1ST PILLAR: PRICE STABILITY
(Through the conduct of monetary policy)
The BSP’s primary mandate is to maintain price
stability conducive to a balanced and sustainable
economic growth of the Philippine economy.
- When you talk about price stability, BSP
must make sure that prices are stable. What
happens if there is no price stability? With
the same amount of money that you have
today is no longer the same 10 years ago
because of inflation. Meaning to say, you
will be able to buy fewer goods or services
with your money today than 5 years or 10
years ago.
What is PRICE STABILITY?
- price stability when the general price level of
goods and services moves at a low and
predictable rate thereby maintaining the
value of our Philippine Peso. When the
prices increase unpredictably, our money
will no longer buy the same quantity of
goods and services.
- refers to low and stable inflation
- preserves purchasing power
- If there is a continuous increase in the
prices of goods and services, then we tend
to become poorer. We will not be able to
buy the same quantity of goods or services
with the same amount of money that we
have today and 5 or 10 years ago.
- It is the responsibility of the BSP through
the conduct of monetary policy to ensure
that prices are stable.
HOW ARE PRICES MEASURED?
Consumer Price Index
- Represents the average price of a standard
basket of goods and services consumed by
a typical Filipino family for a given period.
- When we talk about the expenses, what do
we consume every month? Those are food
and rent, we avail the services of the
transportation (we commute), education is
part of the basket, electric and water bills.
These are the things that we consider when
we compute for the consumer price index
and those are included in the standard
basket of goods and services we consume.
Inflation Rate
- Annual percentage change in consumer
price index
Inflation
- Sustained/continuous increase in the
average prices of goods and services
typically purchased by consumers
- We say ‘continuous” because the increase
must be sustained. It’s not only for a day or
a week, but it’s continuous.
HOW THE CONSUMER PRICE INDEX IS
CALCULATED
- It’s the responsibility of the PSA (Philippines
Statistics Authority) to compute for the
Consumer Price Index. It was used to be
NSO (National Statistics Office) but now the
agency is called the PSA.
5 Steps That PSA Follows in Computing CPI:
1. Fix the basket
- prices that are most important to the typical
Filipino family are determined. If more
hotdogs are bought than hamburgers, then
the price of hotdogs is more important than
the price of hamburgers.
2. Fix the price
- find the prices of each of the goods and
services in the basket at each point in time.
3. Compute the basket’s cost
4. Choose a base year and compute the index
CONSUMER PRICE INDEX FORMULA
Price of basket goods & services in current year
x 100
Price of basket in base year
CPI =
INFLATION RATE FORMULA
CPI in year 2 – CPI in year 1
x 100
CPI in year 1
Inflation Rate =

CALCULATING CONSUMER PRICE INDEX AND
INFLATION RATE: AN EXAMPLE
- This table shows how to calculate the CPI
and Inflation Rate for a hypothetical
economy in which consumers buy only
hotdogs and hamburgers.
PRICE LEVEL vs INFLATION
YEAR 1 YEAR 2
Price Level P100 P110
Increase in prices P10
Inflation (rate of increases in prices) 10.0%
There is a 10% increase in year 2. In year 3 it’s
already 120 pesos so the difference is 10 pesos.
But it doesn’t mean that 10% also is the increase.
So how did we compute the 9.1%?
**120-110/110 x 100**
The inflation rate here is lower. You will notice that
the increase in prices is the same, which is 10
pesos. But it doesn’t mean that 10% is the inflation
rate. From 100 pesos to 110 pesos, the inflation
rate in Year 2 is 10%. But from 110 pesos to 120
pesos, the inflation rate in Year 3 is 9.1% so there
is a decrease.
- Prices increased but inflation slowed down
- But consumers will usually fixate on the rise
in prices rather than on the slowdown in
inflation.
HOW ARE PRICES DETERMINED?
- Prices are determined by the interaction of
Supply and Demand
- When Demand falls and supply rises, price
falls
- When Demand rises, Supply falls, price
rises
- In determining the price, why price will
increase and decrease, we have to know
the different factors that affect the demand
and supply.
- The only factor that affects quantity
YEAR 3
demanded is the price of the goods itself.
P120
P10 Ex: the price of gasoline per liter will
9.1% increase. The quantity that buyers will
purchase will going to decrease during a
given period of time at a particular price.
- With the same amount of money, holding all
things the same (Ceteris paribus), you can
no longer buy the same quantity of gasoline
per liter with the same amount of money
now that prices increase
- If income will increase, demand for some
goods will increase but not the demand for
all goods. Normal goods vs Inferior goods
- But there are several factors that affects
demand.
 - Quantity demanded is the amount of
goods and services that buyers are willing
and able to buy at a particular price during a
period of time
- Demand is the willingness and the ability of
buyers to purchase goods or services at a
particular price during a period of time
WHY IS IT IMPORTANT TO KEEP INFLATION
LOW AND STABLE?
- price stability is felt if inflation is low and
stable. Keeping inflation low and stable is
the primary goal of the BSP. This promotes
economic efficiency thereby improving the
well-being of the Filipino people. There are
a number of benefits of price stability
deducted with expenses. That will be
your basis on how much you will be
spending for the month. At low
prices savings and investments are
encourages
 Greater productive activities are promoted
 Job opportunities are increased
 Purchasing power specially of the poor is
preserved
Price stability enables consumers and firms to
effectively decide on economic and financial
matters. If inflation is not kept at a minimum, there
will be a tremendous increase in prices of goods
and services. We become poorer and poorer as our
money will not allow us to buy enough goods and
services. 

Preventing erratic changes in the inflation rate has HOW DOES THE BSP KEEP INFLATION LOW
several benefits: AND STABLE?
 It enables households and firms to make - It is the BSP’s task to ensure that Money
better and informed decisions on Supply is neither too much nor too little.
consumption, investment, savings and
production Too Much Money Too Little Money
Higher inflation Deflation
 When prices are stable, manufacturers are
Increased Demand for Reduced Demand for
protected against the increase in the prices Goods & Services Goods & Services
of raw materials. manufacturers can Productive and
therefore price their products at a Prices are Pushed
Economic Activities are
Upward
competitive price or at a price cheaper than Reduced
competitors. When people save more, more
funds are available for loans and greater - If there is too much money, inflation will
productive activities are promoted which will tend to increase
result to more job opportunities. This in turn - If there is too little money, there will be
will allow more Filipinos to get employed deflation
allowing them to have money to buy and - Inflation is not bad at all if production will
increase
satisfy their needs and wants. 
- One of the reasons why that price will
 Price stability preserves the value of our
increase because there are too few goods
money. If the value of our money is available while there is too much money in
preserved, we can buy the same amount of circulation.
goods and services with the same amount - Money has a price or cost as expressed in
of money. the interest rate.

 Price stability is important in order to keep

With managed inflation,
 a higher level of savings and investments is the purchasing power of our peso stable.
encouraged Ideally, inflation must be kept at 2%. The
- Because when you are working, take higher the inflation rate the more dramatic is
home pay, is different from your its impact on prices.
gross pay. What is left is your take  Recipients of fixed income like
home pay after your gross pay is salaries/wages, pensions and social
 benefits (PPPP) are the groups particularly
hard hit by inflation as often because these
forms of income do not go up for a while
despite inflation.
 The outcome of this is that because of rising
prices, people can afford to buy less and
less for their money. High inflation hurt
savers too. Their investments progressively
lose buying power. For example, money
saved in several years for retirement might
not be enough to live on.  People of flexible income are those which
 There are inflation losers and inflation
gainers. Those people with fixed incomes
are losers during inflationary situation.
Among the fixed income earners are the
retirees who are living on pensions because
unless some adjustments are provided
during times of inflation, they will surely
suffer from inflation. It is only during the
presidency of Rodrigo Duterte that benefits
from SSS have increased by P2000.00.
 Also, fixed salaried employees such as
government employees, teachers, industrial
workers, etc. are also inflation losers. In
Silliman University for example, teachers do
not receive salary increase unless the
members of the Silliman University Faculty
Association (SUFA) demand for salary
increase.
 It is a fact that the CBA (Collective
Bargaining Agreement) of 2018 has not yet
been settled. It is a sad fact that members
of SUFA have no salary increase since
2018. Another group that suffered during
inflation are the creditors or savers. They
lose during inflation because they will
receive less-valued fixed amount of interest
and principal. For example, if you lent
P10,000 to a friend in December 2019
payable in December 2020, the 10,000 you
would get in 2020 could have allowed you to
purchase P9,000 worth of goods and
services in earlier years. Your borrower
actually realized a profit from the transaction
because in 2019 he was able to buy more
goods and services from the money he
borrowed than what you could have bought
with the amount he paid back to you a year
after. If he paid you only 6% interest, your
income was not even big enough to cover
the more than 10% increase in prices. 
 Inflation gainers include speculators, people
of flexible income, and debtors. Speculators
consist of luck or skilled individuals who are
able to buy the goods that enjoy the
sharpest price increases. Among these
goods are land, house, gold, jewelry, etc.
are able to increase their income faster than
the inflation rate. Usually, people in this
group have a monopoly situation or have
market power that enables them to "get
away" with increasing their prices faster
than the average. These usually are the
entrepreneurs, property owners, managers,
etc. The debtors or borrowers gain during
inflation because they need to pay off their
loans and interest in less-valued money.
The longer the term of the loan, the higher
the gain. That is why those who built houses
10 years or more ago gained considerably
because their housing loans were charged
very low interest than today.
Two types of inflation
1. Demand-Pull Inflation - Inflation is said to
be of Demand-Pull variety when buyers of
goods and services (households, firms,
government, and foreigners) desire to
purchase quantities of output greater than
what our economy can produce. In
economics, this is called a state of excess
aggregate demand.
2. Cost-Push Inflation - the continued
increase in some costs of production (labor,
raw materials, profits). An increase in any of
these factors of production would cause an
increase in prices of goods and services
and a reduction in output and employment.
This ability of certain factors of production to
increase prices can be attributed to
monopolistic powers of firms (profits),
 external suppliers (raw materials) and checks. That includes your notes and coins,
unions (wages). and traveler’s check
 M2 or Broad Money – consists of M1 +
peso savings deposits and time or term
BSP is able to address demand-pull inflation thru
deposits
Monetary Policy (will be discussed later) but it
 M3 or Broad Money Liabilities – consists
cannot solve cost-push inflation which needs non-
of M2 + peso deposit substitutes such as
monetary measures such as lowering down prices
promissory notes, commercial papers and
of raw materials and bringing down the cost of
government securities.
business.
 M4 or Near Money –consists of M3 +
Deflation is also harmful to the economy. Although transferable and other deposits in foreign
people can buy more when prices fall on the currency.
average, a general decline in prices also has a
negative effect. POSSIBILE EFFECTS OF CHANGES IN MONEY
- It means that businesses make less profit or SUPPLY
maybe incur a loss. Some will even lay-off
employees. The people who have lost their
jobs can no longer afford to buy as much as
before and downward pressure on prices
continues to build up.
- Furthermore, people delay buying decisions
or postpone their purchases because they
are hoping that prices will drop even further
(meaning decrease in sales).
- This create a dangerous downward spiral of
profits and investments, tax revenues fall,
the debt burden increases, the government
spends more on social benefits and less
capital is invested.
-
Price stability is also important for companies' DEFINITION OF TERMS
planning as it allows them to identify price  Market Interest Rate – is the prevailing
fluctuations of individual goods. They can more interest rate offered on cash deposits that is
precisely assess supply and demand and set driven by factors such as BSP interest
production and investment accordingly. rates, the duration of the deposits, and the
size of the deposits.
 Real Interest Rate – is the rate of interest an
HOW DOES BSP KEEP INFLATION LOW AND investor, saver or lender receives after
STABLE? allowing for inflation adjustment or nominal
- The BSP maintains stable prices by interest rate minus inflation rate.
influencing the cost or volume of money
Real Interest Rate = Nominal Interest Rate – Inflation Rate
circulating in the economy (Money Supply).

Money Supply consists of:  Nominal Interest Rate – is the interest rate
 M1 or Narrow Money – consists of before taking inflation into account.
currency in circulation (or currency outside
Nominal Interest Rate – Interest Rate + Inflation Rate
depository corporations), peso demand
deposits or checkable deposits, traveler’s