Is the CPI still ‘representative’ amid a pandemic?

By Marissa Mae M. Ramos, Researcher
and Luz Wendy T. Noble, Reporter

CHANGING CONSUMPTION PATTERNS of households amid the pandemic have raised the question of whether the theoretical basket of goods and services used to measure price changes over time remains accurate.

“The pandemic has changed that basket — less dine-in consumption, more take-out food intake; less transportation; less hotel accommodation, less domestic and foreign travel; higher spending for medicine and health services; less education services; higher communications services; less clothing; and others,” said BSP Governor Benjamin E. Diokno in a Viber message.

Mr. Diokno was referring to the consumer price index (CPI), which captures the average retail prices of goods and services commonly purchased by households in an area, with each commodity given a weight value to indicate its relative importance in the consumer basket. For instance, the CPI for all income households gives a 38.3% weight on food and non-alcoholic beverages, whereas for low-income households, the same commodity group is assigned a heavier weight of 58.3%. (Refer to the infographic for the weights of other commodity groups for the bottom 30% and all income households.)

These weights are then kept constant to reflect the CPI’s purpose, which is to measure price changes over time or the inflation rate, while controlling for changes in consumption patterns.

For National Statistician Claire Dennis S. Mapa: “The CPI basket still represents the ‘typical’ bundle of goods and services consumed by households,” he said in a separate Viber message.

Mr. Mapa noted the Philippine Statistics Authority (PSA) expects to revise and rebase the basket for the bottom 30% and all income households next year according to their work program. The PSA currently measures the inflation rate using 2012 prices for the CPI adopted in 2018.

As of July, headline inflation reached 2.5%, still within the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% target band, but above the 2.3% forecast for the entire 2020. This was lower compared to the 4.5% and 3.2% inflation rates recorded in the same six months of 2018 and 2019, respectively.

The stable inflation rate this year has been considered a silver lining on the Philippine economy as this has allowed the BSP’s Monetary Board to continue supporting the economy by putting interest rates at record lows, as well as decreasing the reserve requirements for banks to encourage lending activity.

The economy officially plunged into a recession after the second quarter saw an annual decline of 16.5% — the biggest contraction on record based on available government data.

Even so, it may be possible that current inflation is being underestimated considering consumers shifted their expenses towards “essential items.” According to BusinessWorld’s calculations using PSA data, household spending on essential items in the second quarter accounted for 64.9% of the average spending compared with 53.4% in the same period in 2019.

These essential items include expenditures on food and non-alcoholic beverages; housing, water, electricity, gas, and other fuels; health; and communication.

Asked whether the current developments have drastically affected the representativeness of the CPI, National Economic and Development Authority (NEDA) Undersecretary Rosemarie G. Edillon said the only way to ascertain this is to conduct another round of the Family Income and Expenditure Survey (FIES).

“[E]ven then, we need to know if these changes are permanent. In any case, the current basket heavily favors food, which remains true, especially now,” she said in a separate Viber message.

“In addition to the headline numbers, we extensively examine the different components of the CPI,” Ms. Edillon said.

The FIES, which the PSA conducts every three years, serves as the basis for the weights of commodities in the consumer basket as it reflects a commodity’s share in the total consumption of a typical Filipino household. The latest iteration of the FIES was done in 2018.

For BSP’s Mr. Diokno, the changes in the households’ spending pattern raise an argument for modifying the consumer basket, but also expressed concern if such trend is temporary.

“I think one problem is that PSA cannot do this unilaterally. Think the adjustment, if done, has to be in conjunction with the international community,” he added.

For Security Bank Corp. Chief Economist Robert Dan J. Roces, the recent developments “validated the view that consumption may cluster towards more essential items in the meantime.”

“With this, consumer behavior may have adapted to the ongoing quarantine measures from the pandemic, but not necessarily have ‘evolved’ — this we have yet to see as the pandemic seems to be far from over,” he said.

“I think the current CPI basket provides a good baseline to the shifts in consumer preferences, as well as future evolutions once the pandemic is over, and I think only then should [we] take a look at the CPI basket and adjust inflation targeting, if at all,” Mr. Roces added.