IMF questions accuracy of inflation data

The International Monetary Fund (IMF) has raised questions over the reliability of Kenya’s inflation data, arguing that the method used could be having an “upward bias” that exaggerates changes in cost of goods.

A staff report by the African department of the IMF says that data on the cost of living is higher than it should be because of the methodology used and short comparative period used by the Kenya National Bureau of Statistics (KNBS).

The institution also says some economic data compiled and reported by Central Bank of Kenya (CBK) is inconsistent with statistics reported by KNBS since certain items have not been reconciled.

The IMF says that even as the overall quality, timeliness and coverage of macroeconomic statistics have improved over the past few years, further improvements in the method of compiling real, fiscal, and external sector statistics is needed.

“The current methodology of aggregating prices at the elementary level was found to impart a substantial upward bias on consumer price index (CPI) measurement and the current series does not extend beyond February 2009,” said the African department IMF report, compiled in November last year.

Kenya’s CPI, which is used to calculate the overall cost of living, is prepared by comparing current prices of a specific basket of goods and services to their prices at a particular past period.
KNBS started using a geometric mean method, which is said to be more robust than the prior arithmetic mean method, to calculate the CPI measure in February 2010 using information from February 2009 as its base while that of January 2010 had been calculated using the arithmetic mean method with the base as October 2005.

In both cases, this means that the current inflation calculation does not account for years when prices of the same basket of goods and services may have been lower, making it reflect higher prices.

After the implementation of the new method and the a change of the items that made up the basket of goods and services the CPI increased by 0.3 per cent to 105.2 points from 104.9 points in January 2010 and the overall inflation rate rose to 5.2 percent 4.7 per cent.

“It depends on the base year that you are using,” said Samuel Nyandemo, a senior economics lecturer at the University of Nairobi who added that if KNBS had included prior periods then the inflation numbers would be lower.

The IMF, however, said that KNBS is planning to publish an extended historical series based on the current geometric mean methodology this year but that limited funding for data collection activities, a long-term funding strategy, and a lack of trained staff are still major constraints for the government agency.

The Washington-based lender said that certain items in the data that summarises transactions between Kenya and the rest of the world — also known as balance of payments — as presented by CBK to IMF’s statistics department does not reflect what is presented by KNBS to the African department.

“The two data sets are not entirely consistent, and Fund staff has strongly encouraged the authorities to reconcile them,” said the IMF report adding that both data sets are also presented in different currencies.

The report notes that the overall quality of data is good for some sectors but that “many financial accounts transactions are rather weak”.
dmugwe@ke.nationmedia.com