How does consumer price index affect the value of your money?

First, let’s understand what is CPI.

CONSUMER PRICE INDEX (CPI) = The Indicator of the change in the average prices of a fixed basket of goods and services commonly purchased by households relative to a base year. The base year used in the Philippines for CPI computation changes from time to time, but is always set to 100.

Prior to the year 2006, the previous base year was 2000, what does this mean? Suppose in the year 2000 there was a shopping basket commonly purchase by household, this basket contains the following goods in terms of percentage (may have been updated already).

Whatever the cost of the total goods, they will set it to 100 as the base cost. In the next month, they will again pick the same household goods and see the price change. This process will continue month after month.

If you notice, they again reset the basket in the early year 2006 to 100, and by the end of the year, the basket now costs 101.3 relative to the base year 2006. By the year 2016, the basket cost 146.3, an increase of 46.3% from the base cost.

In May 2020, the CPI recorded is 122.3. You might wonder why did the CPI decrease from 146.3 last Dec 2016 to 122.3 last May 2020? The reason is that they again reset the CPI last 2012 to 100, so now the baseline is not 2006 but the year 2012.

So what is the effect of this CPI change on your money?

Suppose you put PHP100,000 last 2012 in a time deposit with an interest rate of 1.1%, by 2019 expectedly, that PHP100,000 will grow to PHP107,959, an increase of almost 8%, but then, the CPI from 2012 to 2019 increase from 100 to 121.9 (21.9%). 

Should we compute the real rate of return which is the effective return on an investment after adjusting for inflation, we would get negative 11.4%, meaning, though your money is already PHP107,959, an increase of 8% from the initial value, if you used that money and spend it last 2019, the real value of it is only around PHP88,597, which means, your money actually dropped by 11.4%. 

That’s only if you invest last 2012, but what if your investment was since the last year 2000, you cannot use the CPI based on the 2019 report as it was adjusted based on the 2012 baseline. That CPI in 2019 when based on the year 2000 would even increase more perhaps to nearly 200, which means, the increase of price goods would be way higher. 

As you can see, you should find an interest rate that bets the CPI increase which is the inflation rate and note that it is being reset from time to time.