The Moorish Wanderer

Inflation and Household Consumption Distribution

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on December 5, 2012

In the fall of 1972 President Nixon announced that the rate of increase of inflation was decreasing. This was the first time a sitting president used the third derivative to advance his case for re-election.

Hugo Rossi

The premise of government fuel subsidies and other goods is to keep inflation low – more specifically, to keep prices low. This policy was sustainable as long as commodity prices were low enough, and they were, up to 2008, at levels manageable enough to avoid large price increases and preserve budgetary balances.

Junior minister Najib Boulif provided a figure of 5% inflation rate if the subsidies provided by the Compensation Fund were lifted overnight – a figure I still grapple with (how did he get 5%?) as it is far above the present level of inflation, as captured by the Consumer Price Index.

Since the new CPI designed by the Moroccan Bureau for Statistics HCP has been used in 2006 (effectively since 2008-2009) inflation has established itself around 1.9% on average – meaning weighted prices for some 387 products have increased each year by almost 2%. And there lies a fact many household might find it hard to understand: their perceived inflation seems higher. “I mean, look at the price of vegetables and bread!” And they are right. Prices of vegetables have increased 7.5% on average, bread and other wheat-based goods increased 3.1% each year – and have been more volatile than other components of the CPI aggregate. However, as mentioned before, the method weights up these goods as an aggregate, and so households will not experience the same CPI. Especially between the top and bottom households.

This is just simple math, the average ICV index is: \mathbb{E}(ICV)_{p,j}=\sum_{p=1}^{385}\mathbb{E}(W_{p,j})Q_{p,j} where \mathbb{E}(W_p) is the average weight for a particular good in all cities.

On the other hand, \mathbb{E}(ICV)_{d_i}=\sum_{p=1}^{385}W_{p,d_i}Q_p provides different weights for each decile (d_i) and these tell a different story. How come the national average weighting is so far off those of perhaps the majority of Moroccan households? It has a lot to do with consumption distribution: the top 10% concentrated a third of household final consumption, so their low marginal propensity of consumption pulls the average weight for food consumption down, further than, say, the median food consumption per household: the weighted average of food-related consumption is 40.6% (close enough to ICV’s allocated 39% to 41% to this consumption category) so it does put those with higher consumption levels relative to their income at a disadvantage. The median consumption on the other hand, is at 47% which would indeed put ICV a full percentage point above the present index.

Poorer households CPI is more sensible to

Poorer households CPI is more sensible to ICV-CPI

Poorer households tend to weight food and related items a lot more than affluent households, and thus the former tend to feel the sting of inflation more acutely: these household tend to spend a larger fraction of their income in food (almost 44% higher than the top decile) and are thus subject to a higher inflation.

The graph opposite shows Morocco’s CPI, ICV tends to underestimate price levels for the poorest household. No news there of course, but a simple analysis shows poorer households have an “ICV effect” 62% higher than the top income earners. So this is not just a matter of weighting averages per class products: the bottom 10% households spend 44% more on food than the top 10%, but they experience a 62% higher inflation factor.

In terms of inflation levels, the “poor inflation” establishes itself around 2.18% – versus a “rich inflation” of 1.4% – a difference of 18%, with a social loss weighting skewed toward the poorer: in essence, 63% of the resulting inflation is shouldered by the bottom 10%. (One could finesse the analysis a bit by including the remaining deciles, but the weight placed on households below the median will be larger still)

So not only the Compensation Fund benefits mainly those who do not need it, it even fails to protect those population from the effects of inflation. I also shows government transfers to businesses – not households directly- only distort needlessly market prices to the tune of 6% GDP worth of compensation cost.

7 Responses

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  1. Lynne Diligent said, on December 6, 2012 at 01:39

    This was a great explanation of why the poor feel the effects of inflation in a magnified manner.

  2. Mo Drissi (@mdrissi) said, on December 6, 2012 at 16:35

    Great work as always. But you need to make a distinction between inflation (growth in price levels) and the affordability of products to the poor. Given the recent variations in prices, the poor do feel more inflation. But it could be otherwise, even though it’s very unlikely.
    As for the subsidies (Caisse de compensation), actually they do help lessen the burden on the poor, since inflation would be much higher if not unbearable for the poor. And not only the “poor”… There’s a flaw in the rationale or the explanation behind the necessity of reform of the subsidies system: it is done in dirhams. The subsidies actually help more the poor (and the middle class) in terms of relative expenses compared to the rich.
    The purpose of this comment is to raise this point. The subsidies system does need a reform. The question is: will anybody be better off, other than the government’s budget?

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