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Everything you need to know about inflation (but were afraid you’d look dumb for asking)

With prices of goods going up, we’re more than a little down. Our resident personal finance guide gives us the low-down on how our lives are affected by inflation, and where it hurts our pockets the most.
Warren de Guzman | Nov 06 2018

Monthly Inflation reports are usually a big deal in financial circles as it can influence the direction of key interest rates and other monetary policy as well as help provide context for key economic drivers such as public and private consumption.  However inflation reports are normally glossed over by the public.  They are often dismissed as too technical, just as the other parts of the first sentence of this piece.  It only becomes ‘fashionable’ to care about inflation when the public starts to feel the impact of higher prices of consumer goods on their wallets.  This is also true in my personal experience.  Growing up, I took for granted the weekly groceries my mother brought home.  I also expected the same number of meals every single day, and an allowance to help me get to school and back with a full belly.  Only when I started helping out in the grocery and wet market shopping did I realize just how much money and effort go into feeding a household.

Still, the gap between the percentages presented in an inflation report and the average Filipino family’s budget seems massive.  What’s the connection? To better understand that we need to understand how our government, in this case the Philippine Statistics Authority, generates its inflation report.  How is inflation measured?

Governments measure inflation by conducting a survey of prices of consumer goods and services that are representative of the Philippine economy.  These are the items and services that all Filipinos pay for on a regular basis.   All these combined make up the so called Consumer Price Index or CPI.  This is done on a monthly basis, and the changes in the monthly CPI, from the previous month and from the same month in the previous year, are reported as the month-on-month and year-on-year inflation rate. 

The October inflation report of 6.7%, matching the September Inflation rate at a near decade high, means the change of prices from October 2017 to October 2018 is the highest seen in those particular goods and services in nearly 10 years.

This graph created by the ABS-CBN Data Analytics Team shows us the ups and downs of inflation through the years.  At a glance it shows us the Philippines as a whole has been able to enjoy low inflation for quite a number of years.  But this data, even presented in this form, doesn’t narrow the gap between our government economists and statisticians, and the average Filipino family.

Let’s dig deeper into the numbers.

Remember the CPI is made up of goods and services.  These include food and drink, gasoline, transportation, utilities, even education.  The top drivers of inflation in October were alcohol and tobacco, food and non-alcoholic beverages, and transport, as shown in this graph also created by the ABS-CBN Data Analytics Team. 

When inflation is presented across commodity groups, it makes much more sense for everyone.

Here is an even deeper dive into the data.  This graph shows us the inflation rates of different food groups.  We see inflation in vegetable prices, a key item for families which can’t afford meat everyday, has eased significantly as storm hit farms in north Luzon slowly recover.  Tough to say if that trend will continue considering a storm just hit the north at the end of October.  Carnivores meanwhile would be happy to note inflation on meat items has gone down.

Want to make it even more relatable?  Here’s a tip, save your receipts.  There are many reasons to save receipts, and tracking your own personal inflation rate is one of them.

Your grocery receipt, your gas station receipt, and your utility bills all present your spending history.  They conveniently itemize your expenditures.  All you need to do is save the receipts and log them in a worksheet.  This is basically what the PSA does every month.  It should be a simple task for you to do for your household, specially if you are already the person in charge of groceries and what not. 

I will be the first to admit that I do not do this on a regular basis.  I try to.  In fact I did it fastidiously for a whole year just to find out where my hard earned money was going.  Without getting into details, I will admit the results were disappointing.  However, the exercise also allowed me to cut out unnecessary expenditures and my personal finances are much healthier now.  (Of course there is room for improvement, there always is).  But I digress.  The exercise allowed me to see the changes in specific items I regularly purchased.  It allowed me to compare prices of the same commodities across different sources/groceries.  Armed with this knowledge, I was able to tailor my shopping habits to avoid higher costs.  I was also able to identify different items or products which I could substitute for more expensive items I used to buy with impunity.  With that data I could also figure out if the prices of goods important to me are going up or down.

If all of this sounds like a lot of work for you, don’t worry, the government does it for you! The PSA does it every month!  All you have to do is pay attention to the monthly inflation report.  A positive inflation rate means prices are going up.  A negative rate means prices are going down and the rate is now called deflation instead of inflation. (That is another topic altogether.). Of course the PSA report won’t be as personalized as your own expenditure journal or worksheet, but it will get the job done.  It will also be helpful for forecasting the direction of key interest rates and consumer spending.  But those topics are best discussed in a separate article.

Graphs courtesy of ABS-CBN Data Analytics Team