24 October 2014

Inflation — Measuring Price But Not Quantity Or Quality?

Some food stall operators selling fresh fish slices in soup weigh the amount of fresh fish that they serve their customers.

Their objective, I suppose, is to ensure that they are not carelessly or overly generous with the fresh fish — the most expensive ingredient of the meal.

To maintain or improve profitability, these and other food stall operators quietly reduce the amount of the more expensive ingredients, serving less meat, skilfully sliced into ultra fine strips; shrink or put less meat into fishballs or meat-balls; place more ice and less fruit juice into the same cups etc.

When determining inflation of cooked-food dishes, it is obvious that we cannot rely on prices only; quantity and quality matter too.

This usually is not difficult with dry or pre-packed food. For example, a 5 kg pack of Thai 100 per cent fragrant rice is just that, unless the pack contains some inferior grade of rice (but that is cheating). Or milk powder, even though manufacturers try their best to confuse consumers (but not the statisticians who have their calculators ready) by changing the size of the packaging. It's possible, however, for producers of canned food to change the relative proportions of what is in the can; we can't tell the difference much of the time.

It's quite different with cooked food.

Consumer Association of Singapore ("CASE") recently surveyed selected stalls selling chicken nasi briyani, chicken rice, fishball noodles, roti prata (one plain prata) and mixed vegetables rice (white rice with two vegetables and one meat)[1].

How did CASE control for the weight of chicken, the size and fish content in fish balls, or the size of servings of the vegetables and meat, for example?

Department of Statistics ("DoS") faces a similar challenge when computing the Consumer Price Index (of which prepared meals account for 13.54 per cent) and the Retail Sales Index and the Food and Beverage Services Index.

Retailers have to be smart to survive. They know that their customers know when they increase their prices, and may turn to their competitors. But customers may not notice if the quantity or quality has been changed, especially if the change is gradual or subtle.

The question is: how does CASE or DoS take into account changes in the quantity or quality of cooked (or prepared) food so that the survey findings are meaningful?

If changes in the quantity or quality of cooked (or prepared) food are not taken into account, inflation will likely be understated some, or possibly much, of the time.

Such understating of inflation obviously cannot continue ad infinitum as otherwise it would mean that the quantity shrinks towards nothingness and/or the quality is so bad that the food is inedible. Some resetting will occur from time to time when prices are adjusted upwards, on which occasions the previous quantity and/or quality will be restored to more or less in line with customers' expectations, before another cycle begins during which the quantity shrinks and/or the quality deteriorates.

DoS may argue, possibly correctly, that there is no need to take into account the quantity or quality of cooked food in its monthly surveys, inasmuch as, with a large number of food stall operators, there will likely be some operators who will be adjusting their prices (and therefore resetting the quantity and/or quality) at any time. Whilst anecdotal evidence suggests that businesses tend to move as a herd when raising prices, the effects on inflation of decreasing quality and/or quality over a long enough period and with a large enough sample size may not be quite as extreme or pronounced as some people may think.

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Notes

1. CONSUMER ASSOCIATION OF SINGAPORE CASE Survey On Hawker Food Prices At 503 Stalls 20 Oct 2014.


This article was updated on 25 October 2014. Note 2 was moved into the main body of the article and rewritten as the last two paragraphs.

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