TKS Research says high urban inflation is presently curtailing GDP growth
Local equity and securities research firm, TKS Securities last week said that its primary research on consumer prices had revealed that the urban middle income consumer is weathering inflation of over 13% in comparison to the national average of 7.8% based on the Colombo Consumer Price Index (CCPI). According to an Inflation report published by the firm, they note that Colombo district which accounts for 22% of total country’s GDP having around 25% of its population as middle income earners are faced with a relatively higher inflation than the number indicated by CCPI and hence affecting the potential GDP growth of the economy.
Outlining on how they arrived at the 13.4% inflation figure for the month of September 2013, the analysts said though they had used the same CCPI Basket, weights given for each item in what they called the TKS Colombo Middle Income Consumer Index (CMICI) were changed according to their primary survey to match the target population.
“We have taken leading supermarket chains as the collecting points of price data in most of the cases, especially FMCG goods. 15% of the Sri Lankan FMCG market is represented by supermarket or modern trade. In average, 45% of the modern trade is spread across Colombo district. In that case, majority of the Colombo middle income population buys FMCG goods from supermarkets which justifies our collecting points,” the analysts noted.
They added that since weights in the CCPI index did not accurately reflect expenditure pattern of Colombo district middle income households appropriate weights were determined based on a primary survey based on a sample of 250 households selected on judgmental basis.
“TKS CMICI applies a food ratio of 35.4% whilst the CCPI is based on a ratio of 45.0%. This is also in line with the recent survey carried out by the DCS in which the food ratio for Sri Lankan urban population is 35.1%. This also justifies the norm that when the income rises people tend to spend more on non-food items whereas expenses on food would be almost uncorrelated to the income level,” the analysts pointed out.
They further outlined that the GDP growth which they expected to be 6.7% in 2013 would otherwise be higher if price pressure faced by the middle income earners were somewhat closer to the national average inflation.
“Hence if the forthcoming budget proposals and future economic policies assist in growing the disposable income of the middle income earners while maintaining national inflation at the current levels Sri Lanka could easily achieve sustainable GDP growth of +7.5% during the medium term,” the report claimed.
Meanwhile, the TKS report also suggested that CCPI which is commonly used as the inflation index has now become a realistic indicator to measure the nationwide inflation rather than limited to consumers in the capital city as rural expansion in economic activity and trade has somewhat narrowed the disparity of needs and wants of the rural and urban consumer.
Since the end of war economic activity in other regions of the country has increased at a faster pace compared to the capital Colombo and hence the Western Province, which contributed +50% of total GDP in 2006, now
contributes only 43%.
- See more at: http://www.nation.lk/edition/biz-news/item/22251-high-urban-inflation-curtailing-gdp-growth.html#sthash.v4U8KGUJ.dpuf
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Relationship b/w Inflation & GDP Growth explained
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Outlining on how they arrived at the 13.4% inflation figure for the month of September 2013, the analysts said though they had used the same CCPI Basket, weights given for each item in what they called the TKS Colombo Middle Income Consumer Index (CMICI) were changed according to their primary survey to match the target population.
“We have taken leading supermarket chains as the collecting points of price data in most of the cases, especially FMCG goods. 15% of the Sri Lankan FMCG market is represented by supermarket or modern trade. In average, 45% of the modern trade is spread across Colombo district. In that case, majority of the Colombo middle income population buys FMCG goods from supermarkets which justifies our collecting points,” the analysts noted.
They added that since weights in the CCPI index did not accurately reflect expenditure pattern of Colombo district middle income households appropriate weights were determined based on a primary survey based on a sample of 250 households selected on judgmental basis.
“TKS CMICI applies a food ratio of 35.4% whilst the CCPI is based on a ratio of 45.0%. This is also in line with the recent survey carried out by the DCS in which the food ratio for Sri Lankan urban population is 35.1%. This also justifies the norm that when the income rises people tend to spend more on non-food items whereas expenses on food would be almost uncorrelated to the income level,” the analysts pointed out.
They further outlined that the GDP growth which they expected to be 6.7% in 2013 would otherwise be higher if price pressure faced by the middle income earners were somewhat closer to the national average inflation.
“Hence if the forthcoming budget proposals and future economic policies assist in growing the disposable income of the middle income earners while maintaining national inflation at the current levels Sri Lanka could easily achieve sustainable GDP growth of +7.5% during the medium term,” the report claimed.
Meanwhile, the TKS report also suggested that CCPI which is commonly used as the inflation index has now become a realistic indicator to measure the nationwide inflation rather than limited to consumers in the capital city as rural expansion in economic activity and trade has somewhat narrowed the disparity of needs and wants of the rural and urban consumer.
Since the end of war economic activity in other regions of the country has increased at a faster pace compared to the capital Colombo and hence the Western Province, which contributed +50% of total GDP in 2006, now
contributes only 43%.
- See more at: http://www.nation.lk/edition/biz-news/item/22251-high-urban-inflation-curtailing-gdp-growth.html#sthash.v4U8KGUJ.dpuf
High urban inflation curtailing GDP growth
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