Financial Risk Manager

When prices of most goods and services are rising over time, the economy is said to experience inflation The percentage increase in the average level of prices over a year is called the inflation rate. Inflation can impose high cost on economies and societies, can disproportionately hurt the poor and fixed income groups, can create uncertainty throughout the economy and can undermine macro economic stability.

Different price indices are used to measure inflation. A price index is a measure of the aggregate price level relative to a chosen base year. In Pakistan a consumer price index (CPI), a sensitive price indicator (SPI) and a wholesale price index (WPI) are compiled. They commonly have the base year 2000-01.

CPI is a main measure of price changes at retail level. It indicates the cost of purchasing a representative fixed basket of goods and services consumed by private households. In Pakistan CPI covers the retail prices of 374 items in 35 major cities2 and reflects roughly the changes in the cost of living of urban areas.

SPI shows the weekly change of price of selected 53 items of daily use consumed by those households whose monthly income in the base year 2000-01 ranged from Rs.3000 to above Rs.12000 per month. SPI also informs about the actual position of supply: whether the commodity is available in market or not. If the commodity is not available, the reason for that is also recorded. SPI is based on the prices prevailing in 17 major cities and is computed for the basket of commodities being consumed by the households belonging to all income groups combined as in CPI.

WPI is designed for those items which are mostly consumable in daily life on the primary and secondary level; these prices are collected from wholesale markets and also from mills at organized wholesale market level. The WPI covers the wholesale price of 106 commodities prevailing in 18 major cities of Pakistan. Through its own staff and voluntary co-operation of government departments, autonomous bodies and private agencies FBS receives the wholesale prices from various areas in Pakistan. The prices are usually reported on monthly basis. WPI covers 425 items, divided in five major commodity groups viz (i) Food, (ii) Raw material, (iii) Fuel, Lighting and Lubricants, (iv) Manufacturing, (v) Building material. So, for many of the commodities more than one specification and markets have been used to have average prices.
Hence, all three indices are needed to quantify inflation for the economy as a whole. In Pakistan as well as in most countries, the main focus for assessing inflationary trends is placed on the CPI, because it closely represents the changes in the cost of living.

CPI, SPI and WPI for the year 2008-09 have increased by 24.43%, 30.96% and 27.98%respectively over the corresponding period of 2007-08. It increased by 8.01%, 11.03% and 10.26% respectively, in 2007-08 over the corresponding period of 2006-07 and in 2006-07,
increased by 8.39%, 11.80% and 7.80% respectively over the same period of 2005-06.

Ref: Federal Bureau of Statistics