An Analysis of Alternative Weighting System on the National Price Index in Tanzania: The Implication to Poverty Analysis

Abstract

This paper set out to calculate and compare “plutocratic” inflation to “democratic” inflation in Tanzania using monthly price data from 2003 to 2006 and the 2000/2001 National Household Survey data with the view to assess their impact on the poor. The paper first compares national inflation for plutocratic weighted price index against the inflation based on democratic weighted price index. Then the paper calculates “plutocratic” and “democratic” inflation for poor households and compares this to the non-poor households. Finally, the paper calculates both the “plutocratic” and “democratic” inflation for the households in the lowest quintile of consumption and compare to similar inflation for the highest quintile.
The paper finds that the plutocratic weighted inflation tends to be more sensitive to the changes in the prices of goods that are mostly consumed by the rich, while the democratic weighted inflation tends to be more sensitive to changes in the prices of goods consumed by the poor. The paper further finds that inflation rates based on “plutocratic” weights is generally lower than the inflation rate based on “democratic” weight, suggesting that the official inflation rate, which is based on the plutocratic weighting system, understates the inflationary burden to the poor In particular, the democratic inflation is found to be more pro-poor than plutocratic inflation rate. For this reason, the paper recommends that “democratically weighted” inflation should be preferred to “plutocratic weighted” inflation.

Key Words: Tanzania, Africa, Inflation, Plutocratic Weights, Democratic Weights, CPI