Monetary Policy - Glossary and Abbreviations

Base Money (BM) – the sum of the reserve money (RM), reserve-eligible government securities, liquidity reserves and reserve deficiency of banks. ¹

Consumer Price Index (CPI) – represents the average price for a given period of a standard basket of goods and services consumed by a typical Filipino family. This standard basket contains hundreds of consumption items (such as food products, clothing, water and electricity) whose price movements are monitored to determine the overall change in the CPI, or the level of inflation (See also Inflation Rate).

Demand-Pull Factors of Inflation – pressures on inflation caused by relatively higher demand compared to the available supply of goods and services. Usually, when people, business or the government receive more income, realize capital gains or obtain easier access to credits, the overall demand for goods and services may increase. This would lead to increased prices, assuming the supply of goods and services is not able to adjust quickly enough to meet the higher demand. In addition, supply shocks in the economy that, either increase the costs of raw materials or curtail supply or both could result in second-round effects that, in turn, may lead to higher demand-side price pressures. Higher oil and agricultural commodity prices, for instance, may eventually affect the price- and wage-setting behavior of economic agents, which could then lead to second-round price pressures from the demand side.

Explanation Clauses - the predefined set of acceptable circumstances under which an inflation targeting central bank may fail to achieve its inflation target. Such circumstances recognize the fact that there are limits to the effectiveness of monetary policy and that deviations from the inflation target may sometimes occur because of factors beyond the control of the central bank. Under the inflation targeting framework of the BSP, these circumstances include price pressures arising from: (a) volatility in the prices of agricultural products; (b) natural calamities or events that affect a major part of the economy; (c) volatility in the prices of oil products; (d) significant government policy changes that directly affect prices such as changes in the tax structure, incentives and subsidies.

 

Inflation Rate - the rate of change in the weighted average prices of goods and services typically purchased by consumers. The weights of the goods and services are based on their corresponding share to the Consumer Price Index (CPI) basket, i.e., the standard basket of goods and services purchased by a typical household. In the Philippines, the composition of the CPI basket is determined from the Family Income and Expenditure Survey (FIES) periodically conducted by the National Statistics Office (NSO). Inflation is typically defined as the annual percentage change in the CPI. It indicates how fast or slow the CPI increases or decreases.

• Headline Inflation – the rate of change in the weighted average prices of all goods and services in the CPI basket.

• Core Inflation – An alternative measure of inflation that eliminates transitory effects on the CPI, core inflation removes certain components of the CPI basket that are subject to volatile price movements, such as food and energy, and other items affected by supply side factors, the price changes from which are not within the control of monetary policy.

  Official Definition - This refers to the rate of change in the CPI which excludes the following items/ commodity groups: rice, corn, fruits and vegetables, and fuel items (gas, liquefied petroleum gas (LPG), kerosene, gasoline and diesel), which together represent 18.4 percent of the CPI basket. Core inflation data for 2001-2002 are BSP estimates while the data starting January 2003 are the official National Statistics Office (NSO) figures.
  
  BSP’s Alternative Measures of Core Inflation:
   
  • Net of Selected Volatile Items - This measure refers to the rate of change in the CPI which excludes the following items/ commodity groups: educational services, fruits and vegetables, personal services, rentals, recreational services, rice, and corn which together represent 37.6 percent of the CPI basket.
     
  • Trimmed Mean - represents the average inflation of the (weighted) middle 70 percent in a lowest-to-highest ranking of year-on-year inflation rates for all CPI components.
     
  • Weighted Median - represents the middle inflation (corresponding to a cumulative CPI weight of 50 percent) in a lowest-to-highest ranking of year-on-year inflation rates.