A cautionary article from Mahfi Eğilmez: 'The CPI basket must be reviewed'

Economist Mahfi Eğilmez provided examples of calculations regarding real growth in an article analyzing Turkey's growth figures. Eğilmez stated that it is particularly important to reconsider the CPI basket and price compilations when calculating inflation.

Eğilmez stated the following in his article:

"The growth rate of an economy at current prices (i.e., without inflation adjustment) is found by taking the ratio of the GDP calculated with the prices of the current year to the GDP of the previous year. This is called the nominal (or current price) growth rate:

Nominal Growth Rate t+1 = (Nominal GDP t+1 - Nominal GDP t) / (Nominal GDP t) x 100

The positive difference between the GDP calculated according to the chained volume index of two years (GDP at constant prices) gives us the real growth rate. Real growth shows growth adjusted for price increases (inflation) in the economy, or in other words, physical growth. The real growth calculation for year t+1 is done as follows:

Real Growth Rate t+1 = (GDP According to Chained Volume Index t+1 - GDP According to Chained Volume Index t) / (GDP According to Chained Volume Index t+1) x 100

Turkey's 2022 and 2023 GDP data are shown in the table below (Source: TURKSTAT, Quarterly Gross Domestic Product, Q4: October-December and Annual, 2023):

Now, let's calculate the nominal and real GDP growth for 2023 using the equations above and the data in this table.

Nominal GDP Growth Rate 2022 = (Nominal GDP 2022 – Nominal GDP 2021) / (Nominal GDP 2021) x 100 = (26,276.3 - 15,011.8) / (15,011.8) = 175

Accordingly, when Turkey's 2022 nominal GDP is accepted as 100, it became 175 in 2023, meaning it increased by 75 percent (0.75) at current prices (including inflation).

Real GDP Index Change 2023 = (GDP According to 2023 Chained Volume Index x 100) – (GDP According to 2022 Chained Volume Index) / (GDP According to 2022 Chained Volume Index) = (22,040) / (210.9) = 104.5

Accordingly, Turkey's real GDP index in 2023 compared to 2022 was 104.5, meaning GDP increased by 4.5 percent in real terms in 2023.

The GDP implicit deflator is calculated by taking the ratio of the index of increase in GDP at current prices compared to the previous year to the index of increase in GDP at constant prices compared to the previous year. Let's formulate this as well:

GDP Implicit Deflator t+1 = (Nominal GDP Index / Chained Volume GDP Index) - 1

Now let's plug the Turkish data into this equation:

GDP Implicit Deflator 2023 = (175 / 104.5) – 1 = 67.5

This means the GDP implicit deflator was 67.5 percent in 2023.

In 2023, CPI inflation is calculated as 53.9 percent based on twelve-month averages. In contrast, as we showed the calculation above, the GDP implicit deflator is 67.5 percent. The difference between these two consists of the number of goods covered. The CPI is a sampling basket, and in 2023, there were 406 goods and services in this basket. In contrast, since thousands of goods and services in the economy and their prices are taken into account when calculating GDP, the GDP implicit deflator calculated from this becomes an index covering all of these thousands of goods and services in the economy. Therefore, the deflator is a much more comprehensive indicator than the CPI and is therefore a much more accurate measure for measuring inflation. The only problem is that while it is possible to measure inflation every month via the CPI, it is only possible to measure the GDP implicit deflator quarterly.

Despite all the differences, if the 406 goods and services in the CPI basket are truly based on the goods and services that the public consumes the most and their actual weights in household budgets, there should not be significant differences between the annual average inflation and the GDP implicit deflator.

The table below shows the CPI annual averages and the GDP implicit deflator comparatively by year (I received the table from my esteemed friend, former President of the State Institute of Statistics, Sıddık Ensari. I also consulted him on the calculations. I owe him a debt of gratitude.)

If one pays attention to the table, the difference between the annual average inflation (CPI) and the GDP deflator is not very high until 2021, as we mentioned. In the last three years, however, the gap has been widening. There may be several reasons for this: (1) The goods and services that make up the CPI basket or their weights may not reflect the appearance of household budgets. (2) The compilations made for the CPI may not be done correctly. (3) There may be errors in CPI calculations. (4) GDP data may be problematic.

Within the framework of these findings, I believe that the CPI basket, price compilations, and calculations need to be reviewed. This is a necessity not only for ensuring that workers are fairly compensated for their labor, but also for eliminating the grievances of all segments of society against inflation and for implementing the correct monetary and fiscal policies to reduce inflation.