Transcript Session 2.1. Elements of Price Analysis CPI, Real, & Nominal Prices

Session 2.2.
Elements of Price
Analysis
WFP Markets Learning Programme
Price Analysis Training
2.2. 1
Learning Objectives
By the end of this session, participants should be able to:
 Explain use of CPI & its potential to underestimate extent of real
food price increases
 Explain the implications of using nominal vs. real prices for
analyzing household food security
 Analyze graph of nominal & real food prices & identify
implications for HH food security of any changes
 Calculate real prices of particular good in the country based
nominal prices and the CPI
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Price Analysis Training
2.2. 2
Reminder:
Why prices are important to WFP
 Prices provide key to understanding
market behavior
 Costs & price differences along marketing
chain - from farmer to consumer - indicate
where markets may be weak, failing or
functioning well
 Market performance: analyzed mainly
through price analysis
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Price Analysis Training
2.2. 3
What is
reality?
But…
…to understand
market reality, it
is important to be
understand what
a real price is.
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Price Analysis Training
2.2. 4
Nominal vs. Real Prices
Nominal price:
Real price (PR):
 denotes current monetary
value of good/service (as
observed by monitor in shop,
at market stall)
 Changes determined by:
o Inflation
o Seasonality
o Cycles
o Production trends
o Stochastic factors
 Nominal price (PN)
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adjusted by a price index
of a basket of other
products (I)
PR = (PN/I)
 Important to use real prices
when inflation is high (i.e.
high spread between
nominal & real prices)
Price Analysis Training
2.2. 5
Aspects of Market Price Analysis
The Consumer Price Index (CPI)…
Measures level of prices facing consumers.
(Increase in overall level of prices is
inflation)
Expresses cost of market basket of goods
relative to its cost in a base period.
Based on budget of typical urban family (in
most countries)
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Price Analysis Training
2.2.6
Constructing the CPI
Basket of goods:

Typical basket of goods commonly
purchased by HHs (e.g., grain, flour, other
food items, drinks, fuel and energy,
clothing, household goods, school fees
etc…
Base year:

CPI is price of basket of goods & services
relative to price of same basket in some
base year
Food vs. non-food inflation:

Weights determine which good is driving
general inflation
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Price Analysis Training
2.2. 7
Aspects of Market Price Analysis
The Consumer Price Index (CPI)…
CPI 2009
CPI in base year
=
Cost of market basket 2009
Cost of market basket in base year
When constructing such index numbers, it is conventional to set the index at 100 in
the base period. Thus:
CPI 2009
100
=
Cost of market basket 2009
Cost of market basket in base year
=
Cost of market basket 2009
X 100
Cost of market basket in base year
Resulting in:
CPI 2009
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Price Analysis Training
2.2.8
Aspects of Market Price Analysis
Understanding the CPI…
 Suppose: 2009 CPI is equivalent to “143.5”
• Simply means: In 2009 it costs 143.5
currency units (francs, dollars, dinars, etc.)
to purchase the same market basket of
goods & services that cost 100 currency
units in the base year
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Price Analysis Training
2.2. 9
Quick Quiz
Answer:
6300 X 100 = 300
2100
 A WFP monitor finds the cost of a market basket in
December 2009 costs 6300 francs.
 In 2000, the base year, the cost of the same basket
was 2100 francs.
• What is the CPI in December 2009?
CPI 2009
=
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Cost of market basket 2009
X 100
Cost of market basket in base year
Price Analysis Training
2.2.10
Aspects of Market Price Analysis
Understanding the CPI…
In absence of inflation:
• Value of money stays constant over time.
Therefore, it is easier to compare prices over time
In presence of inflation:
• Prices need to be adjusted for inflation to enable
comparison in constant money terms over time –
to determine whether consumers are better off –
or not
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Price Analysis Training
2.2. 11
Limitations of the CPI to be aware of…
The CPI is…
 not easy to calculate
 available only as secondary data.
 usually not available regularly (e.g., on a monthly
basis) or at geographical level
 CPI does not take into account all items in the
economy.
If available it is better to use the GDP deflator
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Price Analysis Training
2.2.12
Limitations: Nominal prices
 Where high inflation disconnects price
from real economy, economic agents do
not consider nominal price as a relevant
indicator for decision making
 Nominal price can be manipulated by
government or private actors (price
control, speculation…)
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Price Analysis Training
2.2.13
Aspects of Market Price Analysis
Turning nominal into real prices
 Formula translates non-comparable monetary figures into
directly comparable real figures.
 Same concept is used to analyze wages, to determine by
how much purchasing power has been eroded by inflation
(a reason to prefer real prices in market analysis)
Preal in 2009
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=
Pnominal in 2009 X 100
CPI 2009
Price Analysis Training
2.2.14
Limitations: Real prices
 Bias due to the use of inappropriate CPI to
compute real price: use of annual CPI for monthly
data or use of CPI from one region to compute
real price in another region (ex: urban CPI for rural
areas…).
 If food item contribution to CPI is high, it induces
downward bias in food real price – i.e., it
underestimates extent of real price increase.
It is better to use a non food CPI
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Price Analysis Training
2.2.15
Quick Quiz
Answer:
1200 X 100 = 400
300
 In December 2009, the WFP monitor visits the
market and finds that the cost of one kg of maize at
the market is 1200 francs
 What is the real price of maize (using same
December 2009 CPI of 300)?
Preal in 2009
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=
Pnominal in 2009 X 100
CPI 2009
Price Analysis Training
2.2.16
Nominal vs. Real Prices
Which deflator to use?
 Choice of deflator – of an index – is important: its
construction depends on data availability for the index
 CPI is not a good deflator if the concerned product
accounts for a high % of index (then the real price will
minimize the degree of relative price changes)
 Using CPI requires a good knowledge of the composition
of the basket
 Using urban-based CPI to deflate a rural-based nominal
price is not appropriate (due to different basket
compositions and weights)
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Price Analysis Training
2.2. 17
Nominal vs. Real Prices
Which deflator to use?
 If real price changes aim to inform production
(not consumption) incentives, a better index is
GDP deflator
 Concerns:
• CPI is not always appropriate
• GDP deflator is rarely available on a monthly
basis
 Seasonal price indices should be constructed
(more on this tomorrow…)
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Price Analysis Training
2.2. 18
Implications for Food Security?
Changes in maize nominal and real prices over time in Rwanda
What are the implications of the graph for HH food security?
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2.2. 19
Real and nominal maize price
comparison
2004
2005
2006
2007
2008
2009
What are the implications of the graph for HH food security?
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Price Analysis Training
2.2. 20
x=z
Wages & “Real” Wages
Quick quiz:
To determine
if people
arein
Purchasing
Power
really better
off this year
Marketastan
compared with last (in terms
of purchasing
Dec
09 CPI: power):
300
Jan 09 CPI:
150
1. Calculate  in CPI over
year
Dec the
09 wage:
8 marks
2. 09
Calculate
Jan
wage:  in nominal
5 marks
wage over the year
Are
really
3. people
Compare:
Is better
2 > 1?offIf now
compared
with a are
yearbetter
ago?off
yes, people
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Answer:
1.  in CPI: (300 – 150) = 1.00
150
2.  in Wages: (8 – 5) =
5
.60
3.
< 1.00 CPI
1. Compare:
end-year CPI.60
– begin-year
i.e. realbegin-year
wages rose
CPI less
than real prices
2. end-year wage – begin-year wage
2.
begin-year
wage off
People
are worse
Price Analysis Training
2.2.21
Small Group Work
Please turn to Workbook Exercise 2.2.a.
The Marketastan File:
Wheat Price Trends in
Marketastan
(use Excel data file: 4.1. Wheat IPP for Marketastan.xls)
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Price Analysis Training
1.4.22
Marketastan 2.2.a. Debriefing
Part I: Do you agree with southern politicians, that
wheat prices are same in Northville as in
other areas of Marketastan? That
conditions in Central Province are better
than in the south? Why?
Part II: Were people in Marketastan worse off by
end- 2009 compared with 2008? 2007?
WFP Markets Learning Programme
Price Analysis Training
2.2.23
Wrap-up:
Interpretation and Decision-Making
Interpretation
 Price analysis informs supply: deficit/surplus status, seasonality of
production, inflows and outflows of food
 Complementary information needs:
• Relative prices: in terms of livelihoods and geography
• Inflation
• HH income sources
• Wage rates
• Levels of income
• Availability - food aid distributions
• Market functioning
 Contribution to decision-making:
• Help determine potential/actual impacts of aid distributions
• Help in formulation of early warnings
 NOTE: Not stand-alone indicator: context is very important
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Price Analysis Training
2.2. 24