Public opinion is generally familiar with the concept of inflation, correctly relating it to a general increase in prices, which, in turn, affects the purchasing power of consumers. In this cost relationship, the weakest are the most affected, since money, as a means of transaction, loses value.
In all the publications of the Dominican Central Bank (BC), related to the behavior of the consumer price index (CPI), there are two references that have to do with prices: general inflation, which serves to give the report a title, and that which more is brought to the analysis table, and underlying inflation, the latter treated as an indicator since the 1970s when the energy crisis (oil) occurred, which shot prices to historic levels in the United States.
However, despite being a highly weighted indicator in the decision making of the monetary authorities, the discussions and analyzes in public opinion focus on headline inflation, ignoring, for whatever reasons, that core inflation is It is essential to understand it for its impact on consumers. There are coincidences that it provides more accurate data on what happens with prices. What is it about and why is it so important?
The Economist Camilo Ulloafrom BBVA Research, explains that the Underlying inflation It is an indicator of the trend or inertia in the growth of the prices of the goods and services that we consume. Therefore, he emphasizes, its technical distinction with respect to the general inflation metric lies in the fact that it tries to leave out of the computation the variations in the prices of certain goods and services, which may be more volatile due, for example, to extreme shocks. and outside of domestic demand.
This is why he explains that energy and unprocessed food are the components of the consumption basket that can normally be more exposed to this type of situation. He cites, for example, when geopolitical conflicts break out in which producing countries are involved or when climatic adversities occur.
“Hence, the most widespread underlying inflation metrics are based on the direct exclusion method of these two groups of goods and services. Beyond the difference in its computation, the importance of subjacent inflation with respect to general inflation lies in how precisely this affects the living conditions of consumers in a more permanent and generalized way ”, he explains in an article published on the portal from BBVA Research.
Excluded goods
In the case of the Dominican Republic, when it comes to subjacent inflation, the monetary authorities exclude some highly volatile agricultural goods, alcoholic beverages, tobacco, fuel, managed services and transportation, whose weight in the CPI calculation represents 30.19%. .
It is appropriate to remember that now, to determine general inflation, 364 goods and services for regular consumption by Dominicans are taken into account, which cover 91% of the basket. The interviews are also applied in 11,168 establishments using 126 field surveyors.
The Central Bank highlights that the practical utility of the CPI is to estimate the evolution of the average cost of living; and the variation of this indicator in a given reference period is what is called inflation.
What has been sufficiently established is that underlying inflation is a matter of concern for the monetary authorities, since its effects are directly related to the pockets of consumers, since it excludes the prices of the most volatile components of the basket.
In some ways, it shows short-term consumer price variability more accurately than headline or conventional inflation. When it was decided to use it as a variable, what the US Federal Reserve authorities did was exclude the most volatile components, such as fuel, electricity and unprocessed food.
The monetary authorities, as established in the monthly press release, give a high weight to underlying inflation, since it is key to making monetary policy decisions. It is because by measuring how much prices rise discounting fresh food and energy, they eliminate their high volatility, since products such as gasoline, diesel and electricity, among others, change up or down more easily than those that are more stable. External shocks, for example, must be taken into account when dealing with imported goods.
In its May report, the Central Bank highlights that year-on-year core inflation maintains a downward trend, standing at 5.51% in May 2023, 178 basis points below the maximum of 7.29% registered in the same month of 2022.
“This indicator makes it possible to extract clearer signals for the conduct of monetary policy, since it excludes some items that normally do not respond to monetary or liquidity conditions in the economy, such as food with great variability in its prices, fuels and services with regulated prices such as the electricity rate, transportation, in addition to alcoholic beverages and tobacco ”, establishes the Central Bank.
It is worth noting that the core CPI registered monthly variations of 0.28%, 0.32% and 0.20% in the months of March, April and May 2023, respectively, rates that when annualized are consistent with year-on-year inflation within the target range of 4.0%±1.0 %.
annual goals
In the Dominican Republic, an inflation target is established each year, which has been adopted since 2012. Adopting it required a prior process that included the advice of technicians from the International Monetary Fund (IMF). According to this strategy, this variable is included annually in the monetary program, thus becoming, according to the authorities, the nominal anchor of the economy. In this scheme, therefore, monetary aggregates are considered as indicative or follow-up variables for the decision-making process, together with other variables, such as growth or the exchange rate.
As explained by the Central Bank, under the framework of the explicit inflation targeting scheme, a monetary policy meeting is held monthly, where internal and external risks regarding compliance with the inflation target are analyzed. It points out that a monetary policy statement emanates from this meeting, containing the decision on the monetary policy rate (TPM) and a summary of the reasons that motivated the measure.
In its May report, it indicates that the consumer price index (CPI) experienced a monthly variation of -0.20% in May 2023. With this result, year-on-year inflation measured from May 2022 to May 2023 fell to 4.43%, this being the lowest rate verified since July 2020. In this way, inflation returns to its target range of 4.0% ± 1.0% established in the Monetary Program, converging ahead of schedule.