# 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 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.

## Inflation, Households and Wages

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on October 26, 2010

Some of us need to be the wicker man, I guess. In my case, mine is to rise above the banal and bring about -or at least, give the impression to do so- some rigorous pieces on subjects I can be of contribution. Does it sound bombastic a bit? yes I does.

Inflation. A friend joked about me being a left-wing monetarist, it might have to do with the cheer contradiction this description embodies. and I could as well be so; Save for income inequality and unemployment, inflation is one essential variable I believe to be harmful and of no great use -under certain set of conditions- to an economy. I cannot emphasise enough the need to keep at low level.

Morocco has got over inflationist policies -through painful and yet to be proven necessary- process and the annual inflation target of the BAM is getting more and more steady. I referred to the problem in controlling core inflation and losing focus on the volatile one in a previous post, now I shall devote this piece to the broad parameters that influence it in Morocco; My primary findings support the fact that the level of wages in Morocco, especially the minimum wage, bears little influence on the present inflation –contrary to what people from the employers’ union CGEM claim. The main course remains our -shall we say structural, inflation.

Over all, monthly average inflation is characterised with low volatility and low YtD average

Over the last quarter, the Central Bank pointed out the downward trend inflation is following during Q1 2010: “Les données du mois d’août 2010 relatives à l’indice des prix à la consommation (IPC) confirment la faiblesse des tensions inflationnistes […]. En glissement mensuel, l’IPC a enregistré une hausse de 0,9% après les baisses consécutives de -1% et -0,6% observées durant les deux derniers mois.” It is good news, although it can get confusing when one gets into details: “En glissement annuel, l’inflation a connu un ralentissement, revenant de 1,1% en juillet à 0,6% en août, en raison du niveau relativement élevé des prix à la consommation en août 2009, lui même imputable à l’envolée des prix des produits alimentaires volatils. Abstraction faite des produits alimentaires exclus et réglementés, l’inflation sous-jacente s’est établie à 0,4%, niveau quasi-inchangé depuis mai dernier.” Things are not as straightforward as they seem to be. To be frank, this deflationist trend, while it can be of unarguable benefits to the consumer welfare as well as to the whole economy, shades great concerns about Morocco’s future economic stability. I’ll elaborate on that later on.

First, a formal definition of inflation. Olivier Blanchard in his much interesting textbook ‘Macroeconomics‘ (not to be confused with the much challenging Lecture Notes in Macroeconomics co-written with Stanley Fisher) described inflation as: “the sustained rise in the general level of prices in the economy- called the price level. The inflation rate is [therefore] the rate at which the price level increases”. the standard index used for inflation computation is the Consumer Price Index. the Haut Commissariat au Plan (HCP) produces a very comprehensive documentation on how and why this index is used. It is essential to understand how the CPI is computed, because it is the important step to understand how inflation behaves, especially in Morocco, and why core vs volatile inflation differences are so important. Also, I wanted to discuss some interesting paper I read on unconventional monetarist policies in times of recession or contraction. The St-Louis Federal reserve produced an interesting research on the matter. On second thoughts, let’s leave it till next post.

Inflation Breakdown per group of goods: consumption goods like food are experiencing a higher than average inflation compared to the rest of index components

According to the HCP, the Consumer Price Index: “L’indice des prix à la consommation (Base 100 : 2006) mesure le niveau et l’évolution des prix de détail […] Le panier de l’indice contient 478 articles et 1067 variétés de produits représentant la majorité des articles consommés par la population urbaine. Ces articles sont classés en 12 divisions et 41 groupes.
Les pondérations de l’année de base ont été calculées à partir des données provenant de l’enquête de consommation de 2000–2001 et actualisées sur la base des résultats de l’enquête sur le niveau de vie réalisée en 2006–2007. Elles représentent la structure des dépenses de consommation des ménages urbains. Les prix sont relevés à l’aide d’une enquête permanente dans 17 des principales villes représentant les 16 régions du Royaume […] La formule de calcul de l’indice est celle de « Laspeyres en chaîne ». Cette formule offre la possibilité d’actualiser en continu le panier et les coefficients de pondération. Elle permet aussi de résoudre les problèmes induits par les produits saisonniers. Signalons que les indices publiés sont des indices bruts, c’est–à–dire non corrigés des variations saisonnières.”

There is nothing to be added- in facts I tried to get the a shorter definition, but that one looks perfect and just fine. It is tedious indeed, but I cannot stress enough how important it is to understand how the index is computed in order to grasp the full implications of any changes in inflation rate over the last quarter as well as the last years; The HCP uploaded an interesting presentation some while ago about how the new index is computed. I went a bit ahead of myself: the HCP produced a new index in 2006 as base year. the index under-weights some specific goods because the 2000-2001 survey proved Moroccan household spend less, compared to the previous census’ results on these same goods. Moroccan households spend less in food and tobacco, clothing, small equipment household goods and miscellaneous services.They do however spend more on housing, transport, communications, education and to a smaller extent, health expenditure. We will notice that this relatively sizeable shift in consumption pattern can explain, up to a point, part of the low inflation the Moroccan economy generates. Because patterns of consumption changed, there is less strain on specifically volatile price goods and as such, less pressure on the core inflation and the global inflation, though in different respective magnitudes.

Price elasticity of foods and related goods is still very sensitive in Morocco. the negative sign on the B column shows it to be a vital good. Yet inflation breakdown points out to food goods as the most volatile component

There’s also a price effect that is difficult to capture here: although Moroccan household devote a little above 41% of their income to food and related goods in 2007 (compared to about 45% in 1998), there is little said on the extent of substitution effects, on prices or on quantities. In facts, an HCP study shows than prices are at an actual higher level when base year is set to 1989 (Prices have double since -September 2009). Was 1989 a particularly inflationist year? not much, about 3% -much less compared to the average of the past 5 years-. Did GDP increase by that much on the 1989-2009 period? certainly not (its grew an average of 3% in real terms, that is a total increase of 84%, comparatively lower to the overall inflation of 102% on the same period of time), effectively meaning that the real wages of households -relative to food and food-related goods- have been worse-off over the period. I am a bit drifting from the subject here, though not entirely, as we do now understand why and how inflation is so low in Morocco: the base year has been recomputed to 2006 with a lower weight base for the highly volatile and highly inflation-sensitive food category. But then again the central bank focuses on core inflation, which is not as volatile as overall inflation, but still is over-priced compared to the previous index computation. Why would the HCP go through these changes? partly because household behaviour changed. consumption shifts gradually from foods and peripherals to other.  The results of it were shown in a study that proved price elasticity changed overtime in Moroccan households, but certainly not enough to aver that Moroccan standards of livings have improved. Or rather, that the improvement is following a steady way. It is not, as it is notoriously known that vital consumption goods’ prices are the most volatile components of the general consumption price index, and even though the index has been rebalanced in 2006-2007, the effective inflation since the late 80’s is still high. This state of high if not volatile inflation does not do great good for the Moroccan consumer -which happens to be the average Moroccan household-. And one should credit the central banks efforts to muscle out the inflation. But this is not enough. Inflation in financial and monetary spheres is one thing, inflation in the grocery market is another. All in all, Morocco is not a bit facing deflation, nor is it getting near zero inflation; quite simply, it experiences a stabilization in its price level. stabilization means inflation grows at a lower rate compared to the 80’s and 90’s, but still is quite high and, more disturbing, quite volatile.

What about wage-driven inflation? CGEM bosses argued some while ago about the need for a different way for computing the minimal wage. The idea is sound indeed, as the setting is entirely discretionary -compared to how an economy is doing -, the proposed policy is poisonous: in 2005, the textile sector pushed for a regional SMIG (minimum wage) in order to bolster their competitiveness, and some employers would like that to be extended to a sector minimum wage. The latter is economically sound -labour marginal productivity differs from one business to the other- but it does not take into account the overall welfare, which is worth some distortions in wage settings. That is of course another subject I hope I will deal with some other time. The idea behind the quiet clamour as it were of employers for minimum wage reform is that it hurts competitiveness -and, quite indirectly, that it boosts inflation a bit. Something we know not to be true. Indeed, the 2010 BAM report displayed a nice chart that does contradict the previous statement:

Real Minimum Wage increases by Lump intervals, but gradually decreases to its original level if not below

Under the initial predictions set, real minimum wage should be increasing (as indeed it is expected to pay workers a wage above the marginal productivity of labour), while the graph shows a remarkable quasi-linearity compared to the lump-like nominal wage. If anything, the real wage is not a cause of inflation, and its downward trend is definitely an effect of inflation. One has to point out the increasing gap between real and nominal wage, due to the inflation effect. The immediate effect of inflation on real wage is even more important when one takes into account the fact it kept a quasi-linear profile over the years.