DIMENSION OF INFLATION

Lesson 20|pp. 200-210

What is Inflation?

Hyperinflation

Continuing increase in the general price level of commodities.

Problem

Price is continuously increasing- every HOUR, DAY, WEEK.

[CanNOT_be_controlled]

CAUSES OF INFLATION

1. Cost-push

High Prices

Wage Increase

Inflation

<Production Side

Takes place in the

“Oftentimes, it is said that inflation is brought by unions, yet, how true is this, still inflation is the reason for the emergence of uinions.”

-Joan Robinson, Economist

Raw Materials

Commodities

Fees

2. Demand-pull

◦Sectors desire to buy products and services more than the available supply in the market.

◦Excessive money supply causes increase in demand.

Aggregate Demand

Aggregate Supply

“Excessive money supply causes the increase in demand of each sector”

-Milton Friedman, Economist

3. Structural Inflation

◦Every action and movement of each economic sector causes an increase in the price of commodities.

Ex. New Tax Reform

New Economic

Policy

Price Increase

Imbalance in Demand

& Supply

Price Increase

REASONS FOR INFLATION

Why does Inflation exist?

◦Belief as a sign of PROGRESS

◦A cause of POVERTY

◦Hoarding of commodities by monopolies.

◦Payment of foreign loans

◦DEVALUATION (decrease in value of peso compared to foreign currencies)

Inflation

Import Dependent

Foreign Debt

Export Oriented

Monopoly/ Cartel

inflAtion

1.Creditors1.Debtors

2. People without fixed income

2. People with fixed income

3. Individuals who save

[Benefits] [Hurts]

3. Speculators

PEOPLE WHO

From INFLATION.

BENEFITARE

HURT&

DebtorsBorrow money Lend money

Inflation Rate

Interest Rate

Creditors

HOW?*LOWER interest rates,

HIGHER inflation rates

WithOut fixed income

◦Monopolists

◦Entrepreneurs

◦Investors

◦Resource Owaners

◦Employees◦(janitors, nurses, teachers, etc.)

With fixed income

Their incomes increase.

Same income =Afford less products

Speculators◦Banks

◦Same interest rate, higher inflation = higher expenses, less savings.

Savers

Same income =Afford less products

Inflation Rate

Savings

◦“Risk-takers”◦Speculate- “Gamble”, “Risk”

◦E.g.

◦Hoarding products before inflation occurs.

MEASURING PRICE INCREASE

Measuring Price Increase

◦Market Basket of Goods◦Commodities commonly purchased by an average family.

EX. Rice, Milk, Cooking Oil, Bread, Eggs, Meat, Beverages, Tobacco

C

INSTRUMENTS IN MEASURING PRICE

INDEXES

Instruments in Measuring Price Indexes

◦Price Index ◦number that compares prices of present year to base year.

Instuments in Measuring Price Indexes1. Wholesale Price Indexes and Retail Price

Index1. Changes in price of finished products,

intermediate goods, and crude materials in wholesale and retail trading. 1. Wholesale-volume of goods2. Retail-individual goods

Instruments in Measuring Price Indexes2. GNP Deflator or GNP Implicit Price Index

Average price index used to adjust the current GNP against constant GNP.

Any changes in price in the computation of GNP.

GNP Delfator- to know the value of GNP based on the previous year.

GNP (constant prices)

Instruments in Measuring Price Indexes◦Consumer Price Index (CPI)

◦Average percentage in the change of retail prices of commodities usually purchased by consumers.

◦Describes present living conditions of consumers through price changes.

◦Commodities= products in the market basket of goods.

CPIConsumer Price Index

Importance of CPI

◦Cost of Living can be approximated◦Cost of Living- amount of money needed to purchase

basic commodities. ◦ Weight assigned in each item in the basket of goods by

household

◦Determine the Purchasing Power of Peso (PPP) or the equivalent value at base year 2000; prices of goods and services that a peso could buy at current prices.

◦Measure the real value of peso in a given period relative to a chosen preference period.

CPI

PPP

Purchasing Power of Peso◦PPP = or

◦To determine the real value of peso compared to a base year.

◦EX: Months CPI PPP

Jan 157.2 0.63

Feb 158.0 0.63

Mar 158.1 0.63

Apr 158.9 0.63

May 158.8 0.63

Jun 159.8 0.63

Jul 160.2 0.62

Aug 160.5 0.62

Computation for Inflation Rate

𝐶𝑃𝐼 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟−𝐶𝑃𝐼𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟𝐶𝑃𝐼𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟

×1000

155.0−141.8141.8

×100

ITEMS 2007 2008

Rice 40.00 44.00

Milk 58.00 60.00

Cooking Oil 45.00 59.00

Bread 35.00 60.00

Eggs 115.20 125.00

Meat 225.00 258.00

Beverages 120.00 150.00

Tobacco 80.00 120.00

Miscellaneous 558.00 519.00

TOTAL 1 276.20 1 395.00

CPI 141.8 155.0

13.2141.8

×100

𝐼 𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛𝑅𝑎𝑡𝑒𝑜𝑓 2008=9.3%

Computation of CPI◦ Average of the prices in the market basket of

goods

◦ 141.8 % of 2000 prices (2007)

ITEMS 2007 2008

Rice 40.00 44.00

Milk 58.00 60.00

Cooking Oil 45.00 59.00

Bread 35.00 60.00

Eggs 115.20 125.00

Meat 225.00 258.00

Beverages 120.00 150.00

Tobacco 80.00 120.00

Miscellaneous 558.00 519.00

TOTAL 1 276.20 1 395.00

CPI 141.8 155.0

Headline Inflation Rate

◦Headline Inflation- measure changes in the cost of living based on the movement in prices of a specified basket of major commodities.

◦Annual rate of change or the year to year change in the CPI.

Effects of Inflation◦Viewed as progress in an economy

◦Motivates businessmen to improve & increase production

◦Increase employment

High Prices

More Production

High Wages

More Workers

Ways to address inflation

◦GOVERNMENT◦Bangko Sentral ng Pilipinas- contrl of money supply

◦Implement tight money policy◦Setting high interest rates on bank loans

◦Reserve requirement (increasing its ratio)◦Percentage of deposit money kept by the banks as their reserve

◦Treasury bills (bond used as evidence of government loans to the public