Beyond the Numbers: What Do Prices Tell?

While I was reviewing the classic work of George Stigler on the evolution of distribution theory which has been a landmark in the history of economic thought, I was motivated to write sort of a sequel to my previous article which focused on Consumer Price Index (CPI). Thus, the centerpiece of this issue is a relevant topic that has something to do with price: the Producer Price Index (PPI).

In his article titled "Some Recent Developments In The Theory Of Production", Robert M. Solow of the Massachusetts Institute Of Technology stressed that "mainstream economic theory assumes that firms seek to maximize profits. Production theory, then, asks what combination of inputs (known as factors of production) will generate the quantity of output that yields maximum profit." On the other hand, we can also relate to the dominant production theory in use today, the transformation theory, which is based on input, process and output (IP0). According to Koskela "this theory seeks to optimize the entire production phase by optimizing each individual task, assuming that minimizing the effort and cost of each task translates directly to maximum throughput and customer value."

These theories and the rest of the theories are very interesting and may have many implications. However, what is more interesting is to know what Producers Price Index (PPI) measure and what implications does it offer .

The Producer Price Index (PPI) measures average changes in prices received by domestic producers for the sale of their output. This is generated by the National Statistics Office through the results of the Producers Price survey (PPS) conducted nationwide.

According to the preliminary results, the Year- on-year growth of the Producer Price Index for the manufacturing sector shows a decline when it slowly decreased to - 0.3 percent in July 2012 from -2.2 percent in June. As indicated in the report, this could be traced to the double —digit decrements posted by furniture and fixtures (-42.6°/0).The other side of the picture, however, shows six major sectors that posted increases headed by rubber and plastic products.

Looking at a month-on -month growth ,the PPI slowly improved to -0.8 percent in July 2012 from -2.0 percent in June 2012. As indicated in the report, Furniture and fixtures led the eleven sectors with a double-digit downtick recorded at -17.9 percent. On the other hand, five sectors posted increases led by petroleum products (4.5%).

Going back to the concept on input costs… output prices, we can infer that changes in PPIs reflect what actually is occurring with prices charged to buyers from month to month, thereby making PPIs a significant price measurement tool for researchers, policymaking and business purposes.

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A Two-digit inflation rate registered in Camiguin

A FREQUENT QUESTION raised by consumers is “how much would a specified amount of money at a certain period of time be worth today?" If you would be looking at price increases on the same basket of goods, even for just a short period of time, do you take it as enough warning of a coming periods of inflation?

               Indeed, consumers and investors consider inflation as an economic phenomenon that has an increasing change in the price of goods and services. Price inflation is typically measured using the Consumer Price Index (CPI .which takes into consideration a constant basket of goods.

               It is the National Statistics Office that generates the CPI.  Accordingly, NSO had revised last June the base year from 2000 to 2006 including the weights for the consumer price index (CPI) to ensure that the key measure reflects the current situation. As reported by the agency, “as household expenditure patterns vary (they tend to spend less on some items and more on others), weights are used to ensure that the CPI reflects the relative importance of each item or group of items in the market basket. The weights are expressed as a proportion of household expenditure for an item to the total national expenditure."

               According to the latest results of the Consumer Price Index (CPI) Survey conducted by the National Statistics Office, the Philippine’s annual headline inflation rate increased to 3.2 percent in July 2012 from 2.8 percent in June 2011. This was due to higher annual increments registered in all the commodity groups except those in clothing and footwear, health, transport, and education indices. Inflation a year ago was 4.9 percent.

               On the other hand, inflation in the National Capital Region (NCR) jumped to 3.1 percent in July from 2.2 percent in June. Except in clothing and footwear, health, transport, communication, and education indices, all the commodity groups posted higher annual gains. Annual inflation in areas outside NCR grew 3.2 percent in July from 3.0 percent in June. lt resulted from higher annual upticks in the indices of food and non-alcoholic beverages; housing, water, electricity, gas, and other fuels; furnishing, household equipment and routine maintenance of the house; and recreation and culture. Moreover, the country’s month-on-month inflation decelerated to 0.3 percent in July from 0.5 percent in June. Price increases were observed in food items like rice, meat, fish, vegetables and sugar. However, these were tempered by the downward price adjustments in cooking oil, selected condiments and seasonings, gasoline and diesel.

               ln Region 10, inflation rate was highest in Camiguin with 14.7 and the only province in the region with a two digit rate. This was attributed to the significant increase on the provincial index for housing, water, electricity, gas, and other fuels by 30.9 percentage points. The commodity  price index for all income households in Camiguin posted  at 154.3 which is also noted as the highest in the region.   

               So, how do inflation and CPI affect you? Inflation erodes your purchasing power. This means that, as prices of goods and services increase, consumers can purchase or consume less and less for the same amount of money. This would suggest that your peso will be able to buy fewer goods next year, and yet fewer goods every year after that.

             Moreover, an inverse relationship exists between purchasing power and CPI. Therefore, we expect that the purchasing power of the peso (PPP) will decline if CPI is high. If we try to look at the purchasing power of peso in Camiguin, it registered the lowest value with P0.65 and yet highest in CPI. Other provinces in region l0’s PPP ranged from P.70 to P 0.75 and the CPls were lower compared with the province of Camiguin.

               The Purchasing Power of Peso shows how much the peso in the base period is worth in another period. It gives an indication of the real value of the peso in a given period relative to the peso value in the base period.

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