Adjusting Prices for Inflation and Creating Price Indices

INTRODUCTION Prices are a standard and important component of market and food security analysis because they serve as an indicator of both food availability and food access. Prices are a measure of availability because they tend to rise as the supply of food falls in relation to demand (e.g., poor production, constrained imports of food), and they tend to fall when supply expands in relation to demand (e.g., a bumper harvest). Food prices are also a measure of food access because they affect the household's purchasing power: the ability of a household to acquire goods and services based on the amount of money or other forms of wealth they possess. Consumer prices of food determine how much food a household can buy given their level of income or wealth. The relationship between the price of food and other basic goods and services on the one hand and wages, household income or household wealth on the other hand determines the households' level of purchasing power. Generally, in order for a household to have adequate access to food, they need to have adequate purchasing power. For the poorest households, food is likely to account for the largest share of the household budget. Consequently, consumer prices of food are probably the indicator most often monitored, analyzed and reported in the analysis of household food access. Regular monthly or weekly collection of consumer or retail price data for a set of key commodities is a standard component of most food security monitoring systems. Traditionally, food security analysts have focused on the assessment and analysis of actual consumer prices found in the market (i.e., the spot price or the prices consumers face when they go to the market). These prices are analyzed and reported as a measure of the affordability of food. Early warning analysts watch the level of these prices, the changes over the season and how prices compare to normal levels and patterns. Early warning analysts look for price anomalies (irregular behavior) as an indicator of a potential improvement or deterioration in food security. The purpose of this guidance is to expand upon the traditional level of price analysis by considering and using prices adjusted for inflation in regular FEWS NET analysis. While readers of FEWS NET products want to know actual prices that are found in the market (nominal prices), market analysts should also account for the effects of inflation and changes …