Fresh approach needed for measuring inflation

The Bangladesh Bureau of Statistics (BBS) recently announced plans to introduce a new inflation calculation method within six months. This new method known as "core inflation" measure will track price changes of just 50 widely consumed products, running parallel to the existing Consumer Price Index (CPI) that monitors 749 items. Officials claim this will provide a "more accurate picture" of inflation. But will it really? And more importantly, what does "accurate" even mean when measuring something as complex as inflation?
The new method excludes products with volatile prices like fuel oil, cooking oil, onions, and seasonal vegetables. While this approach might make statistical sense, it raises fundamental questions about how we measure economic reality in Bangladesh. Let's consider what this means for ordinary citizens and policymakers alike.
The proposed change reveals several concerning gaps. First, reducing the basket from 749 to 50 items risks missing crucial price movements that affect different segments of society differently. Think of a family living in Dhaka's Karwan Bazar area versus one in rural Rangpur -- their consumption patterns vary significantly. Can 50 items capture this diversity? The lives and spending patterns of millions of Bangladeshis are far too complex to be reduced to such a limited basket.
Second, excluding "volatile" items might make inflation numbers look better on paper, but it won't make life easier for the millions who must buy these items regardless of price fluctuations. When onion prices spike, telling someone it's not counted in "core inflation" won't help them put food on the table. This disconnect between statistical measures and lived reality is something we must carefully consider.
Third, running two parallel systems requires clear communication about their distinct purposes and limitations. Policymakers need to understand exactly what each measure represents and when to use which metric. Core inflation and CPI serve different analytical purposes - one for understanding underlying trends, the other for capturing the full scope of price changes affecting consumers. The key is to be transparent about what each measure includes and excludes, and how they complement each other in policy decisions.
However, we must acknowledge that core inflation serves important purposes in monetary policy and economic analysis. Central banks worldwide use core inflation measures to identify underlying price trends by filtering out temporary fluctuations. This helps making medium-term policy decisions and understanding persistent inflationary pressures. Some countries even use alternative approaches like the trimmed mean method, which removes extreme price changes regardless of category -- potentially a more neutral approach than predetermined exclusions.
But perhaps the biggest oversight in this discussion is Bangladesh's massive informal sector. Official statistics often fail to capture the economic reality of the millions working and trading in informal markets, from street vendors to rickshaw pullers to domestic workers. Their economic lives often operate in parallel to the formal economy, yet their experiences with inflation can be markedly different.
In order to develop a more inclusive approach to measuring inflation, we should consider creating an Informal Sector Consumer Price Index (IS-CPI). This would track prices where most low-income people actually shop -- local bazaars, street markets, and informal vendors. It would include items and services relevant to informal sector workers: basic food items, informal housing rent, street food, second-hand goods, informal transport, and healthcare costs. The goal would be to capture the inflation experience of those who often fall through the cracks of official statistics.
South Africa offers an exemplary model with its comprehensive CPI system. Their statistics office publishes detailed breakdowns by expenditure deciles (from the poorest to the richest households), geographic regions (including rural-urban differences), and various analytical series such as the CPI for durable and non-durable goods, and even a CPI for the pensioners. They even track inflation by province, recognising that price pressures can vary significantly across regions.
The BBS already maintains separate weights for urban and rural areas, recognising their distinct consumption patterns. For instance, in 2016-17, food items constituted about 40 per cent of urban consumption versus nearly 52 per cent in rural areas. Building on this foundation, Bangladesh could consider additional improvements inspired by South Africa's comprehensive approach. The BBS could gradually expand its current urban-rural framework to include income group-specific indices, especially for the bottom 40 per cent where consumption patterns and inflation impacts differ significantly from national averages. This would be particularly valuable for understanding price pressures in the informal economy, where many low-income households both work and shop.
Needed to say, implementing such improvements would require enhanced statistical capacity, trained personnel, and robust data collection systems, the BBS already has the basic infrastructure for differentiated indices. The key would be to strategically expand this existing capability, perhaps starting with pilot programmes in key urban areas where informal economic activity is concentrated. This measured approach would allow for capacity building while moving toward a more comprehensive measurement system that better reflects Bangladesh's complex economic realities.
The goal shouldn't be finding a single "accurate" number but understanding different aspects of price changes across our complex economy. Any new inflation measure should be evaluated not just by its statistical elegance but by its usefulness in improving economic policy and people's lives. A comprehensive approach that combines core inflation with specialised measures like the IS-CPI would better serve policymakers in understanding and addressing the economic challenges facing all segments of Bangladesh's society.

Syed Abul Basher is Professor of Economics at East West University.
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