WHY COST OF GOODS AND SERVICES ARE INCREASING? “NO MAJOR INFLATION RISK ACCORDING TO PLANING MINISTRY”

Note: This article was published on 38^th Edition of Goveli Weekly on 10^th May 2007

By: Ismail Hassan Manik

What does Consumer Price Index (CPI) means?

In economics, a consumer price index (CPI) or retail price Index (RPI) is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and considered by some a cost-of-living index.

The CPI can be used to track changes in prices of goods and services purchased for consumption by households, i.e., of the consumer basket. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (such as stocks, bonds, life insurance, and homes) are not included. In countries with a higher than average indirect tax system the CPI is used along side a RPI that includes a more accurate reflection of cost of living.

According to statistics of Planning Minis-try, it is believed that inflation has been controlled in the Maldives Economy. But as a matter of fact, what we see today is, the cost of goods and services are increasing constantly day by day. Taking into account the rapid increases in prices, public is not in position to accept this increase.

Let's look at the recent statistics released on March, comparing the inflation rate in February; there was a 0.4% increase in inflation. Inflation on Food items has increased 0.73% in March, when compared to February. Rents, transportation costs and household items have all increased in March compared to February.

Post tsunami, (2004 and 2005) inflation rate has risen up to 6.3% in the Maldives. But in 2006, the official statistics shows that there was a 3.5% decline in inflation rate. Some economists argue that, it is not a decline in inflation rate. “It does not mean that inflation rate has declined by comparing 6.3% inflation rate of 2005which has fallen up to 3.5% in 2006. Rather, it means that in 2004 purchasing power of money has fallen up to 6.3% and again in 2006 additional 3.5% has fallen and altogether inflation rate has risen up to 9%. ” As quoted by an economist “It can’t be true that we don’t have inflation problem and I think the official statistics are incorrect. Cost of Goods and services are increasing day by day. Therefore I feel we have the inflation problem.” As quoted by an employee of a private company.

According to some of the businessmen, It is hard to believe that inflation is the major reason why cost of goods and services are increasing. There is inflation in the countries from where we mostly import goods from! Countries like, India, Sri Lanka, Thailand has been experiencing inflation problems, and consequently, the cost of goods and services has increased accordingly. Maldives solely depends on imports. Therefore, increase in cost of our goods and services may have come from 'imported inflation'.

An official from trade ministry has said that, it is hard to believe that the cost of goods and services has increased due to inflation in the country of origin of imports. It may be a problem of some-thing else and cost of goods and services are now slowly declining.

In response to the quote from the trade ministry official, a retail owner said that, cost of goods and services has not fallen collectively. But those items which price has risen in the beginning of the year due to inadequate supply, has fallen to a reasonable price. This is not a solution for increase in cost of goods and services.