Tshering Dorji

Change in prices, as measured by the producer price index (PPI) has experienced a deflation in the second quarter (April, May and June) of 2019, as compared with the same period last year.

On average, this is a decrease of 3.27 percent from the second quarter of 2018. This doesn’t mean that prices at the end of consumers are declining because PPI measures the ex-factory price, which is the price at which producers sell goods to wholesale dealers. Consumer Price Index on the other hand measures that retail price, which notes changes in the price level of a market basket of consumer goods and services purchased by households.

According to the National Statistical Bureau (NSB), the deflation is due to a decrease in the prices of steel, contributing to a deflation in the manufacturing sector.

The manufacturing sector saw a price decrease of 6.54 percent in April, 7.22 percent in May and 8.64 percent in June.

However the sectors that recorded increase in price are mining/quarrying, transport and electricity & gas. Transport sector recorded the highest increase followed by mining/quarrying and electricity & gas while prices remained same for Logging, Water supply and Information and communication sector.

PPI in Bhutan only covers domestically produced goods and services, and the sectors include logging, mining and quarrying, manufacturing, utilities (electricity and water), transport and communications.

While there is a strong relation between PPI and CPI,  the former being the lead indicator for the later, Bhutan’s case is different because the country does not produce much, except for utilities like electricity, water supply and communications. PPI in Bhutan does not reflect the overall inflation in the country.

For instance, despite the deflation in PPI, Consumer price index for June 2019, according to the NSB increased by 2.7 percent from June 2018. This means, on average, the consumers are paying 2.7 percent more than they did in June 2018 for the goods and services in the CPI basket.

For the purpose of measuring CPI, food commodities, transport, including fuel prices and housing and electricity are attached more weights for the sake of determining inflation.

Weights reflect the relative importance or contribution to the total consumption expenditure of all households. It is determined using the spending patterns of households based on the living standard survey. The more current the weights, the more reflective they are of current consumer spending patterns.

Price inelastic goods, like fuel and rice are attached more weights because despite the change in price of such goods, the demand and the supply is unlikely to be affected.