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Core inflation still positive

Mar 29,2015 - Last updated at Mar 29,2015

Data issued by the Department of Statistics indicated that the average price index in the first two months of this year was 0.8 per cent lower year-on-year.

This finding should be examined carefully as the inflation rate in Jordan is based on the consumer price index.

This is to claim that inflation in Jordan during the subject period is not negative. 

It is actually positive, to the extent of 1.43 per cent if only we let ourselves to be guided by core inflation.

To prove the point, one finds that all major consumer basket items showed increases in their prices.

The problem is that one item, i.e., transport, which reflects fuel prices, dropped by 16.5 per cent. Since this item alone forms 13.5 per cent of the consumer basket, its influence must have reduced inflation by 2.23 per cent, but it did not except for 0.8 per cent, an indication that excluding fuel prices, core inflation is 1.43 per cent positive.

Economists calculate inflation in two ways: the usual one, which includes all items in the consumer basket, and the core inflation, which excludes fuel and agricultural products.

Those two items move up and down and influence inflation though they are not moving under the influence of the local economy in general.

Fuel prices fluctuate according to world market, while prices of agricultural produce fluctuate following seasons and access to neighbouring countries.

Neither factor is the product of Jordan’s economic activity and must be excluded to reach the real local inflationary pressures.

In a normal situation, there should be no material difference between the rate of total inflation and the rate of core inflation.

That is why the Department of Statistics ceased to calculate core inflation.

However, in the case of a major drop in one or more of the consumer items for reasons not related to the activity of the local economy, one should use the two methods so as not to let decision makers be misguided and take the wrong policies.

If inflation in Jordan is negative, as the official statistics show, certain monetary and fiscal policy makers should take note and make the necessary adjustment.

Business circles should also take this fact into consideration when deciding on their behaviour in the market.

Since real core inflation is still positive and close to expectations, both authorities and businesses should act accordingly.

For all practical purposes, one can conclude that inflation in Jordan during the first two months of this year is 1.43 per cent positive.

This is a normal development that does not call for action or changing course.

The decline of the inflation rate is due to external factors that are treated as given.

The most important factor in this case is, of course, the major drop in fuel prices, by around 50 per cent.

How can inflation be negative if the prices of all major items in the consumer basket rose at various rates?

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