Inflation

The Philippines' annual inflation rate rose to 5.7 percent in July of 2018 from 5.2
percent in the previous month, above market estimates of 5.5 percent. It is the highest
reading since March 2009, as cost increased at a faster pace for housing and transport
while food inflation stayed at nearly 4-year high. On a monthly basis, consumer prices
went up 0.5 percent, after a 0.6 percent rise in June. Inflation Rate in Philippines
averaged 8.41 percent from 1958 until 2018, reaching an all time high of 62.80 percent
in September of 1984 and a record low of -2.10 percent in January of 1959.

Prices

Year-on-year, prices of heavily-weighted food and non-alcoholic beverages

increased by 7.1 percent year-on-year, following a 6.1 percent in May. It is the highest
food inflation since August 2014. In addition, cost rose at a faster rate for: alcoholic
beverages and tobacco (21.5 percent from 20.8 percent in June); clothing and footwear
(2.4 percent from 2.2 percent); housing, water, electricity, gas and other fuels (5.6
percent from 4.6 percent); furnishing, household equipment and routine maintenance
(3.3 percent from 3 percent); health (3.7 percent from 2.7 percent); transport (7.9
percent from 7.1 percent); communication (0.5 percent from 0.4 percent) and restaurant
and miscellaneous goods and services (3.7 percent from 3.6 percent). Meantime,
inflation slowed for: recreation and culture (0.9 percent from 1.4 percent) and cost
declined for education (-3.9 percent from 4 percent).

On a monthly basis, consumer prices went up 0.5 percent, after a 0.6 percent
rise in June. Prices increased for: food and non-alcoholic beverages (0.9 percent);
alcoholic beverages & tobacco (1.1 percent); clothing and footwear (0.34 percent);
housing, water, electricity, gas and other fuels (0.9 percent); furnishing, household
equipment and routine maintenance of the house (0.6 percent); health (1.2 percent);
transport (0.7 percent); communication (0.1 percent); recreation and culture (0.3
percent); and restaurants and miscellaneous goods and services (0.35 percent). On the
other hand, cost slumped for education (-7.3 percent).

In March 2018, Philippine Statistics Authority decided to rebase CPI series to

2012 from 2006 in order to accommodate the economic changes in the country. For
2018, the central bank set an inflation target range of between 2 to 4 percent.
Meaning of Inflation

In economics, inflation is a sustained increase in the price level of goods and

services in an economy over a period of time. When the price level rises, each unit of
currency buys fewer goods and services; consequently, inflation reflects a reduction in
the purchasing power per unit of money – a loss of real value in the medium of
exchange and unit of account within the economy. Inflation means an increase in the
cost of living as the price of goods and services rise. Inflation leads to a decline in the
value of money. It means that your money won’t buy as much today as you
could yesterday.

Inflation affects economies in various positive and negative ways. The negative
effects of inflation include an increase in the opportunity cost of holding money,
uncertainty over future inflation which may discourage investment and savings, and if
inflation were rapid enough, shortages of goods as consumers begin hoarding out of
concern that prices will increase in the future. Positive effects include reducing
unemployment due to nominal wage rigidity.

Hyper inflation is generally considered to occur when inflation is greater than

1000%. With hyperinflation, money loses its value so rapidly that nobody wants to use it
as a medium of exchange. And depletion occur when there is a fall in the price level of
the economy, it means there will be a negative inflation rate.

Undesirability of Inflation

A moderate inflation is very good for investment prospect and often seems
during prosperous period. But high inflation is not desirable as supply of goods fell short
of supply of money. It happens during the period when government revenue fell short of
government expenditure, export is less than imports and foreign debt is high. Country
relies more on deficit finance, internal and international borrowing. The situation is
associated with high unemployment, low spending power, tight money policy, shortages
of investment liquidity etc.

Inflation is undesirable for many reasons. Inflation negates the economic objective of
improving the quality of life of people:

 People who have fixed incomes are severely affected during inflation. With
increased prices, people who belong to this group would lose out because the
income they receive now would be able to buy less than before. Thus, their
economic welfare is diminished.
  Because of increased prices, benefits of pensioners from the SSS or the GSIS
would result in a net loss to the pensioners. Unless, the benefits received by the
pensioners are adjusted to the inflation rate, the pensioners would suffer a net
loss.

 Creditors also lose out during inflation because the fixed amount of principal and
interest they lent out would now be valued less.

 Much of the reason why the economic welfare of people deteriorates during
inflation is the depreciation in the purchasing power of the peso. If the purchasing
power of the peso depreciates, people would be able to buy less.

With inflation, things are technically becoming more pricey, hence people will naturally
not be so inclined to purchase goods and services, thus could lead to decreased
spending, and this is not good to the economy.

If inflation is not controlled, then people pull their money out of economy driving
investments and into non-economy driving investments such as gold. If you invested in
a company with a 10% return and inflation was 12%. You would rather pull your money
out and purchase gold, which theoretically will always retain its "true" value, but this
does nothing for the economy.

Inflation Gainers

Just as there are losers in an inflationary situation, there are also gainers. Among
the gainers during inflation are the following:
1. People who have flexible incomes. For example, businessmen would gain more
if prices of commodities they produce and sell go up. So long as there is a
demand for their product, their products would be sold at higher prices and their
income would obviously register a bigger gain.

2. The Speculators. These are the perceptive and lucky individuals who are able to
buy goods at cheaper prices and then sell them later at higher prices because of
inflation. Among the goods that are traded in this category would be groceries,
appliances, land, jewelry and etc.

3. The Debtors. Unless there is an automatic adjustment for inflation, debtors

usually gain because the value of the money they borrowed before would now
have more value.
 Types of Inflation

There are two main types of inflation: demand pull and cost push. Fueled by income
and strong consumer demand, demand-pull inflation occurs when the economy
demands more goods and services than are available. Cost-push inflation happens
when the demand for goods increases because production costs rise to the point where
fewer goods can be produced. Both drive prices upward.

Demand-Pull Inflation

Demand-pull inflation is asserted to arise when aggregate demand in an

economy outpaces aggregate supply. It involves inflation rising as real gross domestic
product rises and unemployment falls, as the economy moves along the Phillips
curve. This is commonly described as "too much money chasing too few goods. More
accurately, it should be described as involving "too much money spent chasing too few
goods," since only money that is spent on goods and services can cause inflation. This
would not be expected to happen, unless the economy is already at a full
employment level.

Demand –pull inflation occurs under many different circumstances. Primarily, this
has to do with money. Without an increase in the supply of money, no major inflation
can last very long. Excessive supply of money in the circular flow would invariably lead
to upward movement of prices.

Cost-Push Inflation

Cost push inflation is inflation caused by an increase in prices of inputs like labor,
raw material, etc. The increased price of the factors of production leads to a decreased
supply of these goods. While the demand remains constant, the prices of commodities
increase causing a rise in the overall price level. In this case, the overall price level
increases due to higher costs of production which reflects in terms of increased prices
of goods and commodities which majorly use these inputs. This is inflation triggered
from supply side i.e. because of less supply. The opposite effect of this is called
demand pull inflation where higher demand triggers inflation.

Apart from rise in prices of inputs, there could be other factors leading to supply
side inflation such as natural disasters or depletion of natural resources, monopoly,
government regulation or taxation, change in exchange rates, etc. Generally, cost push
inflation may occur in case of an inelastic demand curve where the demand cannot be
easily adjusted according to rising prices.
The Quantity Theory of Money

The quantity theory of money argues that the size of the money supply influences
the price of goods. This is the theory that traces the increase in prices to money supply.
The quantity theory of money (QTM) states that the general price level of goods and
services is directly proportional to the amount of money in circulation, or money supply.

The quantity theory of money (sometimes called QTM) says that prices rise when there
is more money in an economy and they fall when there is less money in an economy.
The following formula expresses the theory: M V = PQ

Where M = the money supply

V = the velocity of money
P = average prices
Q = physical volume of goods & services produced

The quantity theory of money revolves around the basic idea that the
more money people have, the more they spend, and when more people are competing
for the same goods and services, they essentially bid the prices up for those things.
This is the core of monetary theory. Accordingly, when employment rates increase or
the government cuts tax rates, people suddenly have more money to spend. This, when
not done in moderation, can create runaway inflation.

The Phillips Curve

An important starting point in the analysis of inflation is the empirical relationship

between unemployment and inflation called the Phillips curve. The Phillips curve is a
single-equation econometric model, named after William Phillips, describing a historical
inverse relationship between rates of unemployment and corresponding rates of rises in
wages that result within an economy. Stated simply, decreased unemployment, (i.e.,
increased levels of employment) in an economy will correlate with higher rates of wage
rises.

The theory states that the higher the rate of inflation, the lower the
unemployment and vice-versa. Thus, high levels of employment can be achieved only
at high levels of inflation. The policies to induce growth in an economy, increase in
employment and sustained development are heavily dependent on the findings of the
Phillips curve.

However, the implications of Phillips curve have been found to be true only in the
short term. Phillips curve fails to justify the situations of stagflation, when both inflation
and unemployment are alarmingly high.
Measurement of Price Increases

There are 4 commonly used measures of price increases:

 Consumer Price Index (CPI) - intended to provide a general measure of average
monthly and annual changes in the retail prices of commodities commonly bought
by consumers in the Philippines, covering all income households. This is the most
popular and the most used measures as it reflects what happens to the living
standards of most of us, the consumers.
 Retail Price Index (RPI) - designed to measure monthly changes of the prices at
which retailers dispose of their goods to consumers and end-users. The term
‘retail price’ refers to the price at which sellers accept orders for spot or earliest
delivery usually in small quantities. They are transactions on cash basis in the
open market.
 Wholesale Price Index (WPI) – measures monthly changes in the general price
level of commodities that flow into wholesale trade intermediaries. This is based
on the wholesale price of a few relevant commodities of over 240 commodities
available. The commodities chosen for the calculation are based on their
importance in the region and the point of time the WPI is employed.
 Stock Price Index (SPI) – serve as a measure of the changes in, and to trace the
movement of the average prices of company shares of stocks traded. It is
computed from the prices of selected stocks (typically a weighted average). It is a
tool used by investors and financial managers to describe the market, and to
compare the return on specific investments.

Meaning of the Index

Index Numbers compare figures which show changes in a given variable. The
most common variables used in index numbers are price and quantity. Among the more
commonly used index numbers are the consumer price index, retail price index,
wholesale price index and the cost-of-living index.
An index number is a statistical measure designed to show changes in a variable
or group of related variables (price, quantity, value), with respect to time, geographic
location, or other characteristics such as income, profession, and the like.

Measures to Curb Inflation

Inflation is considered to be a complex situation for an economy. If inflation goes

beyond a moderate rate, it can create disastrous situations for an economy; therefore is
should be under control.

The main aim of every measure is to reduce the inflow of cash in the economy or
reduce the liquidity in the market.
The different measures used for controlling inflation are:

 Monetary Measures- Monetary policy is one of the most commonly used

measures taken by the government to control inflation. In monetary policy,
the central bank increases rate of interest on borrowings for commercial
banks. As a result, commercial banks increase their rate of interests on
credit for the public. In such a situation, individuals prefer to save money
instead of investing in new ventures. This would reduce money supply in
the market, which, in turn, controls inflation. Apart from this, the central
bank reduces the credit creation capacity of commercial banks to control
inflation.

 Fiscal Measures - The two main components of fiscal policy are

government revenue and government expenditure. In fiscal policy, the
government controls inflation either by reducing private spending or by
decreasing government expenditure, or by using both. It reduces private
spending by increasing taxes on private businesses. When private
spending is more, the government reduces its expenditure to control
inflation. However, in present scenario, reducing government expenditure
is not possible because there may be certain on-going projects for social
welfare that cannot be postponed.

 Price Control - Another method for ceasing inflation is preventing any

further rise in the prices of goods and services. In this method, inflation is
suppressed by price control, but cannot be controlled for the long term. In
such a case, the basic inflationary pressure in the economy is not
exhibited in the form of rise in prices for a short time. Such inflation is
termed as suppressed inflation. The historical evidences have shown that
price control alone cannot control inflation, but only reduces the extent of
inflation.