Inflation may be much higher than reported by the Polish Central Statistical Office

04.09.2018 09:16|Marcin Lipka

"According to the Polish Central Statistical Office (GUS), over the last 13 years retail prices of clothing and footwear have fallen by half in Poland. However, taking trends in other countries or rising import costs into account, such strong reductions would be practically impossible", writes Marcin Lipka, Conotoxia Senior Analyst.

The slight fall in the prices of clothing and footwear in the European Union since 2005 may be the result of lower customs restrictions, increased competition and the production being relocated to the lowest cost areas. In larger countries, it may also result from a scale effect, where unit costs of labour, transport or commercial space rental may be lower due to the large volume of sold goods.

As a result, looking at Eurostat data, it is not surprising that average prices of footwear and clothing have fallen by about 7% in the EU since 2005, but it may be surprising that among the EU countries, Poland stands out with the biggest decrease in this category. The scale of the phenomenon is even more surprising. The prices of clothing and shoes expressed in PLN decreased by 49.1% over 13 years.

However, there are many indications that the actual price decreases for consumers were many times smaller than those reported by Eurostat, according to the GUS survey. It is possible that they did not exist at all.

The UK has already faced the problem

Since the Polish economy has a much shorter history of a free market than most developed countries, the problems that usually appear in Poland have already occurred in other countries. It is no different in the context of inflation.

In 2010, the British Office for National Statistics (ONS) changed the methodology for collecting statistics on clothing and footwear. This was a reaction to the fact that between 1997 and 2009 average prices of these products fell by 50% (which is exactly the same as in Poland), although import prices of clothing and footwear remained more or less stable for the analysed 12 years, and inflation in the eurozone, close to the UK geographically and in terms of development, was even above zero in this category.

There are a lot of scientific studies on this subject. However, the issue is presented quite accurately in the standard Inflation Report from February 2011 (p. 39) prepared by the Bank of England (BoE). Clothing and footwear are highly seasonal products, which makes retailers want to get rid of them relatively quickly and reduce prices significantly, compared to the debut collection. This means that after only a few months a pair of shoes or a dress may cost tens of percent less than at the beginning of the season. Price falls obviously result in lower or even negative inflation in this category, even if other goods or services in the same segment are becoming more expensive.

However, the sale effect should disappear after a year, if the dress from next year collection is treated as analogous to the one from the sale (the correct approach). However, if it is considered to be a completely new product due to a different cut, length, material, etc. Then the period of price increase does not occur, but only a sequence of seasonal drops is repeated.

In Poland, prices are falling very fast... Or is it a measurement error?

In the UK, the ONS corrected an incorrect data collection. An example of a dress, even if it differs from last year, is treated as an analogous and not a completely new product. This resulted in an immediate halt to the unnatural downward trend in prices in the UK, with slight increases since 2010. On the other hand, there are many suggestions by the Vistula river that the GUS is adhering to incorrect assumptions.

First of all, it is indicated by the trend which has been stable for several years (a decrease in retail prices of clothing and footwear by about 5% each year) and which is practically insensitive to the economic situation or to the exchange rate. Secondly, as in the case of the UK, import prices for clothing alone are not falling at all. Over the last 10 years, they have increased by more than 30% (data from the foreign trade statistic yearbooks and the GUS Knowledge Base).

Another puzzling element is the information that Poles now spend the same percentage of their household budget on clothing and footwear as they did a dozen or so years ago - about 5%. Given that the Poles' income has more than doubled since 2005 and that the GUS reported such a strong fall in prices in this category, the share of clothing and footwear in a statistical Pole's spending basket should decrease (a larger share would probably appear in 'hotels and restaurants', 'health' or 'recreation and culture'). However, this did not happen, which reinforces the belief that the prices of clothes and footwear did not actually fall.

Another argument is the fact that all of the several products and services available in the public database of the GUS, which are not seasonal in nature, have clearly become more expensive. For example, a men's elancotton shirt cost 79.26 PLN in 2005, and now it is 103 PLN. The situation is similar with a women's woollen coat, which increased from 600.49 PLN in 2005 to 682 PLN in 2017. In turn, in the case of jeans trousers for children aged 6-11, the price increased from 60 PLN to 67.18 PLN in the corresponding period. Since 2005, chemical laundry and men's, women's and children's leather shoes, women's boots and soleing men's shoes have become more expensive by 40-50%.

Hazardous crack on reliability

Inflation is a very important indicator in the economy. It is used, among other things, to index pensions. In addition, foreign capital is extremely sensitive to any doubts about inflation, as a faster than reported increase in prices may change an investment profitability.

The overall inflation rate underestimation, due to the annual decrease in the prices of clothing and footwear by 5%, may amount to about 0.25 percentage points each year. It seems not much, but in fact it is about 12% of the total price increase reported by the GUS within 13 years. In addition, the clothing and footwear category contributes to core inflation, which is important for monetary policy.

Solving this problem or dispelling doubts will help to maintain the good reputation of the GUS in the coming years and will reduce the risk of a deeper image failure. Many years ago, the United Kingdom already demonstrated how to deal with the seasonal trap of falling clothing and footwear prices.


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