it is ''more representative''? The answer is no. The three CPI series relate to households in different expenditure brackets - CPI (A) covers households in the low expenditure bracket; CPI(B), households in the medium expenditure bracket; and the Hang Seng CPI, households in the high expenditure bracket.

As the company director is concerned with managerial personnel on the occasion, the Hang Seng CPI would be more appropriate.

For more information about this article or other presented in this column, you are welcome to write to the General Statistic Branch (1) of the Census and Statistics Department at Wanchai Tower, 12 Harbour Road, Wanchai, Hongkong or call 582 4731.