Prepared by:

Inflation
Asst. Prof. Henry B. Pahilanga Basic Macroeconomics
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The Philippine Inflation Rate

• The Philippines' annual inflation rate rose to 6.7 percent in
September of 2018 from 6.4 percent in the previous
month, and compared to market expectations of 6.8
percent.
• It is the highest reading since February 2009. due to a
surge in prices of food and a faster rise cost of transport.
• On a monthly basis, consumer prices went up 0.8 percent,
after a 0.9 percent rise in August.
• Inflation Rate in Philippines averaged 8.40 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.
Colegio de San Juan de Letran
Intramuros, Manila
Colegio de San Juan de Letran
Intramuros, Manila
 Colegio de San Juan de Letran
Intramuros, Manila

The Philippine Inflation Rate

• In addition, upward prices pressure came from: alcoholic
beverages and tobacco (21.8 percent from 21.6 percent in
August); clothing and footwear (2.5 from 2.4 percent);
housing, water, electricity, gas and other fuels (4.6 percent
from 5.5 percent); furnishing, household equipment and
routine maintenance (3.6 percent from 3.5 percent);
health (4.1 percent from 4 percent); transport (8 percent
from 7.8 percent); communication (0.5 percent from 0.5
percent); recreation and culture (3 percent from 2.4
percent); and restaurant & miscellaneous goods and
services (4 percent from 4 percent).
• On the other hand, cost continued to fall for education (-
3.8 percent vs -3.8 percent).
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1%
1%
Food and Non-alcoholic beverages
2%
3%
3% Miscellaneous goods and services
4%
Housing, water, electricity, gas and other
4% fuels
Transport
4%
41% Education

Restaurants and hotels

12% Furnishings, household equipment and

routine household maintenance
Communication

Health

12% Recreation and culture

13% Alcoholic beverages, Tobacco

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Inflation
• Generally used to mean any sustained or continuing
increase in price.
• It is universal experience of all countries both
developed and developing.
• The difference lies on the magnitude of price increases
countries suffer from.
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Undesirability of Inflation
• Inflation negates the economic objective of improving
the quality of life of people. Those who are affected:
1. People who have fixed incomes.
2. Pensioners from the SSS and GSIS.
3. Creditors also lose out during inflation.

• Why the economic welfare of people deteriorates

during inflation because of the depreciation in the
purchasing power of the peso.
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Inflation Gainers
1. People who have flexible incomes
2. Speculators
3. Debtors
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Types of Inflation
1. Demand Pull-Inflation
• If those who buy goods and services desire to
purchase goods and services greater than what the
economy can produce. Excess demand for commodity
would tend to push prices up.
• Occurs under the following:
1. Increase in the supply of money (Quantity Theory of Money)
2. Cyclical booms (high investments
3. Wartime periods
4. Elections
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Demand-Pull Inflation
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Quantity Theory of Money

 The greater the volume of transactions in the
economy, the higher the level of money required to
finance the transactions.
 If the GDP/GNP rises, it is but natural that the
transactions requirements for money will also rise.
 All major inflations must be fed by an increase in the
supply of money.
 If the monetary authorities keep the money supply
from rising, the resulting scarcity of money, tightening
of credit, and increases in interest rates will eventually
halt an inflation.
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Quantity Theory of Money

 Money does not affect prices directly but only through its
influence on spending.
 Spending can rise by moderate amount even when the
money supply is constant, as individuals and business firms
economize on their cash and as pockets of idle cash
balances are drawn into circulation.
 The Quantity Theory of Money can be expressed in the following
equation:
MV = PQ
Where:
M = the supply of money;
V = the velocity of money, i.e. the number of times the average peso is spent on
final goods and services;
P = the general price level, or the average price at which each unit of physical
output is sold;
Q = the physical volume of goods and services produced.
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Modern Version of the Quantity Theory of Money

 Milton Friedman, Nobel Prize Winner in Economics based
in the University of Chicago, has revised the theory
postulating that M and P are directly related.
 Monetarists are the believers of the modern version.
 Do not necessarily accept the constancy of the velocity of
money.
 Admit the possibility changes in V, except that they
believed that V can reasonably be predicted.
 A degree of control on M helps to control the level of
GDP/GNP.
 In this way, they put less emphasis on the direct
relationship of P and M.
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Modern Version of the Quantity Theory of Money

 Modern monetarists talk of controlling the supply of
money to influence the course of the growth of the
economy.
 General agreement that money supply affects the level
of GDP/GNP, and monetarists emphasize it only much
more – in other words, have greater faith in the
singular efficacy of monetary policy – than those who
place as important an emphasis on fiscal policy.
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Modern Version of the Quantity Theory of Money

 The new monetarists would argue that the control of
the money supply eventually determines the direction
of incomes and employment through the control of
GDP/GNP.
 If GDP/GNP growth is to be achieved at a desired rate,
the corresponding growth of the money supply should
be kept at that rate of GDP/GNP growth.
 Though this medium, the price level is also under
control.
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Types of Inflation
2. Cost-Push Inflation
• Type of inflation where increases in the costs of
production push prices up.
• Cost-push model of inflation creates problems for
policy makers because of the difficulties that supply-
side pressure create for stabilization.
• Occurs under the following:
1. Increase in the cost of production of inputs and raw materials
2. Increase in monopoly mark-up
3. Increase in wage cost
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Cost-Push Inflation
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Phillips’ Curve
 An important starting point in the analysis of inflation
is the empirical relationship of unemployment to
inflation.
 Phillips curve supplied a rough explanation of causality
in the inflation process.
 Low unemployment is associated with tightness in the
labor market and high levels of consumer income and
demand.
 When conditions for rapid wage and price increases
are present on both demand and supply side, high
degree of business activity follows.
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Phillips’ Curve
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Phillips’ Curve
 Demand for work increases causing low
unemployment.
 Likewise, high employment implies soft labor markets
and low inflation rates.
 This implies that consumer income and spending are
depressed signifying slow business activity.
 It calls the idea of trade-off between unemployment
and inflation.
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Phillips’ Curve
 It suggests that the economy can opt for low
unemployment, but only at the price of a high rate
inflation.
 It can also opt for price stability, but at the cost of a
high employment rate.
 Thus, it provided an explanation of how policy makers
could disagree over appropriate policy without
disagreeing over theory.
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Measurement of Price Increases

 Consumer Price Index. Most popular and most used
measures as it reflects what happens to the living
standards of the consumers.
 Retail Price Index. Designed to measure monthly changes
of the prices at which retailers dispose of their goods to
consumers and end users.
 Wholesale Price Index. Measures the monthly changes in
the general price level of commodities that flow into
wholesale trade intermediaries; hence measures price
changes during trade turnover.
 Stock Price Index. Serves as a measure of the changes in,
and to trade the movement of the average prices of
company shares of stocks traded in PSEI.
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Philippines Consumer Price Index (CPI)

• Consumer Price Index CPI in Philippines increased to
119.50 Index Points in September from 118.50 Index
Points in August of 2018.
• Consumer Price Index CPI in Philippines averaged
36.18 Index Points from 1957 until 2018, reaching an
all time high of 119.50 Index Points in September of
2018 and a record low of 1 Index Points in February of
1957.
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Philippines Consumer Price Index (CPI)

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Meaning of the Index

 Index numbers compare figures which show changes
in a given variable.
 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.
 Most common variables used in index numbers are
price and quantity.
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Price, Quantity, and Value Relatives

Where:
 Simples kinds of index Pc = price during the current period
numbers are called relatives: Pb = price during the base period
Qc = quantity during the current
Price relative (PR) period
𝑃𝑐
Qb = quantity during the base period
 𝑃𝑅 = 𝑃𝑏 Vc = value during the current period
Vb = value during the base period
Quantity relative (QR)
𝑄𝑐 Example: The prices of a
 𝑄𝑅 = commodity in 2015 and 2017
𝑄𝑏 were PhP 20 and PhP 24
respectively. Considering 2015
Value relative (VR) as the base year and 2017 as
𝑉𝑐 𝑃𝑐𝑄𝑐 the given year, find the price
 V𝑅 = = 𝑃𝑏𝑄𝑏 = 𝑃𝑅 ∗ 𝑄𝑅 relative and interpret the
𝑉𝑏 results.
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Price Index Numbers

Types of price index numbers:
1. Price Relative 3. Unweighted Price
2. Unweighted Price Index Index
a. Simple Aggregate Price Index a. Laspeyres Index
∑𝑃𝑐 ∑(𝑃𝑐𝑄𝑏)
𝑆𝐴𝑃𝐼 = 𝐿𝐼 =
∑𝑃𝑏 ∑(𝑃𝑏𝑄𝑏)
a. Average of Price Relatives a. Paasche Index
𝑃𝑐 ∑(𝑃𝑐𝑄𝑐)
∑( ) 𝑃𝐼 =
𝐴𝑃𝐼 = 𝑃𝑅 = 𝑃𝑏 ∑(𝑃𝑏𝑄𝑐)
𝑛
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Example
2015 2017
Commodity
Price Quantity Price Quantity
A PhP 0.10/pound 80 pound PhP 0.15/pound 200 pound
B PhP 2.00/picul 10 piculs PhP 1.50/picul 50 piculs
C PhP 0.80/liter 50 liters PhP 1.00/liter 75 liters
D PhP 0.20/dozen 100 dozens PhP 0.25/dozen 100 dozens

Compute for the following and interpret your answers:

1. Simple Aggregate Price Index
2. Average Price Index
3. Laspeyres Index
4. Passche Index
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Measures to Curb Inflation

1. Monetary Policy
a. Inhibit and lessen demand through lessening money supply
in circulation.
b. Increasing interest rates to inhibit investments.
c. Increase reserve requirements of banks.
d. Minimize or close rediscounts.
2. Fiscal Policy
a. Cut back on government spending.
b. New taxes to be considered to cut down on consumption
and investment.
c. Break up monopoly power.
d. Set of wage and price controls.