by the MSU-IIT Economics Department
Inflation is the general increase in the level of prices of commodities over a period of time. Commodities are either goods or services. Can an increase in the price of one commodity in the market be called inflation? Definitely no! As the term “general”, as defined in the Merriam-Webster Dictionary, as “involving, applicable to, or affecting the whole” inflation means that prices of practically all commodities available in the market have increased but by different percentages, depending on the supply and demand situations faced by each commodity group.
Photo source: https://www.cbsnews.com/news/get-ready-inflation-could-hit-15/
Understanding inflation is an important concern of every individual. Inflation reduces the value of money, which means that as inflation rises the money you have today won’t buy the same amount of commodities as it did before. Inflation, therefore, reduces your purchasing power. As such, inflation affects badly all the fixed income earners and pensioners.
Lenders are also affected by inflation. If they lend Php100 with an interest rate of 10% annually but inflation soared to 6.4% the real interest rate is diminished by the inflation rate, or will yield only 3.6%. Time deposits expected to earn an annual interest rate of 4% will similarly face reduced earnings. The same inflation figure of 6.4% will result in a real interest rate of -2.4%. This defeats the purpose of placing your hard earned money time deposits as you are actually dissaving. As costs or production increases, the business sector will also experience difficulties. While the practice is to pass on the added costs to consumers, demand elasticities faced by various commodities temper such practice. [Elasticities shall be tackled in a follow up article.]
Inflation may be demand-pull or cost-push in nature. When people buy more and more of commodities that have limited or dwindling supplies, prices go up. This is demand-pull inflation. An example is when supplies of rice, vegetables and other agricultural products, are going down due to lower harvests (e.g., due to typhoons or declining soil fertility) in the face of increasing demand for them.
A rise in the price of a key resource used in production and/or in the movement of many commodities triggers a general increase in commodity prices. This is cost-push inflation. An increase in the global price of petroleum, for instance, causes cost-push inflation as petroleum in its various forms (e.g., crude oil, gasoline) is used in the production and transportation of food and other goods. The increase in the costs of production and transportation are passed on to consumers for producers and distributors to maintain their profit margins.
photo source: www.investagrams.com
Starting July of this year, the public has been alarmed by rising prices. The Department of Finance (DOF) and the Bangko Sentral ng Pilipinas (BSP) had forecasted August inflation to be only at 5.9%, while economists’ median estimate was at 6%. The Philippine Statistics Authority (PSA) reported a 5.7% inflation rate in July, and this rose to 6.4% in August, the highest since 2009. The BSP has set a target of keeping the inflation rate within the range of 2% to 4% in 2018.
Inflation in NCR went up by 7% in August. Reports on inflation rates outside of NCR by the PSA showed an average of 6.2%. In Mindanao, Caraga registered the lowest, with 4.8%. Northern Mindanao or Region 10 – where Iligan City is located – posted 6.1%, but inflation rates in the Zamboanga Peninsula (6.4%), Davao Region (7.1%), and SOCCSKSARGEN (7.9%) are higher. The ARMM has the highest inflation rate at 8.1%.
The current inflation in the country is a combination of cost-push and demand pull inflation. The global price hike in petroleum products, especially amidst a weakening peso, has caused rising prices in several commodity groups, led by the food and non-alcoholic beverages; alcoholic beverages and tobacco; and transport; housing, water, electricity, gas and other fuels due to increasing cost of production and distribution.
Several quarters earlier said that the TRAIN Law influences inflation as it increases the take home-income of both government and private employees by restructuring personal income taxes. Additional money chasing commodities whose quantities cannot immediately be augmented is inflationary. The introduction of new excise taxes on fuel, coal, tobacco, sugar-sweetened beverages, and automobiles, among others, has put some offsetting mechanisms to higher take-home pay, which can temper price hikes. In April 2018 Financial Assistant Secretary Paula Alvarez pinpointed that the TRAIN Law accounted only for 0.4% of the 4.5% inflation rate at that time. No recent figure has been reported yet for the contribution of the TRAIN Law to the ongoing rising prices. Empirical studies on this are in order for evidence-based policy making.
Photo source: http://www.ibtimes.ph/ph-inflation-rate-forecast-lowered-14-1432
What can we expect in the short term?
It is doubtful that US dollar inflows from OFWs during the Christmas season can considerably strengthen the peso and ease pressures brought about by soaring prices of crude oil. The USD is the world’s most tradable currency. There is currently a net long position in the USD, which means that the balance of traders looks at the USD as appreciating in value rather than declining.
The country’s resiliency to typhoons and other forms of disaster that have bearing on our agricultural activities have remained weak. Regions occasionally hit by typhoons need support to boost their agricultural productivity. Lesser raw materials from agriculture constrain industrial production, and can affect supply levels. That inflation will move higher in the short term is not far-fetched, with the likelihood of stretching to the medium term. Additional importation is viewed as a quick-fix solution by some sectors. While it has its merits, this has long term implications on national productivity and income, especially among primary producers, the farmers and fishers – the poorest and comprising the biggest percentage of our population.
Topics : inflation Philippine economics TRAIN law