Last Tuesday the Philippine Statistics Authority announced that inflation for the month of February rose to 3.9 percent, from 3.4 percent in January 2018. At the same time, they also announced that, using 2006 prices, inflation actually was higher to about 4.5 percent. Why were there two inflation rates announced? The PSA made an announcement that, beginning March this year, they will start estimating consumer price index (CPI) using 2012 as the base year. This means that the current base year that we were using, i.e., 2006, will slowly be discarded in favor of 2012.
Why is this necessary? I recall discussing with my mother the price of pandesal. She said that, when I was an elementary student, pandesal sells for P0.10 a piece. Currently, the neighborhood bakery sells it for P2.50 each. She complained that it has risen more than 10x from the last three decades and that the price increase was faster than the income increase. Her observation is correct—the price has been increasing, which could be due to a number of factors. But, since pandesal is only one of the many items included in the daily family basket, we need to take into account the purchasing power of the income rather than the increase of prices of individual product/service items. The prices of the individual goods and services in this basket are averaged and computed into an index, which we call the CPI. The changes in the CPI is what we call inflation rate.
Going back to the pandesal, it may be a popular breakfast item in the 1970s, but not anymore today. If we continue to use the same weight it has in the CPI from the 1970s to today, it will not give us an accurate measure of the average price increase of the consumer basket. Thus, the shares or weights of the components of the basket change through time. This is the most important reason for rebasing the CPI—to take account of the change in consumption pattern of the people. The base allows us to have a common reference point so that we are talking about the same time horizon. Hence, the base allows us to compute for the purchasing power of the peso today compared to the same peso value of the base year. Thus, the faster the price increase from the base year, the lower the purchasing power is today. Using 2006 prices, the purchasing power today of one peso is P 0.65, meaning the same peso in 2006 can only buy 65 centavos worth of goods and services today, losing 35 percent of value from 2006. Using 2012 prices, purchasing
power eroded by 14 percent, or that it can only buy 86 centavos worth of goods and services. This is why having low inflation is important, because it means that the peso’s purchasing power is not easily being eroded.
The changing of the base is patterned from the results of the Family Income and Expenditure Survey conducted in 2012. Consider the table below from the PSA, it shows how the average family consumption basket has changed in the last six years. Composed of 11 commodity groups, the higher share remains to be food. But note significant changes, such as the almost 0.5-percent decrease in the share of alcohol, beverages and tobacco even before the “Sin” tax law was implemented in 2013 and the almost 1 percentage point increase in the share of health, suggesting that the population is becoming health conscious. It would be good to look into the details of the February 2018 inflation report for more specific commodity items (https://www.psa.gov.ph/statistics/survey/price/summary-inflation-report-consumer-price-index-2012100-february-2018).
The table can also help understand new business opportunities or changing demand patterns that could help pinpoint where capital can be directed. As the country’s average income grows larger, this pattern will show more significant changes moving away from food and more toward other components. For instance, the detailed report showed that more people actually have personal transport in 2012 than in 2006 and that more are spending on personal care and personal effects. Considering that the basket did not change significantly, especially in terms of food, the direction of inflation will still largely follow that of the previous base year. The lower rate for February using the 2012 base only implies that some items that weighted heavier in 2006 are not as important six years later.