uleac cost of living and inflation measurement in lebanon part 3

Upgrading Lebanon’s

Economic Analytical Capacity

Rima Turk Ariss, Ph.D.Lebanese American University

& Lebanese Economic Association

May 31, 2012

Background

• Following the end of the civil war, the first wages adjustment

process took place in 1996:

– A unique amendment in 2008 granted a lump sum increase of LBP

200,000 per month bringing the minimum wage up to LBP 500,000.

• Wages adjustment became one of the top priorities on the

public scene between Sep 2011 and Jan 2012.

– Adoption of the wage adjustment decree No. 7426 during the January

18, 2012 session of the Lebanese Cabinet.

• Still people feel there is a gap between the inflation

measurements and the reality of the increase in prices.

• Five lessons learned from the wages adjustment discussions.

Background

1. Lack of agreement on the magnitude and causes of

inflation– CAS and CRI provide different inflation rates.

– Are price rises attributed to imported inflation?

– Is inflation due to an increase in the prices of non-tradables? Clothing and

footwear? Transportation costs?

2. Revival of the Price Index Committee and expanding its

inclusiveness, despite not adopting its recommendations– Includes the Minister of Labor, representatives from economic

bodies, General Labor Confederation, Coordination Committee of

Syndicates, and from CAS & CPI.

– Has the official mandate to recommend wages adjustment in the country.

Background

3. Introduction of the social wage concept– Proposals aimed at including transportation expenses as an integral part of

the salary, as well as extending health coverage to all Lebanese citizens.

– Greater attention given to attempt reducing inequality gaps among the

Lebanese population and towards strengthening the social safety net.

4. Predominance of political considerations when

undertaking economic decisions– A total of six wages adjustment proposals were discussed and circulated.

– Lengthy discussions even threatened the unity of the Cabinet.

– Final consensual decision did not account for the PIC recommendations.

5. Absence of a robust framework to monitor price

increases and enforce compliance– Unfounded price increases hiked prior to and following the adjustment.

Consistency and Validity Checks

Monthly Inflation Rate Evolution: CAS vs. CRI

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-1

1

CAS

CRI

`

Discrepancy: CAS vs. CRI

• CAS covers numerous points of sale from all over the

Lebanese territory whereas CRI figures are collected from

selected outlets in Beirut and its suburbs.

• CRI excludes the lowest and highest income category

from the CPI calculation compared to the comprehensive

coverage of CAS of all income group categories.

• CAS uses weights that are derived from the 2004

household survey whereas CRI extracts its weights from

the 1997 household survey because it questions some of

the findings of the 2004 survey.

Consumption Weights: CAS vs. CRIExpenditure Category CAS 1997

weights %

CAS 2004

weights %

CRI 1997

weights %

Food and non-alcoholic beverage 32.3 19.935.4

Tobacco and Alcohol 2.3 2.1

Clothing and Footwear 6.3 6.2 6.55

Housing 1.6 16.2 1.68

Water, Electricity 7.2 9.5 4.81

Furniture and Household Maintenance 7.9 3.9 8.18

Health Care 8.8 6.8 9.82

Transportation 9.8 12.314.39

Communication 1.5 4.8

Recreation 2 3.72.7

Restaurants and Hotels 3.4 2.7

Education 13.4 7.7 12.45

Other goods and services 3.5 4.2 4.02

Total 100 100 100

Consistency and Validity Checks 1

Yearly inflation rates: CRI, CAS and OECD Europe

-20

24

68

01jan2008 01jan2009 01jan2010 01jan2011 01jan2012

yearly CRI inflation yearly CAS inflation

yearly OECD Europe inflation


Yearly inflation rates: CRI, CAS and OECD U.S.

-20

24

68

01jan2008 01jan2009 01jan2010 01jan2011 01jan2012

yearly CRI inflation yearly CAS inflation

yearly OECD US inflation

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

FAO food inflation rate

IMF food inflation rate

CAS food inflation rate

Food component: CAS, IMF & FAO inflation rates


Food component: CRI, IMF & FAO inflation rates


-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

FAO food inflation rate

IMF food inflation rate

CRI food inflation rate

Transportation component:

CAS vs. Ministry of Energy and Water Inflation rates


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11

Ministry inflation rate

CAS inflation rate

Transportation component:

CRI vs. Ministry of Energy and Water Inflation rates


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11

Ministry inflation rate

CRI inflation rate

Proposals for New Price Indices:

Food Imports Price Index

• Extract data on Lebanese agro-food commodities

and products imports between 2008 and 2011 from

the Lebanese Customs website

– Items selected correspond to two hs levels of the detailed

taxonomy of agro-food sections : 1 (hs1 between 1 and 4)

and 2 (hs2 between 1 and 24)

• Compute the unit price of imported goods per kilogram

and then derive an imports price index using a monthly

bugdet share weighted Laspeyres price index

Lebanese Food Imports CPI vs. IMF Food Component CPI


9010

011

012

013

0

01jan2008 01jan2009 01jan2010 01jan2011

IMF Food Component CPI Lebanese Food Imports CPI

CAS Food Component CPI vs. Lebanese Food Imports CPI


100

110

120

130

01jan2008 01jan2009 01jan2010 01jan2011

CAS Food Component CPI Lebanese Food Imports CPI

CRI Food Component CPI vs. Lebanese Food Imports CPI


100

110

120

130

01jan2008 01jan2009 01jan2010 01jan2011

CRI Food Component CPI Lebanese Food Imports CPI

Proposals for New Price Indices:

Real Estate Price Index

• Data on real estate prices is scarce in Lebanon and no

official entity collects such information

– Preparing a real estate price index is practically impossible.

• CAS imputes a rent component without disclosing the

methodology, and CRI ignores housing costs in its CPI.

• However, several Lebanese households typically spend

a large share of their income on housing expenses

– Failing to adequately capture these expenditures in the CPI

may cast doubts on the usefulness of the price index.

Real Estate Price Index:

Hedonic Price Estimation

• Real estate prices for new apartment listings are first

collected from Lebanon Opportunities, which publishes

new apartment listing regularly since 2009.

– Covers 5 geographical areas: Beirut and

suburbs, Baabda, Aley, Metn, and Kesrouan.

• Reported prices are not equilibrium prices but asked (or

demand) prices that are likely to be overstated by

sellers.

– However, changes in a constructed real estate index based on

asked prices also reflect changes in real estate conditions.

Hedonic Price Estimation:

Sample & Methodology

Time Period Number of Apartment Listings

Fall-Winter 2009 533

Winter-Spring 2010 580

Summer-Autumn 2010 505


Summer-Autumn 2011 990


Each square meter of living space adds βt to the value of the house, parameters γt , δt , φt , and

ώt capture the location premium for apartments in different regions. εijt includes all other non-

size characteristics (number of parking spots, time to delivery, number of rooms…)

Empirical Results

RegionFall-Winter

2009

Winter-

Spring 2010

Summer-

Autumn 2010

Winter-

Spring 2011

Summer-

Autumn 2011

Winter-Spring

2012

Aley 1,017 1,196 1,278 1,354 1,504 1,496

Beirut 3,002 3,659 3,144 3,076 3,410 3,266

Metn 1,509 1,569 1,842 1,966 1,976 2,069

Baabda 1,758 1,946 1,860 2,037 2,306 2,468

Kesrouan 1,358 1,834 1,685 1,820 1,904 1,816

Region Winter-Spring

2010-2011

Summer-Autumn

2010-2011

Winter-Spring

2011-2012

Aley 13% 18% 10%

Beirut -16% 8% 6%

Metn 25% 7% 5%

Baabda 5% 24% 21%

Kesrouan -1% 13% 0%

Conclusions: Real Estate Price Index• Real estate prices peaked in the first quarter of 2010 for Beirut

and Kesrouan regions and decreased afterwards

– The first quarter of 2011 even witnessed a deflation in real estate prices.

• Prices in different regions do not move in the same direction:

– Prices in Baabda picked up over the past 2 years while Metn witnessed a

decrease in prices.

• In comparison, the corresponding housing CPI component

reported by CAS was reportedly unchanged at 111.2 over the

same period, pointing to no fluctuation in the rent price

imputation component.

– It appears that the CAS housing component might not be an adequate

reflection of households’ expenditures on this major component of the

goods basket.

Summary: Validity Checks• Strong positive correlation between domestic & international inflation rates

– Domestic inflation rates are more correlated with U.S. than E.U. inflation

rates, as expected in light of the peg of the Lebanese currency to the U.S.

dollar, and despite Europe being the major trading partner of Lebanon.

– However, local rates are always above comparative international rates.

• Food inflation rates are below comparative international rates and did not

correct downwards as international food prices declined recently.

• Transportation component of domestic inflation rates is less volatile than

global trends in fuel prices.

• Housing component of CPI does not capture the reality of housing costs.

• The above validity checks suggest that current CPI measures in Lebanon

may need to be revised either in terms of collecting a more representative

data sample or improving the methods involved in its calculation, as well as

conducting a more recent household budget survey to better reflect

household consumption patterns.

uleac cost of living and inflation measurement in lebanon part 3

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