Making sense of the price index

By Nicholas Fang (ST Feb 15, 2008)

WHY do the prices of certain consumer items seem to increase more sharply than the consumer price index (CPI) - one of the most commonly used indicators of inflation?

The reason, said the Department of Statistics (DOS) yesterday, is that the CPI is designed to be an accurate reflection of overall spending by Singaporeans. The index reflects average price changes and is weighted to reflect actual spending patterns, DOS added.

Costlier food, transport and health care drove the CPI to a 25- year high of 4.4 per cent in December compared with a year earlier.

Mrs Foo-Wu Wen Chee, deputy director of the DOS' consumer price indexes section, said the index measures the prices of a fixed basket of 5,170 goods and services commonly used by Singaporean households.

Speaking at a conference on the Economic Survey of Singapore by the Ministry of Trade and Industry, she said a change in the index reflects the average change in the prices of all items in the basket. That is why the CPI's rise sometimes appears smaller than the jump in the prices of certain goods.

Mrs Foo-Wu said the index is very specific. For example, it uses Royal Umbrella brand rice, and Giordano and Crocodile men's shirt labels. 'Items are selected from 3,000 outlets covering a wide range of retailers and service providers across the island,' she said.

The items in the basket are given different weights according to the Household Expenditure Survey which covers more than 6,700 households. 'That sample size is sufficiently large for a country such as Singapore, which has four million people compared to other countries,' Mrs Foo-Wu said.

Britain, with an estimated population size of 60 million, uses a sample of 6,300 households while the United States, with 292 million people, uses 7,800 households.