Consumer Price Index in the Philippines: Is there a Need for Change?

One of the common criticism on Philippine computation of Consumer Price Index (CPI) is the formula used, the weighted Laspeyres Price Index. There were suggestions even before to change the computation methodology just as United States and other countries change their own methodology from Laspeyres indices to a two stage CPI computation using Laspeyres in the primary stage and then combined these results to create a number of aggregate indices, including the CPI for the second stage of computation (Wikipedia.com). This change in the methodology was driven with the perceived notion that the index systematically overstates inflation because it does not take into account changes in the quantities consumed that may occur as a response to price change. 

The same conclusion was made by von Auer (2002) where he concluded in his paper that the price index of Laspeyres is unable to pass inversion test or factor reversal test which gave rise to the idea that the formula tends to measure “spurious inflation” which renders it useless and fallacious.

However, von der Lippe (2008) pointed out that when it comes to the issue of substitution bias, which is one of the major flaws of Laspeyres price index, he commented that in all those cases in which quantities of different commodities will be different to changes over time, there is no basis for interfering price levels from expenditure levels only. Moreover, for his central point to make against von Auer (2002) conclustion, when analysing the price movement, the concomitant quantity movement should be taken in to account. A “spurious inflation” of the price index P should not be seen in isolation without realising that there will always be a corresponding “spurious real growth” displayed by the quantity index Q pertains to P. Further, in the case of the “inversion test” or factor test where values remain constant, a price movement is unavoidably followed by a quantity movement in the opposite direction. With the introduction of expenditure weights in the original Laspeyres formula to form a weighted Laspeyres Price index, then the notion of spurious inflation loses much of its charm one the quantity dimension is considered with the conjunction with the price dimension that is once we consider quantities in addition to its prices. This maybe the reason why National Statistical Coordination Board (NSCB) still using the Laspeyres index formula even though some of the countries are now adopting much improve and close to economic theoretic index results.

Bayangos and Estigoy, 2010 study of price index using Philippine data, on the other hand, shows that there is positive bias estimate in the current official CPI measure compared to a geometric CPI (the study used Fischer and Tornqvist Price Index Number for comparison). In particular, the year-on-year growth of CPI using a geometric mean formula is relatively lower compared to that for CPI using a Laspeyres formula by about 0.1 percentage point. They added that the bias estimate may be lower as to the real bias estimates since the result does not yet fully accounted the substitution bias of which the current price index used is liable for. Further, they conclude that this positive bias percentage point indicates that the current CPI measure may overstate “true” inflation.

Another thing that we need to point out,  is the selection of base year for the Laspeyres index formula. In the country adopted methodology, there is no fixed interval (number of years) in the rebasing of the CPI (1996, 1978, 1988, 1994, 2000) and solely depends on the availability of the data. The Philippine CPI is reweighted only every six years. And because the CPI is fixed-weighted, it does not adequately reflect on-going changes in the buying habits.

This may greatly affect the computed index number since Laspeyres relies heavily with the base year price and any mistakes made with the choice of base year could result to detrimental outcomes. In particular, a re-weighting of the CPI in a fixed interval basis is necessary to ensure that CPI truly represents the current domestic price condition. Consumer tastes and technology change over time, causing the fixed market basket of goods and services to become outmoded. To capture such changes for a more meaningful price comparison, revision or updating of the fixed market basket, the sample outlets, the weights and the base year have to be undertaken periodically. Thus, the need for more regular conduct of FIES which can be used to reweight the CPI is highly suggested.

Von der Lippe (2008) may pointed out that there are still reasons to believe that Laspeyres could still be a good index formula for computing CPI’s but without proper adjustments made by statisticians, the formula used could not be put to blame.

References:

Bayangos, Veronica B. and I.T. Estigoy. 2010. A Geometric Price Index for the Philippines: A Preliminary Assessment. BSP Working Paper Series No. 2010-01 11 

Ericta, Carmelita N. and R. B. Sta. Ana. 2009. Price Collection for the Consumer Price Index: Documentation. Philippine Institutes of Development Studies. Discussion Paper Series no. 2009-19.

T. Srivastava, ShailajaRego 2008, Statistic for Management, McGraw-Hill, New York. 

'United States Consumer Price Index', Wikipedia, The Free Encyclopaedia, viewed 20 January 2012, < http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index>

von der Lippe, Peter 2008, Index Formula of Laspeyeres and the Inversion Test, viewed 15 January 2012, <mpra.ub.uni-muenchen.de/7045/>.

von Auer, Ludwig, Spurious Inflation: The Legacy of Laspeyres and others., Quarterly Review of Economic and Finance, 42 (2002), pp.529-542.

The Impending Issue of Global Warming: Carbon Cycle Explains

Introduction

Carbon cycle is one of the natural process happened on Earth every day. This biogeochemical cycle maintains the balance of carbon flows in every reservoir that prevents all carbon in the planet to enter the atmosphere or being stored entirely in rocks. The problem here is not the process, since this is a natural phenomenon as I mentioned, but the millions of tons of carbon into the atmosphere cause by human’s destructive activities i.e. burning of fossil fuels and deforestation every year. This leads to a demonstrably negative results for the global climate and considered one of the most serious environmental problems of both developed and developing countries ever to date- global climate change.

Climate change and carbon cycle becomes a matter of public concern on global scale during 1980’s and 1990’s respectively. By late of 1980’s interest in climate change had become more focus and concentrated. The Intergovernmental Panel for Climate Change (IPCC) was organized in 1988 to aid government and policy makers with expert opinions concerning the impending problem. In year 1992, the International Geosphere-Biosphere Programme (IGBP) was created allowing international co-ordination of research and scientific effort. This was considered one of the most important steps on making climate change a global concern. Within the same year, political leaders from different countries met in Rio de Janeiro in Brazil to set up agenda to address the environmental, economic, and social challenges facing the international community. 

Two years later, the United Nations Framework Convention on Climate Change came into force aimed at stabilizing atmospheric concentration of greenhouse gases at a level that would prevent human-induced actions from leading to dangerous interference with the climate system. In 1997, the Kyoto Protocol was unveiled; dealing predominantly with greenhouse gases, it was the largest and ambitious piece of environmental legislation ever seen.

The carbon among the greenhouse gases received particular attention because 60% of the observed climate change is attributable to the increase in carbon dioxide concentration from about 280 ppm (ppm = parts per million) in the pre-industrial period to today’s 387 ppm. This is considered the highest atmospheric CO₂ levels in over 2 million years ago.

There is the indeed a paradox that CO₂ , one of the “The Gas of Life”, is now being the condemned as the evil “polluting gas”, a gas which will be a threat to people’s living on Earth, through a postulated “Global Warming”.  The atmospheric CO₂ is an important as oxygen for life on Earth. Without the carbon dioxide the plant photosynthetic metabolism would not be possible and the present life forms on the planet would vanish. Further, aside from being the foundation of life, Carbon is the source of majority of energy consumed by the human civilization. 

20 Minutes of Realization from the UP Economics Professor

The First 10 minutes..,



and the rest is history

Inflation won’t hurt PH economy — Metrobank

image source: earthtimes.org

MANILA, Philippines — Metrobank has expressed confidence inflation, although likely to accelerate further, will remain manageable and will not reach levels that could stall recovery.

In its latest research note, Metrobank said various emerging economies have already implemented measures to temper inflation in their jurisdictions. These measures are led by interest-rate hikes, which some economists feared could dampen consumer demand and drag overall economic growth.

It said that despite the increase in interest rates in many emerging markets, the move by the policymakers did not lead to substantial slowdown in the growth rates of economies.

Given this backdrop, accelerated increase in consumer prices as well as efforts to curb the increase, such as interest-rate hikes, could be very well absorbed by the Philippine economy. The bank said faster inflation would remain within tolerable levels and would not cause the economy to significantly slow down.

continue reading here.

Descriptive Statistics of Food Expenditure among Phililippine Household, FIES Data

Associated Press photo by Aaron Favila

Credit: AARON FAVILA

The average food expenditure by income group and geographical location in 2006 presented in Table 1 below (Food Income and Expenditure Statistics, 2006) . Among the food groups, rice grain accounts for the highest budget share at 30% of total households’ food expenditure. Rice remains the main staple food in the Philippines, contributing 35% of the total food calorie intake but as much as 60-65% of the households in the lowest income quintile (CPBD, 2008). Low income families spend a larger part of their income for rice consumption. Rice accounts for about 25% of total household’s expenditure in the low-income group. Families belonging to the high income bracket, on the other hand, allocate lower budget from their income for rice consumption at 17.8%.

Between urban and rural households, the latter allocates more budget for rice consumption at 27.5% of its share relative to urban households with 17.3%. Unlike rice, corn is a staple commodity for a very small portion of the Filipino household particularly in Central Vizayas and in some parts of Mindanao. This explains the small percentage of consumption for corn. The leafy vegetables, however, posted the lowest budget allocation relative to other food item in all population groups. Meat accounts for nearly 12% share of all total households with the budget allocation of urban households higher (15.3%) than those in their rural counterpart (11%). The budget allocation for meat increases with increase in income. On the other hand, the budget allocation for fish decreases with increase in income.

Table 1. Average Expenditure By Income Group and Geographical Locations
	Entire	Location		Income Group
Food Group	Sample	Urban	Rural	Low	Middle	High
Rice	0.2990	0.1773	0.2750	0.2430	0.2090	0.1748
	(0.1303)	(0.1012)	(0.1360)	(0.1334)	(0.1214)	(0.1226)
Corn	0.0314	0.0120	0.0471	0.0349	0.0256	0.0183
	(0.0817)	(0.0407	(0.1010)	(0.0864)	(0.0729)	(0.0735)
Fresh Fruits	0.0320	0.0332	0.0311	0.0318	0.0324	0.0320
	(0.0201)	(0.0205)	(0.0198)	(0.0204)	(0.0196)	(0.0200)
Leafy Vegetables	0.0181	0.1010	0.0205	0.0186	0.0172	0.0178
	(0.0129)	(0.0096)	(0.0146)	(0.0134)	(0.0118)	(0.0012)
Fruit Vegetables	0.0220	0.0199	0.0237	0.0225	0.0213	0.0216
	(0.0135)	(0.0116)	(0.0147)	(0.0137)	(0.0133)	(0.1222)
Meat	0.1290	0.1530	0.1097	0.1229	0.1383	0.1606
	(0.0748)	(0.0172)	(0.0713)	(0.0744)	(0.0741)	(0.0720)
Eggs	0.0216	0.0226	0.0208	0.0215	0.0218	0.0200
	(0.0131)	(0.0130)	(0.0130)	(0.0132)	(0.0216)	(0.0134)
Fish	0.1300	0.1166	0.1409	0.1335	0.1251	0.1197
	(0.0608)	(0.0530)	(0.0643)	(0.0620)	(0.0581)	(0.0592)

The data consists of 18,411 observations (Philippines); 8,243 observations (Urban Area); 10,168 observations (Rural Area); 11,490 observations (Low-income Group); 5,482 observations (Middle-income Group); 1, 436 observations (High-income Group); collected from individual Filipino households, 2004-2006.

* Standard deviations  are in parenthesis

Why Study Economics?

First, i want to solve the economic problem in Philippines, which i think is impossible, my great professor once said. So i will settle on my second reason..,to know and understand everything that happens around me. 

TOP 10 REASONS TO STUDY ECONOMICS 

http://www2.gsu.edu/

1. Economists are armed and dangerous: "Watch out for our invisible hands."

2. Economists can supply it on demand.

3. You can talk about money without even having to make any.

4. You get to say "trickle down" with a straight face.

5. Mick Jagger and Arnold Schwarzenegger both studied economics and look how they turned out.

6. When you are in the unemployment line, at least you will know why you are there.

7. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE".

8. Although ethics teaches that virtue is its own reward, in economics we get taught that reward is its own virtue.

9. When you get drunk, you can tell everyone that you are just researching the law of diminishing marginal utility.

10. When you call 1-900-LUV-ECON and get Kandi Keynes, you will have something to talk about.

Visit School Applied Economics to know more about the courses and programs offered in Mindanao.

Brief Review of Philippine Food Demand Studies

image source: farmlandgrab.org

There have been few food demand studies done using the Philippine household demand data employing AIDS model. Recently, Balisacan (1994) used LA-AIDS model to explained the consumer behavior of urban and rural areas towards the changes on price and income using average expenditure shares for each region and by area ( urban and rural). The study was focused on the aggregated commodities (i.e. cereal, meat beverages, fuel, house and clothing) and not  mainly on food commodities in specific, as this paper is aiming to estimate. The expenditure elasticities, however, suggested that in the commodity group such as cereal, meat, beverages, clothing and miscellaneous groups were inelastic with the expenditure elasticities of 0.382, 0.805, 0.990, 0.967 and 0.25 respectively. Further, the own price elasticities of identified food commodities were not found significant. On the other hand, the uncompensated price elasticities showed a strong evidence between the food groups and non food groups. The price of cereal, for example, has a significant positive effect on the demand for fuel and house with the estimated coefficients of 0.161 and 0.431 respectively.

The result also showed the substantial difference in the demand response  by various population groups to changes in income. In case of cereal, the expenditure elasticity was considerably lower for urban areas than for rural areas, especially in 5^th  income quantiles with estimated expenditure elasticity of -0.463 compared to 0.179 for rural area. Further, there were little variation in price elasticities across population groups. This result, however, was not unexpected since the data set used in the study did not contain information found among households in different circumstances (Balisacan, 1994).

Llanto et.al. (1996), however, made used of QUAIDS model specification by Blundell et.al. (1993) using a cross-sectional household data of Food Expenditure Survey in year 1991. The analysis was focused mainly on the food groups such as cereal, fruits and vegetables, meat and fish products, dairy products and other food items across different population groups. The demand elasticities for cereal was inelastic to its own price for various household classification of urban households, farm households and deficit households with the calculated elasticities of 0.87, 0.89 and 0.90 respectively. Cereal products however, was found elastic, among rural households, at varying household sizes, agricultural households and surpluses households. On the other hand, the result further showed that fruits and vegetables , meat and fish products and dairy products, irrespective to various  household groups, cereal is positive. This implied that cereals was served as substitute good for those  who cannot afford those food groups mentioned at the prevailing prices. Further, the studies showed that the estimated income elasticity were all positive in all population groups, this means that all food groups were all normal goods.

A more recent study applying Philippine household data was conducted by Orbeta et.al. (1998) in simulating the impact of macroeconomic changes on the nutrition status of Filipino households using the LA-AIDS. Using the Tariff Reform Program implemented between 1988-1992 as policy change, the study showed a more progressive impact on nutrition compared to the impact of income. The result of LA-AIDS demand parameters were used to simulate the effect of policy change across income distribution.

Source of basic data: FIES-NSO, various years

image source: ats-ses.agr.gc.ca