Price index revision to push up prices—EIU

The Economist Intelligence Unit (EIU) has warned that the revision of the Consumer Price Index (CPI), an aggregate basket used in computing inflation, will contribute to higher inflation rates in the medium-term and throughout the year.

In May this year, the National Statistical Office (NSO) revised the CPI where the contribution of food was increased from 45.2 percent to 53 percent, more than half of the consumer basket.

In its third quarter country report for Malawi, the EIU said although the rise in inflation has continued to be driven to a larger extent by high global food prices, the rebasing of the CPI will contribute to a surge in inflation this year.

The EIU, a firm within the Economist Group which provides forecasting and advisory services, said rebasing inevitably pushes inflation to even higher levels and this coincides with a surge in global food prices.

Reads the report: “Given the food situation, which has been worsened by lower than expected agricultural output, food prices will be relatively higher; hence, putting pressure on inflation.

“In addition, the 25 percent devaluation of the kwacha in May is expected to keep increasing inflationary pressures given the high contribution of food in the CPI.”

CPI rebasing, the changing of the weight reference period, price reference period or index reference period, is conducted periodically to reflect changes in household consumption patterns.

Economists say it is internationally recommended to rebase the CPI weights every five years.

CPI weights are based on monetary expenditures relating to consumption for all households across the country, according to NSO.

Inflation rate has been rising and is currently at  25.9 percent as of September, largely due to a rise in food and non-food prices.

NSO statistician Samuel Chipokosa justified the new CPI weights, saying they have been based on expenditures of households derived from the Fifth Integrated Household Survey (IHS5) conducted between 2019 and 2020.

He said the implication of the increase in the weight of the food division is more volatile in the inflation rates, owing to the fact that in Malawi, CPI is mainly driven by food prices dominated by maize.

Economics Association of Malawi executive director Frank Chikuta said the review of the CPI is a reflection of a shift in the expenditure pattern.

He said the increase in the contribution of food to the CPI basket indicates that people are now spending more on food.