Imagine you are waiting to check in into a hotel. The first man in line will pay the “rack rate” or the published price for a room. However, he has been given buffet breakfast and upgraded to a “Superior Room”.
The lady in front of you booked online through the hotel web site at a discounted price, including breakfast and a free massage at the hotel spa. You made your reservation through TripAdvisor. The price of the room for you was much less and included breakfast and free Wi-fi. The guy standing behind you is the boyfriend of the sister of the hotel’s general manager. Don’t even ask what his room rate is.
The test question for the day: “What is the price of a ‘Deluxe Room’ at the hotel?”
When you hear about the global price of crude oil, usually it refers to “Brent Crude” extracted from the North Sea. But it is virtually always the closing price of the nearest settlement month of the Brent Crude futures contract traded on the Intercontinental Exchange in the US.
But those are speculative cash-settlement contracts bought and sold by business people, most of whom have never seen a barrel of oil. In fact, the only person who knows the actual price of crude oil is the one who just bought an oil tanker sitting full in Singapore harbor an hour ago.
But there are about 100 different “prices” for crude oil depending on origin and quality, ranging from Qua Iboe crude oil from Nigeria—usually one of the most expensive—to one of the least expensive, Western Canadian Select. The price differential between the Canadian and Nigerian oil on Monday was $21 per barrel. So, while Brent may be a benchmark in pricing, it is the same as the rack rate being the benchmark at the hotel.
The Philippine annual inflation rate for June 2018 showed a 5.2-percent increase against June 2017. Seems simple enough, even with the explanation that this represents the prices of a basket of goods.
Currently though, Philippine inflation is based on the change in the Philippine Consumer Price Index. The breaks prices into 11 categories, including recreation and culture, health, housing, water, electricity, gas and other fuels, clothing and footwear, alcoholic beverages and tobacco, and food and nonalcoholic beverages.
Does that mean that the average consumer is buying equal amounts of these categories? Every three years—due again in 2018—the government makes its Family Income and Expenditure Survey. The data is grouped into income deciles (income distribution is described by means of tenths or deciles). For example, in 2015 the “average” Filipino family spent 42 percent of its income on food and 2.6 percent on clothing and footwear.
However, the bottom 30 percent economic group spent 60 percent of its income on food, while the top 70 percent spent only 39 percent. The bottom spent twice as much on tobacco and 50 percent more on alcohol. The top group used almost twice as much income on housing as did the lower group.
There are many variables to Philippine inflation as there are to crude oil prices. The more important point is that if you are going to mitigate the effects of inflation for the lowest group, you have to know where they are being hit. Interestingly, the “rich” and the “poor” spend almost the same percentage (8 percent and 7.2 percent, respectively) on “water, electricity, gas and other fuels.” So, probably to best reduce inflation, get the price of crude oil down.