THE CPI: IS THE PRICE RIGHT?
by Dr. Romulo A. Virola 1
Secretary General, NSCB
When the inflation rate of 4.2% for March was released by the NSO last April 6, some of you may have groaned and grouched about having spent more than what the NSO CPI tells us! A case of unreliable government statistics once again? Not necessarily, you skeptics out there; certainly not due to structural problems, we just have to declassify and understand the CPI a little better!
The Consumer Price Index or CPI is a tool to monitor movements in prices of goods and services in our economy. When we divide the CPI for March 2004 by the CPI for March 2003, subtract one, and multiply by 100, we get the inflation rate for March, a (not THE) measure of the change in prices during the one-year period from March 2003 to March 2004. Prices of what? You would want to know!
The NSO computes the CPI using a fixed basket of commodities. The index is computed separately for the 17 regions of our country, with different indexes or indices, for different groups of commodities. Thus, there are separate baskets for NCR and for Central Mindanao (Region 12). Within each region, separate indexes are computed for commodities falling under food, beverages and tobacco and for those falling under fuel, light and water.
The National Capital Region (NCR) basket, for example, has a total of 701 commodities. Included under food, beverages and tobacco are biko, puto, sumanmalagkit, bagoong alamang, longganiza, tocino from Pampanga, Rufina patis, San Miguel beer, Ginebra gin, etc. Under educational services, covered are tuition fees in college, Philippine history textbooks by Agoncillo and by Zaide, and even Liwayway magazine! And to help you sweat it out when you had too much of biko, suman and puto as your mouth watered with manggang hilaw and bagoong alamang , the NSO monitors under medical services, prices of immodium and diatabs! For personal services, prices of Bigen and Wella hairdyes, Lady’s hairwave and manicure (ordinary), dry cleaning, etc. are captured. On the other hand, refrigerators, washing machines, mosquito nets and karaoke are included under miscellaneous services while for transportation costs, monitored are jeepney fares and tricycle fares, premium gasoline, etc.
To compute the index, the NSO enumerators, who you sometimes mercilessly drive away as if they will steal your sinampay or else make promotional offers you certainly would like to refuse, collect prices from a number of outlets. The simple average price of each item is then derived. To reflect the varying degrees of importance of the various groups of items, weights are applied when aggregating these average prices instead of taking their simple average. The weight for each group represents its share of consumption by the entire population during a given year. When we use weights from a year in the past, we call the index a Laspeyres’ index; when we use weights from the current year, we call it a Paasche index. But while a Paasche index seems more relevant than a Laspeyres’ index, data unavailability from the current year forces many statistical offices to use Laspeyres.
What does all this mean then? Well, put simply, the CPI does not measure the average increase in your expenditures, whether as an individual or a family or a household! It was never meant to!
Firstly, the items in the CPI basket are not what you always buy! For example, if you always sleep outside a mosquito net, then its price does not affect your budget, and it should not be in your basket! Likewise, you do not buy karaoke every month, especially, if you sing the blues like a true sintunado! In other words, the CPI basket is much more than what you buy in a month! In fact, it is much much more than most of us can afford! The CPI basket is meant to represent the totality of all the goods and services consumed by the entire population. But just to make data collection more manageable, the list is truncated to include only those items with the bigger shares in total consumption. Hence, you would not complain if viagra is not in the CPI basket, or, would you?
Secondly, the prices are aggregated using weights derived from the consumption pattern of the entire population at some point in the past. The NSO currently uses the consumption pattern for the year 2000, which, most probably differs from your consumption pattern. As an illustration, for NCR, the weight for special and ordinary rice combined is 1.26%, slightly higher than the 1.09% weight for transportation. For those of you who find it necessary to drive the latest car models, the weight for transportation in your own CPI should be higher than 1.09%, so please do not curse the NSO CPI if you recall your dealer having charged you a lot more! And the 0.11% weight for beauty parlor services is probably not high enough for those of you who can afford rebonding, with both ears plugged to the latest chismis on how much someone paid for somebody’s liposuction!
Thus, the inflation rate of 4.2% for March means that the general level of prices went up by 4.2% from March 2003 to March 2004 - i.e. the prices of all the commodities included in the basket went up by 4.2% on the average, derived as a weighted arithmetic mean (hopefully, you still remember your mean, median and mode, even if you hated your stat professor?) using the consumption pattern of the population in 2000.
Now, if you really want to compute the average monthly increase in your own individual consumption, you must use the basket of commodities that you normally consume, which will naturally differ from the NSO basket. You must take out hair shampoo from the basket, for instance, if there is nothing to use it on! You also must use weights that reflect your own consumption pattern – meaning that if you love food, your weights must show it! Depending on your chronological perspective, your CPI basket might include expenses for internet cafes; but if you had been a fan of Carmen Rosales and Rogelio de la Rosa, your CPI might include ballroom dancing fees for your favorite Attorney and ten different vitamins, valued of course at 20% discount, a privilege which, even those from Forbes Park and Ayala Alabang conscientiously (consciencelessly, some of my friends would sermon) avail of.
In other words, the inflation rate computed by the NSO is probably right, and it is not supposed to be equal to the increase in prices you have to pay! Happy Easter to All!
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1 Secretary General of the National Statistical Coordination Board (NSCB) and Chairman of the Statistical Research and Training Center (SRTC). He holds a Ph. D. in Statistics from the University of Michigan in Ann Arbor, USA and has taught mathematics and statistics at the University of the Philippines. He is also a past president of the Philippine Statistical Association.
Posted 12 April 2004.