There is no question that policy makers, producers, workers and consumers care about the accuracy and reliability of the consumer price index (CPI), the most common measure of inflation. This is true in developed and developing countries both for very good reasons. Inaccurately reporting high inflation could, among other things, cause central banks to impose tighter than necessary monetary policies in an effort to maintain low interest rates and encourage investment; lead to a devaluation of currency in an effort to maintain a competitive exchange rate and improve a country’s exports; and trigger a higher increase in wages than justified by productivity to prevent erosion in the cost of living. Inaccurately reporting low inflation could similarly lead to unjustified policy change. In short, an inaccurate CPI complicates macroeconomic management and distorts the decision making process of economic actors.
In Egypt, controversy has surrounded the accuracy and reliability of the CPI figure, leading some to wonder if the figure is devalued. This Policy Viewpoint addresses this concern and recommends how to improve the way the CPI is compiled in Egypt. It shows that there are well established procedures for compiling the CPI in Egypt. However, the reported figure may be inaccurate because the outlets surveyed do not reflect consumers’ true buying habits. Moreover, there may be some downward bias due to the way housing is priced.
Author(s): Ahmed Galal and Hala Fares