INFLATION RATE

In Partial Fulfillment of the Requirements

in Economics 1- Principles of Economic
with Taxation and Agrarian Reform

Presented to:

ERNIE LEX D. DE LA SALDE, LFT, DPA, FRIEdr

Presented by:

ERIKA JING CAMPAÑA

RONNEL P. CARREON
WILKY V. CAMPOMANES

October 2019
Rationale

Currently, one of the economic problem today in the Philippines is the Inflation
Rate. This is the realities that each and everyone has to face is the ever changing
value of currency and the price of consumer goods. When we say Inflation it is a
sustained increase in the general price level of goods and services in an economy
over a period of time. 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 occurs due to an imbalance between demand
and supply of money, changes in production and distribution cost or increase in taxes
on products. When economy experiences inflation, for instance when the price level
of goods and services rises, the value of currency reduces. This means now each
unit of currency buys fewer goods and services. It has its worst impact on
consumers. High prices of day-to-day goods make it difficult for consumers to afford
even the basic commodities in life. This leaves them with no choice but to ask for
higher incomes. Hence the government tries to keep inflation under control.
Accordingly, Thornton (1998) found that monetary authorities seeking to target
inflation face the complication that some changes in prices are permanent and others
are transitory. So then, Plecher (2019) Global economy has suffered immensely
since the global financial crisis in 2008 and that the caused global inflation to
increase. The global regions with the highest year-on-year inflation rate in 2014 are
the Middle East and North Africa, as well as Africa Sub- Sahara. As a result of a
global economic downturn, the lack of a sufficient central bank, and the rise in
interest rates, the cost of living in the Middle East has also become much higher than
the industrialized countries. Due to economical progress following the global financial
crisis, developed countries in the European Union and the euro area set forth
economic strategies to strengthen their economy and maintain a stable economy. In
addition, stagnant worker wages and a hesitation from banks to easily distribute
loans to ordinary citizens have also caused the inflation rate in the euro zone to be
relatively low.
As reported by the National Economic and Development Authority (2019) Inflation
in June 2019 eased to its slowest pace in 22 months, but we still need to caution
against upside risks, including weather-related shocks and uncertainties in the global
oil market. Slower inflation comes with the optimism that the quality of life will
improve along with the economy’s robust growth. In the Philippines, the volatility of
inflation has been caused by factors such as disturbances in agricultural food supply
or movements in international oil prices. In addition, they are at the mercy of global
oil price movements determined largely by supply and demand Punongbayan (2018).
Next, the factor that contributes to runaway inflation is the weakening peso. Because
we pay imports in foreign currencies, a weaker peso necessarily makes imports
costlier. As such, oil becomes costlier too, as well as all the other goods and services
in the economy that rely on it.
Additionally, Philippine Statistic Authority Region XI (2018) the Davao Region’s
inflation rate further accelerated to 7.1 percent in August 2018 which remained higher
than the national inflation rate at 6.4 percent. Philippine Statistic Authority said that
the cause of the higher in inflation rate in Davao Region was due to the increase in
the indices of almost all commodity groups. The agency also reported that the
inflation rates in all provinces of Davao Region increased.
Furthermore, Frey and Stutzer (2002) integrate insights and findings from
psychology, where attempts to measure quality of life are well-documented, as well
as from sociology and political science. They demonstrate how micro- and macro-
economic conditions in the form of income, unemployment, and inflation affect
happiness. The research is centered on Switzerland, whose varying degrees of direct
democracy from one to another, all within a single economy, allow for political effects
to be isolated from economic effects. An increase in the general price level, inflation
is disliked by the population. But a lot depends on what kind of inflation takes place.
When the price increase is anticipated, individuals can adjust to it. They can make
contracts that take into account that prices will be higher in the future. In particular,
they will ask for a wage increase in the future in order to compensate for the loss in
purchasing power of money. In contrast, if inflation is not anticipated or comes as a
shock, such adjustment is not possible. Wage earners, as well as owners of nominal.

Literature Review

This portion of paper of paper presents the review of literature and studies
that have bearing on this investigation. Review of literature revolves around the study
about Inflation in the Philippines. Also, related studies are presented herein.

Impact of Inflation in Economic Growth

Much of economic literature in identified investment as the main channel
through which inflation impedes economic growth Fischer, (1993). Inflation reduces
growth by reducing investment and productivity growth; budget deficits also reduce
both capital accumulation and productivity growth. Examination of exceptional cases
shows that while low inflation and small deficits are not necessary for high growth
even over long periods, high inflation is not consistent with sustained growth. More
attention has been taken to deal with the effects of inflation on economic growth. This
is because price stability is considered as the key variable to promote economic
growth as well as sustainable development. The major objective for many central
banks is to maintain price stability with high growth rates. As money loses its value
people lose confidence in it as a medium of exchange. The resulting effect is a fall in
savings and consequently lower investment as well as economic growth.
Inflation Rate

Inflation expectations matter because they change how people behave. This
mentality applies to inflation as well. If people expect inflation to rise in the coming
months, not only will consumers hoard basic goods, but workers will also lobby for
higher wages, and firms will also revise their menus or price lists to safeguard their
profits. One of the key features of inflation targeting is greater transparency, which
means greater disclosure and communication by the BSP of its policy actions and
decisions. This Inflation Report is published by the BSP as part of its transparency
mechanisms under inflation targeting Bangko Sentral ng Pilipinas, (2008).
In addition, Lopez, (2014) the general perception about inflation is that it is
damaging to the economy. Although the effect of inflation is far more damaging than
its benefits, we have to look at the long-term benefits as well. The course of inflation
phenomenon gives rise to other economic occurrences like currency exchange rates,
local stock movements, national income accounts and the like.
Likewise, Mangahas (2014) the most important empirical determinant of both
poverty and hunger is inflation in the cost of living.  Even short-term spikes in inflation
are extremely painful for the poor. Inflation facing the poor is worse. The government
keeps a different index specifically for consumer prices facing the bottom 30 percent
of households in terms of income. Inflation in consumer prices, without compensating
inflation in their incomes, is what keeps the poor from sharing in the benefits of
economic growth.
Methods to Control Inflation
At first, Monetary Policy is one of the method to control the inflation. In a
period of rapid economic growth, demand in the economy could be growing faster
than its capacity to meet it. This leads to inflationary pressures as firms respond to
shortages by putting up the price. We can term this demand-pull inflation. Therefore,
reducing the growth of aggregate demand (AD) should reduce inflationary pressures.
At the same time, Fiscal Policy is also the method to control inflation. The
government can increase taxes (such as income tax and VAT) and cut spending.
This improves the budget situation and helps to reduce demand in the economy. If a
country had high inflation and negative growth, then reducing aggregate demand
would be more unpalatable as reducing inflation would lead to lower output and
higher unemployment. They could still reduce inflation, but, it would be much more
damaging to the economy.
The BSP controls inflation through its conduct of monetary policy which is
done primarily by moving its policy interest rate. Adjustments in the interest rate for
the BSP’s overnight reverse repurchase (RRP) facility, the primary monetary policy
instrument, typically leads to corresponding movements in market interest rates, thus
affecting the demand by households and firms for goods and services. This, together
with the aggregate supply of goods and services, determines the level of prices.
Theoretical Lens

In fact, Gordon (1975) economic research on the causes of inflation has been
primarily devoted to the theoretical and empirical study of the links between
government policy variables and the rate of inflation. While debate continues on the
process of short-run adjustment most economists are prepared to agree that in the
long run “inflation is always and everywhere a monetary phenomenon.” Abundant
empirical evidence has confirmed that the major historical accelerations and
decelerations of inflation-not only during wars and hyperinflations but also during
peacetime-have been accompanied by accelerations and decelerations in the rate of
growth of the supply of money. But confirmation of the connection between money
and prices is only the first and easiest step in the development of a full theory of the
causes of inflation, because it leaves completely unexplained the sources of changes
in money. The central task of a comprehensive theory of inflation is the identification
of the sources of differences in the rate of inflation and hence of monetary growth
across time in particular countries, and across countries at a given time.

Government Intervention and Alternatives

The National Economic and Development Authority (NEDA) is the country's
premier social and economic development planning and policy coordinating body
primarily responsible for formulating continuing, coordinated and fully integrated
social and economic policies, plans and programs.
An act creating the Mindanao Development Authority (Minda), defining its
powers and functions, providing funds therefor and for other purposes. Declaration of
Policy. It is hereby declared a policy of the State to accelerate the socioeconomic
growth of Mindanao, increasing its trade, tourism and investments, encouraging
private enterprise and advancing efforts towards peace and development. Towards
this end, an effective institutional mechanism shall be established to address the
need for a coordinated and integrated approach in the formulation and
implementation of various Mindanao-wide inter-regional development plans,
programs and projects.
The Bangko Sentral ng Pilipinas (BSP) main responsibility is to formulate and
implement policy in the areas of money, banking and credit, with the primary
objective of maintaining stable prices conducive to a balanced and sustainable
economic growth in the Philippines. The BSP also aims to promote and preserve
monetary stability and the convertibility of the national currency.  The BSP controls
inflation through its conduct of monetary policy which is done primarily by moving its
policy interest rate.
The National Economic and Development Authority expects the Rice
Liberalization Act to further bring down the price of rice as inflation slows down to its
lowest rate in 35 months. The Rice Liberalization Act (RLA) continues to help
increase rice supply in the country. This allows more Filipinos to access cheaper rice.
This is especially helpful since a large number of families spends almost 30 percent
of their total food expenditure on rice.
Recommendation
This studies discussed Inflation Rate in the Philippines, its effect to the
economy and how the country handle it over time. The studies looks into the
macroeconomic issues that affects economics. According to Section 3 of Republic
Act 7653 or the New Central Bank Act, signed in 1993, stated that the BSP’s
primarily objective is “to maintain price stability conducive to a balanced and
sustainable growth of the economy. It shall also promote and maintain monetary
stability and the convertibility of the peso. The BSP operates as an independent and
accountable body that enjoys fiscal and administrative autonomy, despite being the
government corporation. Nonetheless, its function and privileges are established and
protect by law. Only the Bangko Sentral ng Pilipinas has the control and maintain the
price stability.
But as a Filipino we also have the ability to manage this problem. The best
way to combat it is to prepare for it. One of the things consumers can do to inflation-
proof their life is invest. Invest in assets that grow in value over time, such as stocks
or real estate. And invest in yourself. Always strive to learn new and in-demand skills.
Nothing is more powerful than boosting your earning power. For businesses, it’s
advisable to raise selling prices in small amounts rather than one big jump. Some of
your competitors would probably do the latter, that gives you an edge to win more
customers. Make sure you have cash reserves to help you with surging costs. With
the onslaught of inflation, costs often rise faster than you can increase your selling
price. You can also try to renegotiate contracts with suppliers who may be willing to
give you discounts for pre or bulk orders. Finally, mind your margins and focus on
earning profits from the get-go, not just during tough times.
We all know that government’s ultimate goal is to maintain a strong and
sustainable economy but there are so many factor to consider in making it work right.
Economic is a complicated matter but is very important. The government is there to
look after its people and one of their goal is to provide everyone a better/higher
standard of living.
V. Referencing

Bangko Sentral ng Pilipinas, (2008). Core Inflation-BSP 2008 Retrieved from

http://www.bsp.gov.ph/downloads/Publication/FAQs/inflation

Frey, B., & Stutzer, A. (2002). Happiness and Economics: How the Economy and
Institutions Affect Human Well-Being. PRINCETON; OXFORD: Princeton
University Press. Retrieved from http://www.jstor.org/stable/j.ctt7rm1k

Fischer, 1993. “The Role of Macroeconomic Factors in Growth.” NBER, 1 Dec. 1993,
Retrieved from http://www.nber.org/papers/w4565.

Gordon, R. (1975). The Demand for and Supply of Inflation. The Journal of Law &
Economics, 18(3), 807-836. Retrieved from
http://www.jstor.org/stable/725066

Lopez, E. (2014) Economics of Inflation. (2014, October 9). Retrieved from

http://www.manilatimes.net/2014/10/09/business/columnists-
business/economics-inflation/133170/133170/.

Mahar Mangahas, 2014 Inflation, enemy of the poor.

https://opinion.inquirer.net/77308/inflation-enemy-of-poverty

National Economic and Development Authority (NEDA) on June 2019 Inflation.

(2019).
Retrieved from http://www.neda.gov.ph/atatement-of-the-national-economic-
and-development-authority-on-june-2019-inflation/.

Plecher, H. (2019) World Inflation Rate from 2014 to 2014. Retrieved from
https://www.statista.com/statista/256598/glabal-inflation-rate-compared-to-
previous-year/

Philippine Statistics Authority Region XI-Davao Region. August 2018 Inflation is 7.1%
in Davao Region (2018). Retrieved from
http://rsso11.psa.gov.ph/article/august-2018-inflation-71-davao-region.

Punongbayan, JC. (2018) [ANALYSIS] Why is Philippine inflation now the highest in
ASEAN? Retrieved from https://www.rappler.com/thought-leaders/211285-
analysis-reasons-philippine-inflation-now-highest-asean

Thornton, J. (1998). Does core inflation help forecast total inflation? Evidence
from
Colombia. Cuadernos De Economía, 35(106), 407-413. Retrieved from
http://www.jstor.org/stable/41951329