Making Sense on Inflation Rates

Inflation rate is the annual or year-on-year rate change of the Consumer Price Index (CPI). CPI is a measure of change of the prices of a basket of goods and services commonly purchased by households in a particular area. The beginning prices are based on 1988 prices. Each region has different number of items included in the basket.

CPI1

The items are classified in six major groups and assigned with “weights.” The weight is determined on the percentage of total expenditure that is spent to a specific major group. The statistics were derived from the results of the 1988 Family Income and Expenditures Survey (FIES).

CPI2

Based on the table above, we can deduce that 58% of total expenditures spent go to food, beverage, and tobacco for the whole Philippines.

In order to determine the price level of specific items, sample outlets are selected to get the price quotes. There are about 9,000 outlets selected nationwide based on the following criteria:

  1. Popularity of the establishment along the line of goods to be priced
  2. Permanency of outlet
  3. Consistency or completeness of stock
  4. Accessibility of outlet

The outlets selected are permanent source of price data unless:

  1. Closing of business
  2. Disappearance of item from the stock for more than three consecutive months or permanently

It is replaced with the nearest retail outlet that is within the vicinity of the replaced outlet. The choice of which outlet to choose is left to the discretion of the price canvasser using the criteria for regular outlet selection.

Knowledge of the composition of the CPI will give us more insights about the inflation rate. By simply analyzing which of the six major item groups is likely to go up, we may be able to anticipate the inflation rate and the monetary policies. Being aware of the food prices which account for more than 50% of the CPI will ideally allow us to anticipate whether the inflation rate will go up or down before official data can be released and whether or not the BSP will modify current monetary policies.

 

Macroeconomic basics here:

https://fundamentalenthusiast.wordpress.com/2012/08/08/macroeconomics-basics/

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