The concept of inflation is not an uncommon subject when it comes to economic fundamentals.

Regardless of our understanding of economics, we feel the consequence of inflation every time we head to that cash out counteror receive that pay check.

Inflation is simply the increase in price of goods and services or the decline in purchasing power of our income.

When prices go up, the amount which can be bought with a fixed amount of money goes down; when prices fall, the amount which can be bought increases.

The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.

CPI data is very closely followed by all the financial market participants to help analyse price movements, market trends, and determining economic policy moves.

If the CPI is rising, the economy is going through a phase of inflation while the economic situation where the CPI value falls below zero is called deflation.

In the latest release by the Fiji Bureau of Statistics, changes were noted in the Consumer Price Index for the month of May.

The average annual rate of inflation for the 12 months to May 2018 (that is comparing the average CPI for the 12 months to May 2018 with the average for the 12 months to May 2017) stood at 2.6 per cent.

However, the month-on-month inflation rate (compared with May 2017) stood at 5.1 per cent.

The All Items CPI for the month of May registered an increase of 0.5 percent over April 2018 (121.4) and closed at 122.0. (See tables)

Details of price changes between April 2018 and May 2018 by expenditure class are as follows:

• Food and non-alcoholic beverages decreased by 1.6 per cent.Lower prices were recorded for milk, cheese & eggs, vegetables and food products n.e.c.
• Miscellaneous goods and services reduced by 0.2 per cent. Lower prices were recorded for other appliances, articles and products for personal care.
• Alcoholic beverages, tobacco and narcotics increased by 5.4 per cent. Higher prices were recorded for wine, beer and yaqona.
• Clothing and footwear increased by 0.2 per cent. Higher prices were recorded for garments and other articles of clothing and clothing accessories.
• Furnishings, household equipment and routine household maintenance increased by 1.1 per cent.

Higher prices were recorded for furniture and furnishings, household textiles, major household appliances whether electric or not, small electric household appliance, glassware, tableware and household utensils, major tools and equipment and non-durable household goods.

• Health increased by 0.3 per cent.

Higher prices were recorded for pharmaceutical products and other medical products.

• Recreation and culturewas up by 0.2 per

cent.

Higher prices were recorded for equipment for the reception, record and reproduction of sound and pictures.

The main use of CPI release for most of the market participants is its role as a major determinant of interest rates for central banks. Modern central banks increasingly regard the inflation rate as the main target of policies, and due to the importance of the central bank rate to economic trends, the CPI serves as an early warning indicator of changes in central bank policy directions.

However, the raw CPI data is prone to be inconclusive on price trends due to its tendency to be distorted higher or lower as a result of seasonal factors such as effect of changing climate conditions, production cycles, and cyclical changeovers at factories, holiday seasons, and sales.

As such, the central banks often refer to seasonally adjusted data, as it excludes the seasonal factors, and provides a more reliable picture of underlying trends.

Given the price developments in the international and domestic markets and the actual inflation outturn in the first five months, our year-end inflation forecast of 3.0 per cent is upward biased.

The RBF will continue to monitor price developments in the coming month and a major inflation review will be conducted in July.

Feedback:  maraia.vula@fijisun.com.fj