Are the Greek inflation readings representative of the actual inflation...?

Something that’s been nagging me for a while now is whether the way that we calculate consumer price inflation is representative of actual inflation experienced by consumers presently.

I do not mean that the current basket of goods which is used to calculate the Consumer Price Index (CPI), was not representative of what the typical Greek household consumed at the time that it was compiled.

Nonetheless, presently, the typical Greek household is experiencing a sizeable reduction in its disposable income, which is bound to have some equally important effects on its consumption patterns. Each and every one of us has to fulfill its basic needs first (food, housing, etc.) everything else comes next (consumer discretionary items etc.). When one’s income is reduced the part of it that is being spent in order to fulfill his/hers basic needs, rises as a % of the total, which means that prices fluctuations in these groups of goods affect her/him more. In the current CPI readings the basket compiled at the 2004/2005 household budgets survey is being used.

Typically, the higher the income the lower the part of it that is channeled at food, housing, etc. and vice versa. Here are the most important groups of goods for the typical Greek household, according to their weights in the consumer price index (CPI).

source: statistics.gr

I do not know whether there are guidelines from the EU, or whether the Greek statistical agency (El.Stat) decides when to update the basket of goods used to calculate the CPI on its own, nor am I trying to throw the blame on anyone of the agencies involved here. I’m just wondering whether it’s time to update the basket of goods…

While browsing through the relevant CPI data for Latvia I stumbled upon the weights of individual goods for the typical basket used there. It seems that they are reviewing the representative basket of goods annually. Of course, to be fair it is probably much easier and less time-consuming to carry out such a survey in Latvia than in Greece, but all the same…

source: Latvijas Statistika

As you can see, during the past 2-3 years that Latvia is undergoing a depression-like recession the weights for food and housing are edging upwards. If something like that was done in Greece right now, maybe the CPI readings that we would get would be a tiny bit different. Maybe then they wouldn’t and I am wrong here, but there is only one way to find out…

UPDATE, 6/4/2011: Since I want to be fair, I have to say that as I discovered today, there is a planned update of the representative basket of the CPI based on the 2009 Household Budget Survey. Obviously, I didn't know this at the time that I was writing the post, otherwise I wouldn't write it at all. Here's the link to the relevant press release:
 http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/General/A0515_DKT87_MT_MM_01_2011_12_2099_01_F_EN.pdf

What about migration after crises...?

One of the contingent consequences of the depression that Greece is currently deep into is negative net migration, meaning that people will actually leave the country and seek employment elsewhere (or maybe a better future in general).

This story is all over the mainstream media. I want to look at what happened at two other countries that entered the crisis a couple of years earlier than Greece and see if this is what happened there, Latvia and Iceland.

Latvia is subject to a similar IMF program, trying to fix things partly through internal devaluation (among other measures) and is already through a shockingly deep recession, way worse than the one Greece is going through right now. Unemployment has skyrocketed and wages have been slashed (this is an internal devaluation that we’re talking about). But then again, they are into this for a while longer, let’s wait and see how things play out here until the bottom is reached (the real bottom not a temporary one) and then maybe we can compare notes. 

On the other hand the story of Iceland is better known around the world since it is being heralded as the country that didn’t bail out the banks. Well, this is not the whole story since Iceland has also seen unemployment rise dramatically (from 1,6% in 2008 to 8% in 2009) and things are far from rosy there too.

What I want to say is that adjustments like these mentioned above are always painful, no matter whether default is involved or whether an IMF-like program is. I’m not going into this here, since this isn’t the point of the post.

To come to the point, both countries have seen negative net migration explode following the breakout of the crisis.

source: Statistics Iceland, Latvijas Statistika

Of course there are some differences between the two cases. Prior to the crisis for the whole 00s decade, Latvia kept recording small population outflows, albeit significantly smaller in magnitude compared to the 90s, after all, at the time it seemed that things were looking up for the country. Iceland was witnessing positive net migration for almost the whole span of the decade, which got really heavy right before the crisis broke out.

This is not the whole story though, while Icelandic citizens kept leaving Iceland for abroad for the duration of the 00s, this was more than offset by the influx of foreign citizens coming into Iceland. What I want to emphasize is that on 2009 foreign citizens started leaving Iceland again.

source: Statistics Iceland

This is what normally should be happening in Greece right now, but is it? As far as Greek citizens leaving Greece for abroad are concerned, I think that this is true. They should be leaving in numbers by now. I think that emigration will happen in waves, the first that will leave will be highly qualified people who wish to find better employment abroad and believe that their chances there are better. The second wave would involve people with a more varied educational background, in the case that things in Greece worsen significantly (which I believe that they will).

Then we come to the issue of foreign citizens living in Greece. Well, those foreign nationals living in Greece legally that have the option of relocating in a country where the current situation is better than Greece will probably leave. Since, a large part of the people captured by official statistics fall under this category then such a trend would be possible. This is the effect that statistics about Iceland are capturing.

What about all the people living in Greece illegally or those that don’t have the option to go someplace else? Here is the wild card. I honestly don’t know. Should things in their respective home-countries be worse than Greece anyway, why should they be leaving? (I do not include in foreign nationals people that have got the Greek nationality and have settled down in Greece, they will not leave that easily either)

Add to that the number of people from MENA (Middle East Northern Africa) seeking refuge in Greece due to the unrest in their home-countries and the uncertainty about the true situation in Greece increases. Due to the geographic positioning of Greece these things literally come with the territory…

I think that it is clear that Greeks will be emigrating abroad in search of something better, but as far as foreign citizens are concerned things are not that clear at all, since there are two opposing effects at work.

As for an economic view of things, when a country’s GDP is contracting significantly, as is the case for Greece, usually emigration helps ebb the building social pressures, as it reduces the growth rate of a country’s population or in extreme cases it reduces the country’s population outright. This is what’s happening in Iceland and Latvia. But if you couple a falling GDP with a rapidly rising population you are bound to get an explosive mix…

I do not want to view things politically in any way, so I will not expand into this…

P.S. Here is two charts, the population of Ireland and Iceland.

source: Central Statistics Office Ireland

 As you can see in the chart, Ireland experienced population declines at times. I don't know why but I'm inclined to believe that it was due to emigration.

source: Statistics Iceland

The blip in the chart is the first population decline in record for Iceland and it happened after the crisis broke out...