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Inflation, deflation and price stability

Inflation
The sustained
increase in the
average prices of
goods and services
typically purchased
by consumers
Deflation
The sustained
decrease in the
average prices of
goods and services
typically purchased
by consumers
Price Stability
When, on average, price changes
neither increase nor decrease over time
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Price stability
An environment in which inflation is
sufficiently low that it is no longer a
consideration in the economic decisions of
households and firms Alan Greenspan

Prices are stable when ordinary people stop
talking about inflation. Alan Blinder

Broadly illustrated as:
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Price stability
In monetary terms, when money
retains its value over time
In practice, price stability means
low and stable inflation.
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The promotion of price stability helps:
facilitates increased
provision for social
services (e.g. housing,
education, health)
promotes greater savings
facilitates the creation of
more job opportunities
increases certainty in
investment decisions
makes goods and services
more affordable
Economic growth
& development
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What is inflation?
The sustained increase in the
average price of goods and
services typically purchased
by consumers
Measured as the percentage
change in the Consumer
Price Index (CPI)
How price changes are measured?
=
=
P
P
P
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Consumer Price Index
Basket
Miscellaneous
Services
Housing
Utilities
Clothing
How price changes are measured?
Food
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How price changes are measured?
Composition of the CPI Basket (2000=100) Weight
Food, Beverages and Tobacco
(e.g., rice, eggs, fish, fruits & vegetables, meat, etc.)
50.0
Clothing
(RTWs, footwear, etc.)
3.0
Housing & Repairs
(rentals and minor repairs, etc.)
16.8
Fuel, Light & Water
(electricity charges, water, LPG, etc.)
7.0
Services (tuition fees, medical bills, movies tickets,
transport fares, gasoline & diesel, etc.)
15.9
Miscellaneous
(appliances, sweepstakes,etc.)
7.3
Total 100.00
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Operational measurement of inflation
Inflation refers to the rate of change in the average
prices of goods and services typically purchased by
consumers for a given period as measured by
consumer price index (CPI).

The National Statistics Office (NSO) calculates and
announces the monthly CPI and inflation rate based
on a nationwide monthly survey of prices for a given
basket of commodities. All information (data and
press releases) are available at the NSO website
http://www.census.gov.ph
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% 100
1
1
x
P
P P
t
t t

Computation of Inflation Rate

Month-on-month (M-o-M) growth rate
% 100
12
12
x
P
P P
t
t t

Year-on-Year (Y-o-Y) growth rate

% 100 1
1
x
P
P
t
t
(

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% 100 1
12
x
P
P
t
t
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10
% 100
1
1
x
P
P P
t
t t

Illustrative Example
Month-on-month (M-o-M) growth rate
% 100 1
1
x
P
P
t
t
(

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% 4
% 100 04 . 0
% 100
100
100 104
=
=

x
x
% 4
% 100 04 . 0
% 100 1
100
104
=
=
(

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x
x