This paper explores the use of a modified Tornqvist index using a geometric mean formula for the Philippine consumer price index (CPI). Using 2000 as base year, preliminary estimates seem to indicate that there is a bias in the current official CPI
measure compared to a geometric CPI, and that this bias tends to be positive. This finding suggests that the CPI measure based on a Laspeyres formula may tend to overstate “true” inflation.
The paper argues that the estimated upward bias in the CPI has a direct
implication on the BSP’s conduct of monetary policy. Moreover, such upward bias may deepen over time and be affected by the business cycle. This may lead to overestimation of domestic price conditions. Along with a set of forward-looking indicators, the BSP
may have to take this finding into account in the conduct of monetary policy.
