The consumer price index or CPI is a measure of change in the average retail prices of a fixed basket of commodities or goods and services commonly purchased by the households relative to a base year or base period.

CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly.

The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases.

The computation of CPI has different components.  These are the following:

1. Market basket

2. Weight

3. Base year or base period

4. Index computation methodology

Market basket is the list of commodities or goods and services commonly purchased by households.

The items included in a market basket are chosen to reflect the spending habits and preferences of a specific group of consumers. The basket contains a variety of goods and services, such as food, drinks, fuel, clothing, toiletries, transportation fare, utilities, and healthcare, among others.

To ensure that the CPI remains relevant and reflective of the changing consumption patterns among different income groups, both the Survey of Key Informants (SKI) and Commodity and Outlet Survey (COS) are being conducted with the objective of gathering information on the commodities regularly purchased or availed of by households, as well as the specific types of outlets where these commodities are bought within the country. Modal commodities are considered the most commonly purchased/availed commodities.

The weights are values attached to the commodities or groups of commodities to indicate their relative importance in the market basket.

The weights are computed as the proportion of the expenditure for a certain commodity/group of commodities to the total expenditure of households during the base year. Therefore, the higher the expenditure of the households on a specific commodity/group or commodities, the higher the weight of the commodity/group of commodities. The expenditure data are based on the results of the Family Income and Expenditure Survey (FIES) conducted by the PSA.

Base year or base period is a reference period, usually a year, at which the index number is set to 100. It is the reference point of the index number series. 

The PSA rebases the CPI every six years as mandated by the PSA Board Resolution No. 01, Series of 2017-146 (Approving the Synchronized Rebasing of Price Indices to Base Year 2006 and every six (6) years thereafter). Rebasing is done to reflect the latest composition of goods and services commonly purchased and availed of by households across provinces and highly urbanized cities in the country. It also ensures that the expenditure patterns of households are updated.

Prices of goods and services are collected from sample retail outlets or stores. These stores are selected based on the following criteria:

1. The store should be popular or is a well-known seller of the items to be priced;

2. The store should have a consistent stock of commodities to be priced;

3. The store should a have permanent physical location; and

4. The store should be accessible to a greater segment of the population. 

The collection of prices of goods and services is done regularly by the price collectors of the PSA. For NCR, food items and fuel products are collected on weekly basis, non-food items are collected on bi-weekly basis, and selected services and utilities are collected on a monthly basis.  For areas outside NCR, fuel products are collected on a weekly basis and the rest of the commodities are collected on a bi-weekly basis. Tuition fees are collected every beginning of the school classes.

Currently, the PSA uses Chained Laspeyres formula as the method of CPI computation. The Chained Laspeyres uses fixed weights until rebasing of CPI is done.

Inflation rate refers to the annual rate of change or the year-on-year change of the CPI expressed in percentage. It is computed using the following formula: 

Inflation rate can be positive or negative (deflation). A positive inflation rate means that the prices of commodities have increased compared with their prices in the previous year. Negative inflation means that the prices of commodities have decreased compared with their prices in the previous year.

A positive but lower inflation rate compared to the previous month’s inflation rate means that the prices of commodities for the current month have increased year-on-year but at a slower rate than the year-on-year increase in the previous month. It does not mean that the prices of commodities have decreased.

A positive but higher inflation rate compared with the previous month’s inflation rate means that the year-on-year increase in the prices of commodities for the current month is faster than the year-on-year increase in the prices of commodities in the previous month.

A positive but lower inflation rate compared with the previous month’s inflation rate means that the year-on-year increase in the prices of commodities for the current month is slower than the year-on-year increase in the prices of commodities in the previous month.

The purchasing power of peso (PPP) is a measure of the real value of the peso in a given period relative to the base period. It is computed by getting the reciprocal of the CPI and multiplying the result by 100 as follows:

The CPI for the bottom 30% income households is compiled by the PSA to measure the changes of prices of commodities commonly purchased by the families that belong to the bottom 30% income decile.  The process of price collection and CPI computation is the same as that of the CPI for all income households.  However, there is a separate market basket and weights for the CPI for the bottom 30% income households.   
 

The headline CPI includes all items in the market basket, while core CPI excludes volatile items like cereals, meat (fresh, chilled, or frozen), fish (live, fresh, chilled, or frozen), dates, figs and tropical fruits (fresh), other vegetables (fresh or chilled), fruit bearing vegetables (fresh or chilled), electricity, liquefied hydrocarbons, diesel, and gasoline.

Core CPI aims to capture the permanent component of the inflationary process that can be influenced by monetary policy. It is used to get a better understanding of underlying inflation trends.
 

The PSA releases the data on inflation rate every 5th day after the reference month through a press conference broadcasted live and through a press release posted on the PSA website.