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Adjusting Prices for Inflation and Creating Price Indices

FEWS NET Markets Guidance, No 3


May 2009

INTRODUCTION

Pricesareastandardandimportantcomponentofmarketandfood
Introduction................................................1
securityanalysisbecausetheyserveasanindicatorofbothfood
Inflation,price,andpurchasepower..........2
availabilityandfoodaccess.Pricesareameasureofavailabilitybecause
Whataretheimplicationsofinflationfor
theytendtoriseasthesupplyoffoodfallsinrelationtodemand(e.g.,
consumersandproducers?........................3
poorproduction,constrainedimportsoffood),andtheytendtofallwhen
Howdoyouadjustpriceswhenyouhavea
supplyexpandsinrelationtodemand(e.g.,abumperharvest).Food
measureofinflation?..................................4
pricesarealsoameasureoffoodaccessbecausetheyaffectthe
Whyisthedistinctionbetweennominaland
householdspurchasingpower:theabilityofahouseholdtoacquire
realpriceimportant?..................................5
goodsandservicesbasedontheamountofmoneyorotherformsof
Limitationsofusingrealpricesinanalysis..7
wealththeypossess.Consumerpricesoffooddeterminehowmuchfood
Somepotentialcausesofinflation.............7
ahouseholdcanbuygiventheirlevelofincomeorwealth.
DifferenttypesofConsumerPriceIndices.9

ComputingtheFoodPriceIndex..............10
Therelationshipbetweenthepriceoffoodandotherbasicgoodsand
InterpretingtheFoodPriceIndex.............15
servicesontheonehandandwages,householdincomeorhousehold
Computingandinterpretingthegeneral
wealthontheotherhanddeterminesthehouseholdslevelofpurchasing
ConsumerPriceIndex...............................16
power.Generally,inorderforahouseholdtohaveadequateaccessto
Choosingtheappropriateindexforanalysis
food,theyneedtohaveadequatepurchasingpower.Forthepoorest
..................................................................18
households,foodislikelytoaccountforthelargestshareofthe
Conclusions...............................................19
householdbudget.Consequently,consumerpricesoffoodareprobably
References................................................20
theindicatormostoftenmonitored,analyzedandreportedintheanalysis
AnnexA:SelectsourcesofCPIdata.........21
ofhouseholdfoodaccess.Regularmonthlyorweeklycollectionof
Glossary....................................................22
consumerorretailpricedataforasetofkeycommoditiesisastandard
componentofmostfoodsecuritymonitoringsystems.

Traditionally,foodsecurityanalystshavefocusedontheassessmentandanalysisofactualconsumerpricesfoundinthemarket
(i.e., the spot price or the prices consumers face when they go to the market). These prices are analyzed and reported as a
measureoftheaffordabilityoffood.Earlywarninganalystswatchtheleveloftheseprices,thechangesovertheseasonand
howpricescomparetonormallevelsandpatterns.Earlywarninganalystslookforpriceanomalies(irregularbehavior)asan
indicatorofapotentialimprovementordeteriorationinfoodsecurity.

Thepurposeofthisguidanceistoexpanduponthetraditionallevelofpriceanalysisbyconsideringandusingpricesadjustedfor
inflationinregularFEWSNETanalysis.WhilereadersofFEWSNETproductswanttoknowactualpricesthatarefoundinthe
market(nominalprices),marketanalystsshouldalsoaccountfortheeffectsofinflationandchangesinrelativepricestotruly
understandtheimplicationsonfoodsecurity.

ThisguidanceprovidesFEWSNETrepresentativesandtheirpartnerswith:
1. Anintroductiontoconceptsandtermsrelatedtoprices,inflation,priceindicesandpriceadjustment;
2. Anillustrationofhowpriceanalysesreliantonrealornominalpricescanyieldsignificantlydifferentconclusions;
3. Anunderstandingofwhyandwhen(forwhatpurposes)pricesshouldbeadjusted
4. Anunderstandingofhowtoadjustprices;and
5. Anillustrationofhowvariouspriceindicesarecalculatedandinterpreted.
TABLEOFCONTENTS

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FEWS NET is a USAID-funded activity. This publication was authored by Abdoul Murekezi. The authors views
expressed in this publication do not necessarily reflect the view of the United States Agency for International
Development or the United States Government.

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FEWS NET Markets Guidance, No. 3

May 2009

INFLATION,PRICE,ANDPURCHASINGPOWER

Inflationisanexpressionoftheincreaseinpricesintheoveralleconomy.Inparticular,inflationismeasuredbasedonthose
goodsandservicesthatrepresenttypicalitemsintheaveragehouseholdsconsumerfoodbasketsuchasgrainandflour,
otherfooditems,drinks,fuelandpower,clothing,householdgoods,schoolfees,etc.

Thereisaninverserelationshipbetweenthepricesofgoodsandservicesandthevalueofmoneyinaneconomy.Other
thingsbeingequal,aspricesriseovertime,agivenamountofmoneywillbeabletopurchasefewerandfewergoodsand
services.Inthepresenceofinflation,agivenlevelofwages,incomeorwealthwillbuylessgoodsandservices.Inother
words,inflationtypicallytranslatesintoalossofpurchasingpower,especiallyifthepricesofgoodsandservicesisrising
morequicklythanwagesorincome.AFEWSNETrepresentativewouldwanttoanalyzehowtheriseinpricesoffood,for
example,isaffectingthepurchasingpowerofconsumersgiventheirexistingwagesorincomesources.

Inflationhasanadditionaleffectonpriceswhenbusinesses,workersandothers
experiencingalossinpurchasingpowerattempttoadjustupwardwhatthey
Whatisprice?
Priceisthecostorvalueofagoodor
receivefortheirgoodsandservicesinordertokeeppacewiththeirrisingcosts.
serviceexpressedinmonetaryterms.
Theresultisfurtherupwardpressureonprices.Essentially,peoplenoticean
Prices,inthepurestsense,indicatevalue
increaseinpricesandadjusttheirbehaviorsaccordingly,furthercontributingto
thathasbeenaddedtoaparticular
theeffectsofinflation.
commodity.

Pricesignalscancarryinformation
Acomparisonbetweentheriseinthepriceofaparticulargoodorservicetothe
aboutthecostofproduction,
overallinflationrateprovidesinsightonwhetherthegoodorserviceis
transportation,storage,perceptions
becomingcheaperormoreexpensiverelativetoothergoodsandservices.For
anddesiresaswellas,insome
example,iftheincreaseintheretailpriceforwheatflourislessthanthe
instances,distortions.
inflationrate,wheatflourisbecomingrelativelycheaper.

Apricerepresentsanagreement
betweenabuyerandsellerarrived

atthroughanegotiatedprocess.
Dependingonconsumerpreferences,thisrelativedeclineinwheatpricescould

Theprevailingpriceatagivenlevel
makewheatmoreattractivetoconsumersincomparisontootherstaples.If
orstageofthemarket(e.g.,farm
wheatistheprimaryandpreferredstapleandcomprisesalargeshareofthe
gate,wholesale,retail)represents
averagepoorhouseholdsbudget,thiscouldimplythatinflationishavinga
thenegotiatedequilibriumpoint
greaterimpactontheconsumptionpatternsofmiddleandincomehouseholds
reachedbetweenbuyersandsellers
thanonpoorerhouseholdssincemoreoftheirbudgettypicallygoestowheat
atthatstageinthemarket.
purchases.Theactualburdenofinflationwillinlargepartbedeterminedby
typicalconsumptionpatternsandtheabilityofhouseholdstoshiftwhenthe
overallpricelevelandrelativepriceschange.

Figure1illustrateshowdifferentdegreesofinflationaffectsnominalprices:inthiscasemilletprices.Whenthereisno
inflation,pricesarerelativelylowandfollowastabletrendovertime.However,forthesamecommodity(millet)overthe
sametimeperiod,10percentinflationresultsinhigherprices.Twentypercentinflationleadstomuchhigherprices.The
figurealsoillustrateshowovertime(inthiscaseoverafewmonths)theimpactoftheinflationrateonpricesis
compoundingifyoudoubletheinflationratetheeffectonpricesismorethandoubleasyoumovethroughtime.The
purchasingpowerofaconsumerwithastagnantwageratewouldbedecliningwitheither10or20percentinflation,but
muchmoredramatically(e.g.,steeply)overtimewiththehigherrateofinflation.

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Figure 1: Retail prices for millet without inflation and with 10% and 20% inflation

Source:Chopak,C.FEWS,1998

WHATARETHEIMPLICATIONSOFINFLATIONFORCONSUMERSANDPRODUCERS?

Intheabsenceofinflation,thevalueofmoneystaysconstantmakingiteasytocomparepricesovertime.

Ifafarmersellsakilogramofmilletfor100CFAinOctoberin2006and125CFA/kginOctoberof2007,andthereis
littleofnoinflation,(s)hewillearnmorefromthesaleofthatkilogramofmillet2007.Thefarmerwillhavemore
incomeandwiththatincome(s)hewillbeabletobuymoregoodsandservices.Therefore,thefarmerisbetteroff.

Ifaconsumerbuysonekilogramofwheatflourfor15RpsinDecember2006andonekilogramofwheatflourfor
25RpsinDecember2007,andthereisverylittleinflation,itispossibletosaythat(s)heisworseoffinDecember
2007comparedtoDecember2006asthepriceofwheatflourhasincreasedsinceDecember2006.

However,inthepresenceofinflation,pricesneedtobeadjustedforinflationinordertobecomparedinconstantmoney
termsovertimeandtodeterminewhethertheproducersandconsumersarebetteroffornot.

Forthefarmer,ifannualinflationwas10percent,thefarmerisstillbetteroffbecausethepriceinDecember2007
ismorethan10percenthigherthanitwasinDecember2006.Although,thefarmerwillhaveseensomedecrease
inthepurchasingpowerofhis/herincome.Ifinflationwas30percent,thefarmerwouldbeworseoffbecausethe
differenceinpricefrom2006to2007islessthantherateofinflation.

Fortheconsumer,ifannualinflationwas10percent,theconsumerwouldstillbeworseoffandwheatflourwould
havegottenrelativelymoreexpensivethanothergoodsandservices.(S)hemightchoosetopurchaselesswheat
flourandmaybemorerice,asubstitutecerealforwheat,ifthepriceofricedidnotriseasmuchaswheatflour.
But,ifinflationwas30percent,wheatflourwouldbemoreattractivebecauseitwouldnowberelativelycheaper
comparedtoothergoodsandservicesincludedintheconsumerbasket1.Theconsumermayevenpurchasemore
wheatflourandlessricebecauseflourmayberelativelycheaperthanrice.Althoughthenominalpriceofwheat
flourhasincreasedsinceDecember2006,wheatisnotgettingrelativelyexpensiveastherateofincreasein
nominalpricesissmallerthantherateofinflation.
1

Aconsumerbasketisatypicalmarket(expenditure)basketofgoods,feesandservicesintendedfortrackingthepricesofconsumergoodsandservices.
Thebasketmaycomprisetheactualquantitiesofconsumptiongoodsorservicesacquiredorusedbyhouseholdsinsomeperiod.Sometimes,aconsumer
basketcanalsobemadeupfromhypotheticalquantitiescreated.

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Thepreviousexampleillustrateswhyfoodsecurityandearlywarningprofessionalsneedtoanalyzepricebehaviorand
trendsandassesswhetherpricelevelsarerelativelyhigh,loworstable.Byadjustingprices,theycanunderstandthe
followingfoodsecurityimplicationsofacertainpricelevelorofpricechanges:

1. Howthecommoditypricestheyobserveinthemarketmaybeaffectingtheincomeofthefoodinsecureand
vulnerablefarmers.
2. Howtheobservedpricesmaybeaffectingthepurchasingpowerofconsumersandfarmerswhorelyonthemarket
fortheirconsumptionneeds.Thisincludesthetermsoftradebetweenlivestockproductsandcerealsorwage
ratesandcerealstogaugethefoodsecurityofpastoralistpopulationsandlaborers,respectively.
3. Howtheobservedpricesmaybeaffectingfoodavailability,themarginsoftradersandtheirincentivestoengagein
trade.

HOWDOYOUADJUSTPRICESWHENYOUHAVEAMEASUREOFINFLATION?

Ameasureofinflationcanbeusedtotransformnominalpricesthatareobservedinthemarketintorealprices.

Nominalpricesarepricesthathavenotbeenadjustedforinflation.Thenominalpriceisequaltothemoney
thatispaidforaunitofagoodorserviceinthemarket,attheshop,etc.Thesearethepricesobservedonthe
market.

Realpricesarepricesthathavebeenadjustedforinflation.Realpricesholdthevalueofcurrencyconstant,and
allowyoutocomparetheexchangevalueofagoodorserviceindifferenttimeperiods.Unlikenominalprices,real
pricesarenotobservedinthemarket,andarecalculated.

ThemostcommonmeasureofinflationistheConsumerPriceIndex(CPI).TheCPIisameasureofchangeinthepurchasing
powerofacurrency.TheCPIexpressescurrentpricesofatypicalconsumerbasketofgoodsandservicesintermsofthe
pricesduringthesameperiodinapreviousyear(referenceorbaseyear),toshowtheeffectofinflationonpurchasing
power.Inotherwords,theCPImeasureshowtheaveragepricelevelofarepresentativebasketofconsumergoodsand
servicespurchasedbyhouseholdshaschangedbetweentwoperiods.IftheCPIwereanationalaverageCPI,itwould
measuretheriseorfallinthecostsofaconsumerbasketofgoodsandservicesforanaverageconsumer.Thisguidancewill
describehowonecanderiveaCPIinlatersections.TheCPIcanbeusedtocalculateinflationusingthefollowingequation:

INFLATION=[(CurrentperiodCPI)(previousperiodCPI)]/(previousperiodCPI)

Forexample,iftheCPIforMay2007is150andtheCPIforMay2006was125,inflationfromMay2006toMay2007was20
percent.

IfinformationonCPIisavailable,wecanadjustnominalpricesinordertocalculaterealpricesusingthefollowingformula:

REALPRICEcurrentyear=(CPIbaseyear/CPIcurrentyear)*nominalpricecurrentyear

Forexampleifthenominalpriceofthecurrentyear(2009)ofriceis$2,thebaseyear(2007)CPIis100andthecurrentyear
CPIis150,therealpriceofricein2009is$1.60.

Wecanalsousetheinflationratestoderiverealprices.Iftheinflationfromthebaseyearisknown,wecancomputethe
realpricesusingthefollowingformula:

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REALPRICE=Nominalprices/(1+inflationrate)

Forexample,letussupposethenominalpriceofmaizeinaparticularcountrywas$1.50perkilograminJanuary2008and
$2.00inJanuary2009.IfwetookJanuary2008asthebaseyearandtheinflationrateinJanuary2009equalto35%in
comparisonwiththebaseyear,therealpriceusingthepreviousformulawillbecomputedasfollows:

RealpriceofmaizeinJanuary2009=$2.00/(1+0.35)=$1.48

WHYISTHEDISTINCTIONBETWEENNOMINALANDREALPRICEIMPORTANT?

Inthepresenceofinflation,theanalysisofnominalpricescanleadtodifferentconclusionsthantheanalysisofrealprices.
Thefollowingnumericalexampleillustratesthispoint.

IfthenationalaveragenominalpriceofmaizeinRwandawas150RwandanFrancs(RWF)perkilograminJanuary2008,200
RWFinJune2008and220RWFinJanuary2009,howcanafoodsecurityandearlywarninganalystinterprettheseprices
andderivefoodsecurityimplicationsofthemaizepricechanges?

Usingonlythenominalprices,theanalystcouldconcludethatthepriceofmaizehasbeenincreasingovertime,whichcould
suggestthatmaizeisbecomingscarceinthemarketorrelativetodemand.Moreover,readingaMinistryofAgricultural
report,theanalystcouldalsobesurprisedwhenthereportstatesthattherewasanagriculturalproductionshortfallin
January2008duetoweatherconditionsandyetpriceswerelowerthantheyarenow(2009).Furthermore,thereportmight
statethattheagriculturalproductioninJanuary2009wasmuchbetterthanlastyearandyetpricesarehighernowthanlast
year.Howcanthisbetrue?Whywouldthenominalpriceofmaizein2009bemuchhigherthanthenominalpriceofthe
yearbefore?HowcanhighmaizeproductioninJanuary2009beassociatedwithhighnominalprices?

TheanalystcouldthenturntothecountrysstatisticalofficewebsitetofindthattheinflationrateinJune2008andJanuary
2009were35percentand57percent,respectively,incomparisonwiththebaseyear,whichisassumedheretobeJanuary
2008.Thefirststepinthisanalysiswillbetoderiverealpricesusingthepreviousformulathatusesofinflationrates.Table1
givesthenominalandcomputedrealpricesforthisexample.

Table 1: Nominal and real prices of maize


Period
Nominalprices
Inflationrate
Realprices

January2008
150.00
base
150.00
June2008
200.00
38%
148.00
January2009
220.00
57%
140.00

TheresultsfromTable1showthattheanalysisofnominalpricesillustratesthatthepriceofmaizehasbeenincreasingsince
January2008.Onecould,therefore,concludethatmaizehasbecomescarceovertimecausingthepricetorise.However,
usingrealprices,priceanalysiswilltelladifferentstory:thepriceofmaizehasgonedownovertimeinrealtermssince
January2008.Theanalysisofnominalandrealpricesinthissituationwillleadtodifferentconclusionsandhaveopposite
foodsecurityimplications.

Byanalyzingchangeinnominalpricesalone,analystswillconcludethatconsumershavebecomeworseoffasaresultofthe
priceincreaseinmaize.Thisconclusionwillbefalsebecauseconsumershaveinsteadbecomebetteroffasthepricesof
maizeinrealtermshavefallenovertime.ThehighnominalpriceofmaizeinJanuary2009didnotreflectashortageof
maize,butratherwasaresultofpriceinflation.Thiscaseillustrateshowtheanalysisofnominalandrealpricescanleadto
differentconclusions.Earlywarningandfoodsecurityanalystsmustbeabletointerpretthenominalandrealpricesand
understandthefoodsecurityimplicationsofpricechangesofthetwotypesofprices.Table1ingraphicalformisshownin
Figure2.

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Figure 2: Changes in maize nominal and real prices over time in Rwanda

Whilenominalpriceshavebeenincreasingovertime,thegraphshowsthatrealpricesofmaizehavenotchangedalot,in
fact,theyhavegonedown.Inotherwords,themaizepricein2009isnotmoreexpensivethaninJanuary2008.

Figure3illustratesanothercasewhyitisimportanttounderstandfoodsecurityimplicationofnominalandrealprices.

Figure 3: Real and nominal maize price comparison for Lusaka

NominalandrealretailpricesformaizeinLusakafromJune1993throughJune1998areshowninfigure3.Nominaland
realpriceswerealmostthesameduring1993and1994wheninflationwaslow.In1996,thetwopricesbegantodiverge
andinflationbecamehigh.InFebruary1998,nominalpricesweremorethanfourtimesthatofrealprices.

TheanalysisofnominalpriceswouldconcludethatpriceofmaizeinLusakahadsignificantlyincreased.However,the
analysisofrealpriceswouldsuggestthatthepriceofmaizeisfollowingitstypicalseasonpatternandwithinarangethat
shouldbeexpected.Ifthefoodsecurityandearlywarninganalystlooksonlyatthetrendsofnominalprices,theanalystcan
wronglyconcludethatmaizeisgettingscarceinLusakaorthemarketofmaizeinLusakaisnotfunctioningwell.Itis
thereforeimportantforfoodsecurityandearlywarninganalyststobeawareofthedifferencesbetweennominalpricesand
realpricesandunderstandthefoodsecurityimplicationsofacertainpricelevelorofpricechanges.Thatsaid,onehasto

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lookatthebehaviorofwagesandincomeoverthesametimeframeinordertounderstandwhetherthehouseholdshave
becomeworseoff.

LIMITATIONSOFUSINGREALPRICESINANALYSIS

Whilecomputingrealpriceshelpsdeterminetheeffectofinflationonprices,realpricesarenotaperfectformof
measurementandcomparison.Therearestillvariousotherfactorsthatshouldbeconsideredbeforemakingconclusions.

Inmostcountries,staplefoodpricesaccountforbetween20to25percentoftheCPI.Thismeansthatincountrieswhere
foodpricesarerisingfasterthantheremainingbasketofgoodsandservicesalsointheCPI,deflatingpricesusingtheCPI
willunderestimatetheextentoftherealfoodpriceincreases.Ontheotherhand,incountrieswherefoodpricesarerising
lessrapidlythantheremainingbasketofgoodsandservices,usingtheCPIasadeflatorwilloverestimatetheextentoffood
priceincreasesrelativetochangesingeneralprices.Thismeansthatdespitetheappearanceofdecreasingorstablereal
prices,theadjustedpricesdonotexplainhowvulnerablelowincomehouseholdsarewithrespecttoothergoodsthey
needinthemarket.Inotherwords,therealpricesdonotprovidethecompletepictureofhowwellorbadoffconsumers
arerelativetothepricesoftheothergoodsandservicesintheeconomy.

Anotherconsiderationispossiblechangesinwageorincome.Whenmakingconclusionsaboutpurchasingpowerbysimply
lookingatchangesinrealpricesovertime,ananalystisassumingthatthewageorincomelevelofthisgroupisremaining
constant.Forexample,itismisleadingtoassumethatthedeclineofrealpricesovertimeisnecessarilyagoodthingfor
consumers.Ifwagesandincomearealsofalling,thereisnorealbenefittoconsumers.Ifwagesarefallingfasterthanreal
prices,thepopulationisactuallybecomingmorevulnerable.Fortheportionofthepopulationthatremainsunemployedor
underemployed,realpricestellabetterstory.Besuretonotemakegeneralizationswithoutunderstandingtheentire
picture.

Realpricesalsocarryverylittleinformationtoconsumers,farmers,tradersanddecisionmakersbecausethesemarket
participantsobservenominalprices.Thatiswhyitisveryimportantforfoodsecurityandearlywarninganalyststoreport
nominalprices,butanalyzebothnominalandrealprices.Ananalysisofthetwopricesprovidesafirststepindetermining
whetherhigherpricesimplythatcommoditiesarescarce,productionisinshortage,tradersaremanipulatingmarkets,etc
Thepreviousexamplesshowhowitisimportanttotakeintoaccountinflationtounderstandfoodsecurityquestions.

SOMEPOTENTIALCAUSESOFINFLATION

Thepriceofanygoodisinfluencedbydifferentmarketforcesthatcanchangethebalancebetweensupplyanddemand.
Manyoftheseforcescomefromdomesticaswellasregionalandinternationalmarkets.Thissectiondiscussessomeofthe
causesofinflation.FEWSNETrepresentativesshouldmonitormarketpriceswhichareaffectedbyallcausesofinflationand
understandconsumersaccesstofoodinrelationtopricemovements.Giventheuniqueenvironmentofeachmarketand
country,agoodgraspofhowindividualsinteractwithmarketsisnecessarytounderstandingtheimpactofpricechanges.

1. Productionshortfalls

Forlocallyproducedgoods,thedifferencesinproductpricesreflectdifferencesinlocalconditionsofsupplyanddemand.In
general,pricesarelowerinregionsofsurplusproductionandhigherindenselypopulatedregionsofdeficitproductionsuch
asurbanareaswheredemandexceedslocalproduction.Similarly,badweatherconditionsandcrop/animaldiseasescan
leadtoshortageinagriculturalproduction.Forinstance,poorrainfallparticularlyinkeyproductionzonesofacountryor
regioncancausenationalandregionalfoodpricestorise.Whenpricesarepushedupoveraperiodoftimeduetorepeated
productionshortfalls,butthevalueofmoneyremainsthesame,theareawillexperienceinflationpropelledbyagricultural
prices.

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2. Effectsofinputmarkets

Ifthecostofinputsusedinproductionofagoodincreases,thiscancauseariseinthecostsofproduction.Theriseininput
costscanalsoresultinadropinagriculturalproduction,creatinganexcessdemandoftheproductinquestionandinducing
anupwardpressureonprices.Forexample,highfertilizepricescanresultinareductionintheuseoftheseinputsby
farmersastheycannolongeraffordfertilizerexpenses.Similarly,fuelpricesincreasecantranslateintoincreasingcostsof
otherinputsthatneedtobetransportedtoruralareaslikefertilizers.Theincreaseincostoftheseinputswoulddecrease
theirusebyfarmerscausingthedropintheagriculturalproductionandinducinganupwardpressureonfoodprices.

3. Governmentpolicies

Governmentpoliciescantakemanyformsandcouldpotentiallycauseinflationarypressure.Whilethisisnotnormallythe
goalofapolicy,itisoftenanunintendedsideeffect.

Inmanycountries,themarketforgoodsissubjecttogovernmentpricepolicies.Thegoalsofthesepoliciesareoftento
stabilizeproducerandconsumerpricesortokeepfoodpricesaffordabletothepoororpoliticallyactiveurbangroups.In
thissituation,pricesofgoodsarenolongersolelyafunctionofdemandandsupply.Aconsequenceofpricefixingpolicies
canincludetheneedtorationfoodsalesduringyearsoflowproductiontothebenefitofsomeconsumergroupssuchas
targetingthepoorandfoodinsecurehouseholds.

Anothergovernmentpolicythatoftenresultsininflationisthedevaluationoftheofficialexchangerate.Devaluationwould,
iflocalpricesstaythesame,meanmorelocalcurrencywillbeneededinordertobuythesameamountofimportedgoods
andservices(orgoodsandservicesdependentonsomeimportedinputs).Thedevaluationoflocalcurrencywillmakeprices
ofimportedinputsincrease,whichwillalsoaffectpricesofdomesticallyproducedgoods.Forcountriesthatareenergy
dependent,oilmustbepurchasedusingforeigncurrency,whichoftencreatesinflationarypressuresinthisway.Localrises
indieselandpetrolcostsincreasethepricesoftransportationandthepricesofconsumergoodssuchasstaplefoodsthat
havetobetransportedfromproductionzonestoconsumptioncenters.Inotherwords,adevaluationoftheexchangerate
canleadtotransportpriceinflationasaresultofthepriceincreaseoffuelsandtransportchargesduetospeculation.

Inflationcanalsobecausedbyanincreaseinthequantityofmoneyincirculation(moneysupply)relativetotheexpansion
intheeconomy.Thishappenswhengovernmentsprintexcessiveamountsofmoneycausingpricestoincrease.Thiswasthe
situationinZimbabweinthepast.Ifwagesremainconstant,boththedevaluationoftheofficialexchangerateandexcess
moneysupplywouldleadtoasignificantlossinpurchasingpowerofconsumers.

4. Internationaltradeandtradebarriers

The2008pricecrisishashighlightedhowglobalcerealmarketshaveasignificantinfluenceonlocalmarkets.Theshortage
ofcerealsininternationalmarketshasresultedinhighpricesforimportsand,inmanycases,haspushedupwardtheprice
ofdomesticallyproducedcereals,limitingaccesstofood,includingpoorurbanhouseholdsandruralnetpurchasing
consumers.Theeffectsweremorepronouncedforthosedependentonimportsandwithlimitedopportunitiestosubstitute
betweendifferentstaples(e.g.,milletorcassavaforimportedrice).

Althoughadeficitofaparticulargoodintheglobalmarketcancausepricestorise,adeclineininternationalfoodpricescan
mitigatefoodinsecuritythroughtrade.Forexample,countrieswithproductionshortfallscanimportatrelativelylowprices
makingfoodavailabletomarketdependentconsumersatarelativelylowercost.

Althoughfoodsecuritycanbeaddressedthroughinternationalorregionaltrade,sometimestradebarrierscanlimitthis
possibility.InMalawiforexample,domesticmaizepriceshavebeenhigherthanthecostofimportingmaizefromSouth
Africaduetoimportrestrictions2.Highfoodpriceswerefoundtobecausedbytraderestrictionsratherthanworldfood
prices.

2
Jayne et al., (2008). The 2008/09 Food Price and Food Security Situation in Eastern and southern Africa: Implications for Immediate and
Longer run responses.

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DIFFERENTTYPESOFCONSUMERPRICEINDICES

Inmanycountries,consumerpriceindicesarecalculatedandavailable.Differentnationalstatisticalofficescompileand
disseminateanumberofdifferentCPIs,eachservingadifferentpurpose.InSouthAfricaforexample,thedifferenttypesof
CPIcompiledinclude:

(1)ConsumerPriceIndex(CPI):isusedtocalculatetheofficialrateofinflation,andconsistsofpriceincreasesfor
allgoodsandservicesinthemainmetropolitanareasofthecountry;
(2)CoreCPI:iscalculatedsuchthatcertainitemsareexcludedfromtheCPIbasketonthebasisthattheirprices
arehighlyvolatile,subjecttotemporarilyinfluencesorareaffectedbygovernmentpolicies.Theindexisusedto
calculatecoreinflationandreflectstheunderlyinginflationarypressuresintheeconomy.
(3)FoodPriceIndex(CPIF):isusedtoassesstheimpactofpriceincreasesespeciallyonthepoorpopulation,as
foodisthesinglebiggestiteminthetotalbasketforthepoor.

Table 2: Trends in the different CPI indices measured in South Africa, 2001-2002
Mainindices
Indices(2000=100)
PercentagechangebetweenFebruary
2001andFebruary2002
February
January
February
2001
2002
2002
CPI(metropolitanareas)
104.1
109.0
110.4
+6.3
CoreCPI
104.4
110.7
111.4
+7.5
CPIF
102.4
113.9
114.8
+12.1
CPI(excludingfoodpriceindex)
104.1
107.7
110.2
+4.8
Source:StatsSA,2002a

Table2showsthattheCPIFincreasedfasterthantheotherindicesduringtheperiod.Thisindicatesthatfoodprice
increasescontributedsignificantlytothehighoverallrateofinflationinSouthAfrica.Thiscanbeduetothefactthatfood
pricesrosemorequicklyorthattheweightoffoodproductsisrelativelylargeorboth,resultinginlargepercentagechange
inCPIF.

Inmostcountries,anurbanconsumerpriceindexisavailable.Thispriceindexiswellsuitedforobservingthewayinwhich
urbanpriceshavechangedonaverage.Thesameindexwillbe,however,inadequateforobservingthewayinwhichprices
havechangedinruralareas.Thecombinationsofgoodsandservicesconsumedintheurbanplacestypicallydifferfromthat
ofruralplaces.Eveninurbanareas,usinganaverageCPIcanbemisleadingifoneanalyseshowchangesofpriceshave
affecteddifferentcategoriesofpeoplewholiveinthesameurbanarea.ForexampleinSouthAfrica,theCPIinyeartoJune
2002rosebetween11and14percentforhouseholdsearningbelowR2,030amonth,comparedto8%fortheveryhigh
incomegroup.

StatisticalofficesaroundtheworldcompileanddisseminateanumberofdifferentCPIaggregates,eachservingdifferent
purposes.Generally,theprecisewayinwhichCPIsaredefinedandconstructeddependsmainlyonwhattheyaremeantto
beusedforandwhowillbethemainusersoftheindices.Moreover,sinceCPIsareoftencompiledtoadjustwagesto
compensateforthelossofpurchasingpowercausedbyinflation,theresponsibilityforcompilingCPIsisoftengiventoa
ministryordepartmentoflabor.AlthoughCPIsmeasureonlyconsumerinflation,theyareoftenusedbycentralbanksor
ministriesoffinanceandeconomicplanningofsomegovernmentsasaproxyforthegeneralrateofinflation.Theseare
potentialsourcesofCPIseriesorthedatausedtocalculateconsumerpriceindices.SeeAnnexAforalistofsourcesofCPI
informationforFEWSNETcountries.

Inplaceswherethistypeofinformationisnotalreadyavailableorinplaceswhereyouwanttounderstandapriceindex
thatisspecifictoonepopulation,creatingandcalculatingapriceindexmightbenecessary.Thenextsectionsdescribesteps
incomputingtheconsumerfoodpriceindexandthegeneralconsumerpriceindex(CPI).

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Calculationsoftheconsumerfoodpriceindexandthegeneralconsumerpriceindexrequireaccesstoasignificantamount
ofdataonpricesandquantitiespurchasedforarangeofbasicconsumeritemsovertime.Informationontheconsumer
basketofgoodsandservicesandtheirrespectivesharesisalsoneededtocomputeinflationindicators.Whenacountry
doesnothaveaCPIorsomeothertypeofindexavailabletoanalysts,theanalystcanusethedataonpricesand
expendituressharesofthedifferentcomponentsoftheconsumerbaskettocreatepriceindices.

COMPUTINGTHEFOODPRICEINDEX

Thefoodpriceindexisapriceindexwhereonlyfooditemsareusedtocalculatetheindex.Thisthenexcludestheother
nonfoodgoodsandservicesthataconsumergenerallypurchases,includingclothing,housing,healthservices,etc.Stepsof
computingofafoodpriceindexareasfollows:

1. Identifycommoditiesandweightsfortheconsumerfoodbasket

Theweightsoftheconsumerbasketareasetofnumbersthatrepresentexpendituresharesofthedifferentcommodities
thatformthebasket.Expendituresharesaretheportionofahouseholdsexpendituresallocatedtoaparticulargood,
serviceorgroupofgoodsandservices.Theweightsgenerallysumuptoone.Conventionally,weightsaredeterminedusing
datafromhouseholdexpendituresurveysorhouseholdbudgetsurveys.Theseweightsarealsocalledbudgetshares.

Statisticalofficesaroundtheworldusedataobtainedfromhouseholdexpendituresurveystocomputebudgetshares.A
FEWSNETrepresentativedoesnotneedtocollecthisorherownsurveydatatoderivetheseweights.Therepresentative
cangetaccesstothisinformationbycontactingthecountrysstatisticaloffice.Manyofficesdisseminatethisinformation
throughtheirwebsiteswhichcanbeusedtogetpriceindicesthatarealreadycomputedorderivenewindicesbasedon
whattherepresentativeneedstoanalyze.

Usingtheresultsofthe2001householdexpendituresurveyconductedinRwanda,table3showsthedifferentcommodities
consumedbyRwandanhouseholdswiththeirrespectivebudgetshares.Thedifferenttypesoffoodsaregroupedinto
similarcategories.Theyaregroupedbecausetheyhaveacommonenduseorbecausetheyaresubstitutes.Forinstance,
theremaybemultiplevarietiesofricesoldinthemarket,suchimportedriceandlocallyproducedricebutallaregrouped
asrice.

Table 3: Weights of commodities consumed by Rwandan households in 2001


Commodity
Budgetshare
Commodity
Budgetshare
Cookingbanana
4.21%
Rice
1.10%
Tomatoes
1.36%
Maize
1.99%
Sorghum
2.46%
Onions
0.53%
Powdermaize
1.46%
Eggplants
0.58%
Cassava
5.08%
Carrots
0.11%
Sweetpotatoes
15.97%
Cabbage
0.76%
Whitepotatoes
8.45%
Meat
1.59%
Cassavaflower
1.97%
Fish
0.41%
Soy
0.46%
Freshmilk
0.43%
Peanuts
0.53%
Eggs
0.18%
Driedbeans
13.59%
Bananabeer
1.49%
Peas
0.17%
Sorghumbeer
1.14%
Fruitbanana
0.50%
Palmoil
1.72%
Source:AuthorscalculationsfromtheRwandanhouseholdexpendituresurveyconductedin20052006

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2. Computeaveragepricesofthecommoditiesthatformtheconsumerfoodbasket

Pricedataarecollectedforabasketofgoodsandservicesfromasampleofplaceswherehouseholdsmakepurchases.
Pricesaregenerallycollectedmonthly,butsomecanbecollectedweekly,everytwoweeks,quarterlyorannually
dependingontherecallperioddeterminedbyanofficeofstatistics.

Sinceearlywarningandfoodsecurityanalystsaremoreconcernedwithmonitoringtheavailabilityandaccesstofoodfor
vulnerableconsumers,theyshoulduserecentnominalpricestoforecastandanalyzethefoodsecuritysituationin
upcomingmonths.Forinstance,theycanusenominalpricesthatwereobservedsincethepreviousagriculturalseasonin
ordertolookatthepatternsofpricechangesandtrytounderstandhowandwhythepricesarechanging.

Thenextexampleshowshowaveragepricesarecomputed.PeoplewholiveintheSouthernprovinceofRwandabuymaize
infourmainmarkets,sotheaverageistakenacrossthesefourmarkets.TheaveragenominalpricesinDecember2000in
thefourmarketswerecollectedbyaveragingobservedpricesofmaizeinthefourweeksofDecember2000,asshownin
Table4.

Table 4: Consumption of maize average prices in Southern province of Rwanda*


Nameofthemarket
AveragenominalpricesinDecember2000
Butare
105
Nyanza
110
Gikongoro
120
Gitarama
115
Averageforprovince
112.5
*AllthepricesareexpressedinRwandanFrancs(RWF)perkilogram.

TheaveragepriceofmaizeinDecember2000iscomputedasasimplearithmeticaverageofthemaizenominalprices.For
thisexampleillustratedintable4,theaveragepriceiscomputedasfollows:(105+110+120+115)/4=112.5

Similarly,provincialaveragepricesarecomputedforallcommoditiesthatformtheconsumerfoodbasket.

3. Determinationofthepricereferenceperiod

Therearethreetypesofreferenceperiodthatneedtobedistinguishedtocomputepriceindices:

Pricereferenceperiodistheperiodtowhichthepricesinotherperiodsarecompared.
Itisalsocalledthebaseyear.Fortherestofthepaper,thebaseyearwillrefertothepriceinthereferenceperiod.
Theweightreferenceperiodistypicallyanearlierpointintimethanthepricereferenceperiod,however,itshould
timespreadbetweenthetwoshouldnotexceedtwoyears.
Weightreferenceperiodistheperiodusedtocomputethehouseholdexpendituressharesorbudgetshares.
Theweightreferenceperiodisusuallyayear.Insomecases,dataforasingleyearmaynotbeadequatebecauseof
unusualeconomicconditionsorbecausethesampleisnotlargeenoughtocalculatethereliableweights.Inthis
situation,anaverageofseveralyearsofexpendituredataisusedtocalculatetheweights.Thechoiceoftheweight
referenceperiodisverycritical.Theyearchosenshouldbecharacterizedbyeconomicconditionsthatare
consideredreasonablystableornormal.Adroughtyear,forexample,shouldnotbeusedasaweightreference
period.
Indexreferenceperiodistheperiodforwhichthevalueoftheindexissetat100.

Thepriceanalystmustchoosetheseperiodsinordertocomputethepriceindex.Thenextexampleillustratestheuseof
oneofthetypesofreferenceperiod.

Rwandahasfouradministrativeprovincesandthecapitalcity.CommodityaveragepricesofJanuary2001inthefour
provincesandthecapitalcityareusedtocomputethenationalaverageprices.Thesepriceswillformthepricesofthe

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referenceperiodbecausethepricesofgoodsfromdifferentpartsofRwandawillbecomparedtonationalaveragepricesof
thesamegoods.Table5givesanumericalexample.

Table 5: Computation of maize prices in the reference period


Namesofprovinces
ProvincialaveragepricesinJanuary2001
CapitalCity
127
East
116
North
103
South
113
West
112
Nationalaverageprices
114

ThenationalaveragepriceofmaizeinJanuary2001iscomputedbytakingthesimplearithmeticaverageoftheprovincial
averagemaizepricesinJanuary2001.Fromdataoftable4,thenationalaveragepricesofmaizeinJanuary2001=(127+
116+103+113+112)/5=114.

4. Calculationofthepricerelative(Pr)

Apricerelativeistheratioofthepriceofagoodorserviceinoneperiodtothepriceofthatsamegoodorserviceinthe
pricereferenceperiod.Thepricereferenceperiod,orindexreferenceperiod,istheperiodforwhichthevalueoftheindex
issetat100.Thisisthesameasthebaseyear.UsingthepreviousexampleofmaizepricesinRwanda,thepricerelativeof
maizeinDecember2000canbecalculatedusingthefollowingformula:

PRICERELATIVEofmaizeinDecember2000=
ProvincialaveragepriceofmaizeinDecember2000/NationalaveragepricesofmaizeinJanuary2001

Usingthemaizeexample,ifthepricerelativeisgreaterthan1inDecember2000,itimpliesthatthenominalpriceofmaize
inDecember2000washigherrelativetothenationalaveragepricesofmaizeinJanuary2001.Thisindicatesthatmaizewas
relativelymoreexpensiveintheSouthernProvinceinDecember2000comparedtothenationalaveragepricesofmaizein
January2001.

5. Calculationofthefoodpriceindex

5.1Differentapproachestocomputingpriceindices

Therearedifferentwaystocomputethepriceindex.Thetwomainapproachesarethefixedbasketapproachandthecost
oflivingapproach.

Thefixedbasketapproach:Abasketofgoodsispricedineachperiodandthepriceindexiscalculatedasthe
costofthebasketinoneperiod(thecomparisonperiod)dividedbythecostofthesamebasketinthereference
period.ThisfixedbasketapproachisalsoreferredastheLaspeyresapproach3.Thisistheapproachthatthis
guidancewillusetocalculatedifferentpriceindices.

Thecostoflivingapproach:Pricesinthecomparisonperiodandreferenceperiodarecomparedusingtheratio
ofthecostoflivinginthetwoperiodstoderivethecostoflivingindex.Thecostoflivingindexisanindexthat
measuresthechangebetweentwoperiodsintheminimumlevelofexpenditurethatwouldbeincurredbya
3

ILO/IMF/OECD/UNECE/Eurostat/TheWorldBank.(2004).ConsumerPriceManual:TheoryandPractice.Geneva.InternationalLabourOffice.

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consumer,whosepreferencesortastesremainunchanged,inorderforthatconsumertomaintainagiven
standardofliving(welfareorwellbeing).Inotherwords,thecostoflivingindexmeasurestheamountof
expenditurerequiredforaconsumertobeequallysatisfiedinonetimeperiodasinanother.

Thekeydifferencebetweenthetwoapproachesisthatthefixedbasketapproachcomparesthecostoftwobasketsof
goodsovertimewhereasthecostoflivingapproachcomparesthecostofmaintainingthesamestandardoflivinginboth
thecomparisonperiodandreferenceperiods.Moreover,asconsumersmaybeexpectedtochangethequantitiesthey
consumeinresponsetochangesinrelativeprices,theexpendituresinoneortheotherorpossiblybothperiodscannot
typicallybeobserved.Thecostoflivingindexis,therefore,notdirectlycalculatedbutcanonlybeapproximated.

Tomeasurethecostofliving,weneedtocomparedifferentbasketsofgoodsandtocheckiftheyresultinthesame
standardofliving.Whendefinedintermsoftheconsumptionofgoodsandservices,thestandardoflivingisameasureof
theextenttowhichpreferencesaresatisfied.Inthiscase,itcanbemeasuredbytheamountofmoneyspentgivenasetof
pricesthatremainconstantoveranumberofperiods.Consumersalwaysthinkthatmoregoodsarebetter(oratleastno
worse)thanlessgoods.Consumerschoicesaredeterminedbypreferencesbutconstrainedbythesizeoftheirincome.
Moregenerally,thestandardoflivingalsocapturesbroaderaspectsofwellbeingsuchashealth,education,etc.

5.2Preferredpriceindex

ThisguidancefocusesonhowtocalculatethefoodpriceindexandthegeneralCPIusingtheLaspeyresapproach(also
referredtoastheLaspeyrespriceindex).ThemainadvantageofusingtheLaspeyrespriceindexisthatitusesconstant
weights,thusallowingthecomputationofpriceindiceswiththesameconstantconsumerbasketovertime.TheLaspeyres
priceindexislessdemandingfromthepointofviewofdatacollectionunlikeothermethodsthatrequireanupdateofthe
goodsandservicesweightsineveryperiod.TheLaspeyresindexhas,therefore,animportantpracticaladvantage:oncethe
weightsofthereferenceperiodhavebeenset,aLaspeyresindexcanbeproducedonthesamescheduleaspricesare
collected.Theideaofcontinuouslyrepricingafixedbasketiseasilyexplainedtononspecialists,whichiswhythe
Laspeyrespriceindexisthemethodmostfrequentlyusedbystatisticalofficesaroundtheworld.TheLaspeyrespriceindex
isthereforerecommendedforfoodsecurityandearlywarninganalystsbecauseitcanbeevaluatedinatimelyand
consistentmanner.

5.3CalculationofthefoodpriceindexusingtheLaspeyresapproach

TheLaspeyrespriceindexisabasketofgoodsandservicesindexthatmeasuresthechangeinthevalueofthebasketof
goodsandservicesactuallypurchasedintheearlierofthetwotimeperiods.Itisaweightedsumofthepricerelatives
computedinstep4,wheretheweightsarethebudgetsharesoftheweightreferenceperiodbudgetdevotedtoeachofthe
goods.TheLaspeyresfoodpriceindexcanbecomputedusingthefollowingequation:

LASPEYRESFOODPRICEINDEX=100*(wnPr)/wn

wherewnisthebudgetshareofthedifferentcommoditiesthatformthefoodbasket(table3)
andPrarethepricerelativescomputedinstep4.

ThenextexampleillustrateshowtousetheLaspeyresformulatocomputethefoodpriceindex.

Supposeconsumersuseafoodbasketthatiscomposedbyfivecommodities(maize,beans,sweetpotatoes,cassavaand
meat)withequalbudgetshareof20percenteach.Table6givesthepricerelativesofthefivecommoditiesacrossprovinces
ofRwandaandshowshowthefoodpriceindexwascomputedgivencommoditybudgetsharesandtheirpricerelativesin
September1999.

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Provinces

Commodities

CAPITAL
CITY

Maize
Beans
Sweet
potatoes
Cassava
Meat
Maize
Beans
Sweet
potatoes
Cassava
Meat
Maize
Beans
Sweet
potatoes
Cassava
Meat
Maize
Beans
Sweet
potatoes
Cassava
Meat
Maize
Beans
Sweet
potatoes
Cassava
Meat

EAST

NORTH

SOUTH

WEST

May 2009

Table 6: Computation of the food price indices


Budget
Pricerelativesin
FoodpriceindexinSeptember1999
shares
September1999
UsingtheLaspeyresformula

0.200
0.967
100*(0.2*0.967+0.2*1.2+0.2*1.042+0.2
*0.781+0.2*1.193)/1=103.7
0.200
1.200
0.200
1.042
0.200
0.200
0.200
0.200
0.200

0.781
1.193
0.799
1.017
0.904

0.200
0.200
0.200
0.200
0.200

0.779
1.065
0.799
1.017
0.500

0.200
0.200
0.200
0.200
0.200

0.650
1.021
0.682
1.101
0.715

100*(0.2*0.799+0.2*1.017+0.2*0.904+0.2
*0.779+0.2*1.065)/1=91.3

100*(0.2*0.799+0.2*1.017+0.2*0.5+0.2*
0.65+0.2*1.021)/1=79.7

100*(0.2*0.682+0.2*1.101+0.2*0.715+0.2
*0.59+0.2*1.124)/1=84.2

0.200
0.200
0.200
0.200
0.200

0.590
1.124
0.670
0.988
0.378

0.200
0.200

0.457
1.145

100*(0.2*0.67+0.2*0.988+0.2*0.378+0.2
*0.457+0.2*1.145)/1=72.76

Itisimportanttoknowthecompositionoftheconsumerbasketusedtocalculatethepriceindex.Ifthegoodhasavery
highproportionintheindex,itisrecommendedtoexcludeitinthecalculationofthepriceindex.Forexample,ifthe
budgetshareofagoodhasaproportionof100percent,itsrelativepricewillnotchange.Inthisextremecase,theprice
indexwillnolongerberelatedtotheconsumerbasketbutinstead,itwillonlyreflectthepricechangesofonegood.The
sameappliesforgoodswithahighproportion.Generally,agoodwithabudgetshareofmorethan30percentisexcluded
fromtheindexcomputationbecausethepriceindexweobtainwillbeheavilyinfluencedbythatgood.

Forexample,ifmaizehasa40percentbudgetshare,itwouldbedesirabletocalculatethefoodpriceindexbyincludingall
thecommoditiesintheLaspeyresformula,exceptmaize.Inpractice,wewillcomputethefoodpriceindexbyexcludingthe
priceofmaizefromtheformulaanddividingtheweightsofalltheremainingproductsby0.6.,i.e.140percent.Usingthe
sameformula,table7givesthevaluesofthemonthlyfoodpriceindexforselectedmonthsandyearsbasedontheanalysis
ofthe2001householdexpendituresurveyconductedinRwanda.Usingthesameprocedure,valuesofthemonthlyfood
priceindexacrossRwandawerecalculatedforselectedperiods.

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Table 7: Values of the monthly food price index across provinces in Rwanda for selected months and years
Provinces September1999 December1999 October2000 December2000 March2001 June2001
East
101.61
90.59
117.94
116.34
100.14
77.38
Capital
113.77
101.16
138.21
129.08
117.70
102.73
North
83.53
72.99
105.46
102.27
94.57
78.04
West
75.95
67.75
103.23
104.91
94.41
80.40
South
95.20
83.86
126.21
112.03
104.71
92.84

INTREPRETINGTHEFOODPRICEINDEX

Theanalysisoffoodpriceindicesisveryimportantforfoodsecurityandearlywarningspecialistsbecauseitcanbeauseful
tooltoassesstheimpactofpriceincreases.Thisisespeciallyimportantforpoorhouseholdsasfoodisthemainiteminthe
totalconsumptionbasket.Vulnerableandfoodinsecuregroupsaremorelikelytobeworseoffinplaceswherethefood
priceindexisveryhigh,i.e.thecostoffoodisveryexpensive.Thefoodsecurityandearlywarninganalystscan,therefore,
makeuseofthefoodpriceindextomakeinformeddecisionsintargetingfoodinsecurepopulations.

ThediscussionofresultsfromTable7relatestothedatacollectedinRwanda.However,theprinciplesofcomputingand
interpretingthepriceindexapplytoanycountry.ThevaluesofthefoodpriceindexofTable7areusedheretoillustrate
theinterpretationofthepriceindexmoregenerally.

FoodpriceinflationovertimeinRwandaissummarizedusingaprovincialfoodpriceindex,whichreportsthecostofagiven
consumerfoodbasketintheaveragepricesofeachprovinceineachtimeperiod.Thereferencebasketisthenational
averageconsumptionpatterninJanuary2001,thereferenceyearfortheindex.Thefoodpriceindexforeachprovinceand
eachmonthiscomputedbyvaluingthecostofthefoodbasketinthepricesforthatprovinceandmonthandcomparingit
tothecostofbuyingthesamebasketinnationalaveragepricesofJanuary2001.

FromTable7,thefoodpriceindexfortheSouthernprovinceinSeptember1999is95.20percent;relativetothereference
basketandreferenceperiod(January2001)indexedat100.Thismeansthatinorderforahouseholdtobuythespecific
foodbasketintheSouthernProvinceofRwandainSeptember1999itwouldcost4.8percent(100%95.20%)lessthanit
wouldcostinJanuary2001.ThefoodindexforWesternProvinceinOctober2000is103.23percent,whichindicatesthat
thebasketcosts3.23percentmoreinthatmonthcomparedtothecostofthesamebasketinJanuary2001.

TheseindicescanbeusedbyFEWSNETrepresentativestoinformdecisionmakersonavailabilityand,inparticular,access
tofoodintheseprovinces.Consumerswithlowpurchasingpowerwouldbethemostaffectedinthethreeprovinces
comparedtotherestofthecountrybecausethefoodpricestheyfacearerelativelyhigh.Theanalysisoffoodpriceindex
canthereforehelpidentifyfoodinsecureregionsandevensuggestsomeformofprioritizationofpolicyorprogram
response.

Foodpriceindicescanalsobepresentedingraphicalform.Figure4showshowthefoodpriceshavechangedovertimeand
acrossprovinces.Thereareimportantvariationsinthecostoftheconsumerfoodbasketovertimeandbetweenprovinces
inRwanda.

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Figure 4: Food price indices by locations and time in Rwanda (Jan 2001=100)

Thisgraphshowshowonecancomparefoodpriceindicesacrosstimeandlocations.FEWSNETrepresentativemaynot
needtogobackfurtherinthepasttolookattrendsinpriceindicesbutthepurposeofthegraphwastoshowhowitis
possibletoidentifylocationsandperiodswhenthecostoffoodwasrelativelyhighorlowcomparedtothebaseyearusing
foodpriceindices.

Thereareregularandseasonalpatternstothepricevariationovertime,which,inthisexample,arethesameacrossall
provincesbecauseallprovincesexperiencethesameagriculturalandmarketingseasons.Thisisnottrueofallcountries,
butithappenstobeacharacteristicinRwanda.FoodpricesinRwandareachtheirpicklevelsaroundSeptemberor
October,increasesteadilyfromaboutMarchtoSeptemberandbegintofallafterSeptemberorOctober.Usingthefood
priceindices,realpricesofkeycommoditiesovertimecanbegenerated.Wecanthenlookattrendsinrealpricesand
comparethemtothepricesofthereferenceperiod.

Besidevariationsoffoodpricesovertime,therearealsopricevariationsbetweendifferentprovinces.Thecapitalcityis
moreexpensivethantheotherprovincesasexpected.Intheruralareas,thecostofthefoodbasket,inthisexample,
appearstobecheaperintheNorthernandWesternProvincesthanintheEastandtheSouth.Populationsthatliveinthe
EasternandtheSouthernprovincescouldbemorelikelytoneedmorefoodaidthanotherprovinces.

COMPUTINGANDINTERPRETINGTHEGENERALCONSUMERPRICEINDEX

Likethefoodpriceindex,therearedifferentwaystocomputethegeneralconsumerpriceindex.IntheUnitedStates,the
consumerpriceindextracksthepriceof218categoriesofgoods,whichincludefoodandnonfoodproducts,and
disaggregateswithinthesecategoriestoaccountfordifferentqualitiesofgoods.Inothercountrieswithmorelimited
resources,theconsumerbasketcanonlybeformedwithlimitednumberofgoodsthathavelargebudgetshares.This
guidanceispresentingasimplewayofcalculatingtheCPIwithalimitednumberofgoodsintheconsumerbasketandwill
followthesameprocedureusedtocomputethefoodpriceindex.

Incalculatingthefoodpriceindex,onlyfoodpricesandproportionsofselectedfooditemsoftheconsumerfoodbasket
wereused.Generallythough,aconsumerbuysothergoodsandservicesotherthanfood.Theseothergoodsandservices
canincludeclothing,housing,healthservices,etc.Inordertounderstandtheeffectonhouseholdsofthemovementof
pricesotherthanfood,anindexneedstobecreatedtoaccountforthis.Table8givesthesourcesofchangeinthe
consumerpriceindexinTanzania.

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Table 8: Sources of change in the National Consumer Price Index (NCPI) in Tanzania, 1972-1989

19721979
Food
45.4
ClothingandFootwear
16.3
Transport
9.3
Fuel,Light,andWater
8.4
BeveragesandTobacco
7.6
FurnitureandUtensils
5.0
TOTALOFSIXITEMS
92.0
Source:Doriye,J.1990

19801989
65.8
9.5
3.9
9.1
3.2
2.3
93.5

Withthisinformation,ananalystcouldthencomputeaclothingpriceindex,ahousingpriceindex,ahealthindex,etcusing
thesamestepsusedtocomputethefoodpriceindex.Thesegoodsandservicesformthedifferentcomponentsofthe
consumerbasket.Fromallthegoodsoftheconsumerbasketthatarenotfood,onecanalsocomputethenonfoodprice
index.

Fromthehouseholdexpendituredatathatwereusedtocalculatethefoodpriceindex,Table9givesselectednonfood
pricesindicesforthesameperiodasTable7computedusingtheLaspeyresformula.

Table 9: Selected non-food price indices across time and provinces


Provinces September1999 December1999 October2000
December2000 March2001
June2001
East

97.30
96.50
102.01
97.98
96.87
97.67
Capital

124.69
123.88
132.64
134.25
131.09
128.59
North

91.50
90.88
96.43
97.50
98.24
97.81
West

98.15
97.53
102.39
98.45
98.55
97.18
South

97.62
97.04
102.86
100.50
97.19
100.01

Thecalculationofanonfoodpriceindexcanhelpfoodsecurityanalystsidentifywhatimpactnonfoodpriceshaveona
householdsabilitytomakenecessarynonfoodpurchases,whichultimatelyaffectsaccesstofood.Highpricesonessential
nonfoodgoodscannegativelyaffecthowmuchmoneyislefttospendonfood:householdscannotalwayschoosefood
overnonfoodexpenditures.Thenonfoodpriceindicescanbeinterpretedusingthesameprinciplesusedinanalyzingthe
foodpriceindices.Figure5showsthevariationofnonfoodpriceindicesacrosstimeandprovinces,agraphical
representationofTable9.

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Figure 5: Non-food price indices by locations and time in Rwanda (Jan 2001=100)

Wecanseethatthevariationsofnonfoodpricesovertimearemuchlessseverethanforfood,whichistobeexpectedin
developingcountries.Therearealsominorvariationsacrossprovinces,exceptthatnonfoodpriceindicesaresignificantly
higherinthecapitalcity.Inthiscontext,thefoodpriceindexismoresuitedtobeusedthanthenonfoodpriceindexorthe
overallconsumerpriceindexinassessingthevulnerabilitytofoodinsecurity.

Usingthehouseholdexpendituresurvey,thefoodpriceindicesandthenonfoodpriceindiceswerecomputedseparately.
BothindicesusedthenationalaverageconsumerbasketinJanuary2001.Thepriceindicescomputedfromthefoodand
nonfoodcomponentsoftheconsumerbasketwereusedtocomputethegeneralCPI.TheCPIis,therefore,theweighted
averageoftheindicescomputedfordifferentcomponentsoftheconsumerbasket.Thenextexampleillustrateshowto
computetheconsumerpriceindex.

AssumethattheaveragesharesoffoodandnonfoodintotalhouseholdconsumptioninRwandawere80percentand20
percentrespectivelyinJanuary2001.Giventhefoodpriceandnonfoodpriceindicesshownintable7andtable9,howcan
wecomputetheconsumerpriceindicesofSeptember1999forallprovinces?TheCPIiscalculatedasaweightedaverageof
thefoodandnonfoodindices.Theweightsaretheaveragesharesoffoodandnonfoodintotalconsumption.
Table10showshowtheCPIiscomputedforthisexample.

Table 10: Computation of the consumer price indices using food and non-food price indices
PROVINCES Foodpriceindicesin
Nonfoodpriceindices
ConsumerpriceindicesinSeptember1999
September1999
inSeptember1999
East
101.61
97.30
CPI=0.8*101.61+0.2*97.30=100.75
Capital
113.77
124.69
CPI=0.8*113.77+0.2*124.69=115.95
North
83.53
91.50
CPI=0.8*83.53+0.2*91.50=85.124
West
75.95
98.15
CPI=0.8*75.95+0.2*98.15=80.39
South
95.20
97.62
CPI=0.8*95.20+0.2*97.62=95.68

CHOOSINGTHEAPPROPRIATEINDEXFORANALYSIS

ThevariationovertimeoffoodandnonfoodindicesasshowninFigure4andFigure5haveimportantimplications
regardingwhattypeofpriceindicesfoodsecurityandearlywarninganalystswouldusetoidentifypopulationsinneed.In

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otherwords,shouldfoodpriceindices,thenonfoodpriceindices,orthegeneralconsumerpriceindicesbeusedinfood
securityanalysis?

Thechoiceofanappropriateindexwilldependonthefocusofanalysisaswellasdataavailability.UsingtheRwandan
example,iffoodsecurityandearlywarninganalystscomputeandanalyzethedifferentpriceindices,itwouldbe
appropriatetousethefoodpriceindicestoanalyzethetrendsofthefoodsecuritysituationinRwanda.Thiswouldbea
betterchoicethanthenonfoodpriceindexbecausethevariationofnonfoodpriceindexovertimehasbeenminor.

Inthissituationthefoodpriceindiceswillreflectverywellhowconsumersarebeingaffectedbytheriseordropinpricesas
thepricesofnonfooditemsdidnotchangemuchacrosstimeandprovinces.Similarly,inanalyzingtheimplicationsofreal
andnominalpricesforfoodsecurity,nominalfoodpriceswillneedtobeadjustedusingtheconsumerfoodindex,i.e.the
foodpriceinflationinsteadofthegeneralconsumerpriceinflation.Theadjustedpricesusingthegeneralpriceinflationwill,
therefore,bemisleadingandshouldnotbeusedformonitoringtheavailabilityandaccesstofoodformarketdependent
households.

Asmentionedbefore,anurbanCPIisusuallycalculatedanddisseminatedbythestatisticaloffices.Thisindexwillonlybe
suitedtoanalyzehowurbanpriceshavechangedonaverage,butwillnotbeagoodindextouseforanalyzingimpacton
ruralconsumers.Generally,goodsconsumedinurbanareasoftendifferfromthatofruralareas.Moreover,urbanandrural
areasfacedifferentmarketprices.Moreover,evenwithinruralorurbancommunities,therecouldbedifferencesinthe
combinationsofgoodsandservicesusedbydifferentgroupsofconsumersdependingontheirlevelofincome,their
consumptionhabits,etc.Foodsecurityanalystsneedtounderstandsomeofthelimitationsassociatedofusinganaverage
priceindexandhowitisspecifictotheircountry.

CONCLUSIONS

Thisguidanceillustrateswhyitisimportantforfoodsecurityandearlywarninganalyststotakeinflationintoaccount.The
processofadjustingpricesforinflationprovidesapracticaltoolforanalystsandhelpsthemunderstandtheoriginandthe
foodsecurityimplicationsofacertainpricelevelorofpricechanges.Throughexamples,weshowedthatlookingattrends
inrealandnominalpricescanleadtodifferentconclusions.Foodsecurityandearlywarninganalyststhereforeshould
understandnominalandrealpricemovementsinrelationtoconsumersaccesstofood.

Byusingpriceindices,ananalystcanbetterunderstandhowthemarketpricestheyobservemaybeaffectingvulnerable
populationsaccesstofood.Thechoiceofanappropriatepriceindexwilldependontheissuebeinganalyzedaswellas
dataavailability.Forexample,ifanurbanconsumerpriceindexexists,theanalystsshouldbecautiousintermsofhowhe
orsheusesthisinformationinmonitoringfoodsecurityofdifferentcategoriesofconsumersindifferentgeographic
locations.AhighurbanCPImayreflecthighpricelevelinurbanareasthatwilllimitaccesstofoodandotherservicesfor
poorurbanhouseholdsbutcannotbegeneralizedtoruralnetconsumersbecausethetwocategoriesofconsumersmaybe
facingdifferentprices.

Furthermore,poorhouseholdsareoftenmoreaffectedbyfoodpriceinflationthanothertypesofexpendituresbecausethe
poortendtoallocatealargerbudgetshareonfoodpurchases.AsillustratedintheRwandancase,foodpricevariations
weremoresignificantthannonfoodpricemovements.Foodsecurityandearlywarninganalystscanimprovetheir
monitoringofthefoodsecuritysituationbymakinguseofavailablefoodpriceindicesorbycalculatingthemtoshow
impactonaparticularpopulation.

Finally,asinflationcanbecausedbyavarietyofdifferentfactors.Analystsshouldhaveagoodunderstandingofpotential
causesofpriceincreasesforgoodsconsumedespeciallybypoorhouseholds.Understatingthepotentialcausesofhigh
pricescanimprovefoodsecuritymonitoringandbeabletotaketimelyactionstomitigatefoodinsecurity.

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REFERENCES

Baker,D.(1998).GettingPricesRight:theDebateOvertheConsumerPriceIndexEconomicPolicyInstitute.M.ESharpe.
Armonk,NewYork&London,England.

Chopak,C.(2000).AnEarlyWarningPrimer:AnOverviewofMonitoringandReporting.FEWSNETProject.

Doriye,J.(1990)'InflationinTanzaniaPolicies,Measures,TrendsandProspects,'TanzanianEconomicTrends,Vol.3,No.3:
413,October.

FAO/RESIMAO/CILSS/MSU.(2008).TrainingModuleforAnalyzingAgriculturalPrices.

ILO/IMF/OECD/UNECE/Eurostat/TheWorldBank.(2004).ConsumerPriceManual:TheoryandPractice.Geneva.
InternationalLabourOffice.

Jayne,T.,Chapoto,A.,Minde,I.,&Donovan,C.(2008).The2008/09FoodPriceandFoodSecuritySituationinEasternand
southernAfrica:ImplicationsforImmediateandLongerrunresponses.

Schultze,C.&Machie,C.(2002).AtWhatPrices?ConceptualizingandMeasuringCostofLivingandPriceIndices.National
ResearchCouncil.

Vink,N.,Kirsten,J.&Woermann,C.(2004).SouthAfricasconsumerPriceIndexforFood(CPIF):aComparativeHistorical
View.Agrekon,Vol43,No2.

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FEWS NET Markets Guidance, No. 3


ANNEXA:SELECTSOURCESOFCPIDATA

Country
DepartmentorOrganization
Afghanistan CentralStatisticsOffice
Botswana
BurkinaFaso

CentralStatisticsOffice
NationalInstituteofStatistics
andDemography
Chad
lInstitutNationaldela
StatistiquedesEtudes
Economiqueset
Dmographiques
Djibouti
DepartmentofStatistics
Ethiopia
CentralStatisticsAgency
Guatemala
NationalInstituteforStatistics
Haiti
InstitutHaitiendes
Statistiquesetde
l'Informatique
Kenya
NationalBureauofStatistics
Malawi
NationalStatisticsOffice
Mali
DirectionNationaleduPlanet
delaStatistique
Mauritania
OfficeNationaldes
Statistiques
Mozambique InstitutoNacionalde
Estatistica
Niger
l'InstitutNationaldela
Statistique
Nigeria
CentralBankofNigeria
Pakistan
FederalBureauofStatistics
Rwanda
NationalInstituteofStatistics
SouthAfrica
Southern
Sudan
Tanzania
Uganda
United
States
Zambia
Zimbabwe

SouthAfricanReserveBank
CommissionforCensus,
StatisticsandEvaluation
NationalBureauofStatistics
BureauofStatistics
USDepartmentofLabor,
BureauofLaborStatistics
CentralStatisticsOffice
CentralStatisticsOffice

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Website (allaccessedonApril19,2009)
http://h1296563.stratoserver.net/cso/index.php?page=9&language=en&men
utitle=CPI
http://www.cso.gov.bw/index.php?option=com_frontpage&Itemid=1
http://www.insd.bf/
http://www.inseedtchad.org

http://www.csa.gov.et/Consumer_Price_Index.htm
http://www.ine.gob.gt/
http://www.ihsi.ht/

http://www.cbs.go.ke/
http://www.nso.malawi.net/data_on_line/economics/prices/prices.htm
http://www.dnsi.gov.ml/
www.ons.mr
http://www.ine.gov.mz/Ingles/
www.ins.ne
http://www.cenbank.org/
http://www.statpak.gov.pk/
http://www.statistics.gov.rw/index.php?option=com_content&task=view&id
=144&Itemid=191
http://www.reservebank.co.za/
http://ssccse.org/blog/node/53
http://www.nbs.go.tz/
http://www.ubos.org/
http://www.bls.gov/CPI/
http://www.zamstats.gov.zm/media.php?id=6

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GLOSSARY

Budgetshareistheportion(percentage)ofthehouseholdbudgetspentonagivengood(maize),serviceorgrouped
goodsandservices(food).Thisisessentiallythesamethingasexpenditureshares.

Consumerbasketisatypicalhouseholdsmarket(expenditure)basketofgoods,services,fees,etc.Itisusedfortracking
thepricesofconsumergoodsandservicesandtheoverallcostofliving.Thebasketmaybecomprisedoftheactual
quantitiesofconsumptiongoodsorservicesacquiredorusedbyhouseholdsinsomeperiod.Sometimes,aconsumer
basketcanalsobemadeupfromhypotheticalquantitiescreated.

Consumerpriceindex(CPI)anindexofconsumerpriceswhichmeasuresthechangeinpricesassociatedwithatypical
marketbasketofgoodsandservicesovertime.TheCPIexpressescurrentpricesintermsofpricesduringthesameperiod
inapreviousyear(baseorreferenceyear),toshowinflationorchangesinpurchasingpower.

CoreCPIapriceindexwherecertainitemsareexcludedfromtheCPIbasketonthebasisthattheirpricesarehighly
volatile,subjecttotemporaryinfluencesorareaffectedbygovernmentpolicies.Theindexisusedtocalculatecore
inflationandreflectstheunderlyinginflationarypressuresintheeconomy.

Costoflivingindexanindexthatmeasuresbetweentwoperiodsthechangeintheminimumexpendituresthatwouldbe
incurredbyaconsumer,inordertomaintainagivenlevelofstandardoflivingorwelfare,assumingthathis/her
preferencesortastesremainunchanged.

Expendituresharesistheportionofahouseholdsexpendituresallocatedtoaparticulargood,serviceorgroupofgoods
andservices.Thisisessentiallythesameasbudgetshares.

Foodpriceindexisapriceindexwhereonlyfooditemsappearingintheconsumerbasketareincludedinthecalculation
oftheindex.

Indexreferenceperiodistheperiodforwhichthevalueoftheindexissetat100.Thisisthesameasthebaseyear.

Inflationisanoverallriseinthepricesofgoodsandservicesinaneconomy.

Laspeyrespriceindexisanindexthatmeasuresthechangeinthevalueofthebasketofgoodsandservicesactually
purchasedintheearlierofthetwoperiods.

Nominalpricesarepricesthathavenotbeenadjustedforinflation.Thenominalpriceisequaltothemoneythatispaid
foraunitofagoodorserviceinthemarket,attheshop,etc.

Priceisthecostorvalueofagoodorserviceexpressedinmonetaryterms.Itisthefinancialcostpaidwhenonebuysa
unitofaspecificproductorservice.Prices,inthepurestsense,indicatevaluethathasbeenaddedtoaparticular
commodity.Thisvalueaddedcanbechangesintheform(e.g.,productionormilling),place(e.g.,transportation),ortime
(e.g.,storage)ofacommodity.Pricesignalscancarryinformationaboutcostofproduction,transportation,storage,
perceptionsanddesiresaswellas,insomeinstances,distortions.

Pricereferenceperiodistheperiodtowhichpricesinotherperiodsarecompared.ThisisusedwhencalculatingtheCPI.

Pricerelativeistheratioofthepriceofanindividualproductinoneperiodtothepriceofthatsameproductinthe
referenceperiod.

Purchasingpowerisameasurementoftherelativevalueofmoneyintermsofthequalityandquantityofgoodsand
servicesitcanbuy.Itrepresentstheabilityofahouseholdtoacquiregoodsandservicesbasedonitsaccesstomoneyor
otherformsofwealth.

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Realpricesarepricesthathavebeenadjustedforinflation.Realpricesholdthevalueofcurrencyconstant,andallowyou
tocomparetheexchangevalueofagoodorserviceindifferenttimeperiods.

Standardoflivingisalevelofmaterialcomfortasmeasuredbythegoods,services,andluxuriesavailabletoanindividual,
group,ornation.Thestandardoflivingcanalsocapturebroaderaspectsofwellbeingorthequalityoflifesuchashealth,
education,etc.

Weightoftheconsumerbasketisasetofnumbersthatrepresentexpendituresharesofthedifferentcommoditiesthat
formthebasket.Theweightsgenerallysumuptoone.Conventionally,weightsaredeterminedusingdatafrom
expenditurehouseholdsurveysorhouseholdbudgetsurveys.Theseweightsarealsocalledexpendituresharesorbudget
shares.

Weightreferenceperiodistheperiodusedtocomputethehouseholdexpendituressharesorbudgetshares.Theweight
referenceperiodisusuallyaspecificyear.

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