Impact of relative price changes and asymmetric adjustments on

aggregate inflation: evidence from the Philippines.

Abstract

The paper uses disaggregated price data to determine whether the higher moments of the
distribution of relative price changes provide information on the adjustments and persistence
of aggregate price conditions in the Philippines. It takes into account the changes that occurred
in relative price movements between the pre-inflation targeting 1994–2001 and inflation
targeting 2002–September 2019 periods. Results indicate that the dispersion of relative price
changes and the skewness of their distribution are positively related to movements in short-run
inflation. Moreover, price adjustments are observed to be asymmetric, which can have
significant effects on s
Introduction

Inflation is a general and ongoing rise in the level of prices in an entire economy. Inflation does
not refer to a change in relative prices. A relative price change occurs when you see that the
price of tuition has risen, but the price of laptops has fallen. Inflation, on the other hand, means
that there is pressure for prices to rise in most markets in the economy. In addition, price
increases in the supply-and-demand model were one-time events, representing a shift from a
previous equilibrium to a new one. Inflation implies an ongoing rise in prices. If inflation
happened for one year and then stopped—well, then it would not be inflation any more.

This chapter begins by showing how to combine prices of individual goods and services to
create a measure of overall inflation. It discusses the historical and recent experience of
inflation, both in the United States and in other countries around the world. Other chapters
have sometimes included a note under an exhibit or a parenthetical reminder in the text saying
that the numbers have been adjusted for inflation. In this chapter, it is time to show how to use
inflation statistics to adjust other economic variables, so that you can tell how much of, say, the
rise in GDP over different periods of time can be attributed to an actual increase in the
production of goods and services and how much should be attributed to the fact that prices for
most things have risen.

Inflation has consequences for people and firms throughout the economy, in their roles as
lenders and borrowers, wage-earners, taxpayers, and consumers. The chapter concludes with a
discussion of some imperfections and biases in the inflation statistics, and a preview of policies
for fighting inflation that will be discussed.
Body

This paper studies the effects of global and domestic inflation shocks on core price
inflation in 105 countries between 1970 and 2016, by using a heterogeneous panel
vector-autoregressive model. The methodology allows accounting for differences
across groups of countries (advanced economies, emerging markets and
developing economies, and low-income countries) and across groups with different
country characteristics (such as foreign exchange and monetary policy regimes).
The empirical results indicate that most of the variation in inflation among low-
income countries over the past decades is accounted for by external shocks. More
than half of the variation in core inflation rates among low-income countries is due
to global core price shocks, compared with one-eighth in advanced economies.
Global food and energy price shocks account for another 13 percent of core
inflation variation in low-income countries -- half more than in advanced economies
and one-fifth more than in emerging markets and developing economies. This
points to challenges in anchoring domestic inflation expectations, which have been
most evident among low -- income countries with floating exchange rates,
especially in cases where central bank independence has been weak.

Problems

 Inflation is a measure of the rate of rising prices of goods and services in an economy.
 Inflation can occur when prices rise due to increases in production costs, such as raw
materials and wages.
 A surge in demand for products and services can cause inflation as consumers are
willing to pay more for the product.
 Some companies reap the rewards of inflation if they can charge more for their
products as a result of the high demand for their goods.

Governments generally try to keep inflation within an optimal range that promotes
growth without dramatically reducing the purchasing power of the currency. 

Solutions

 Governments can use wage and price controls to fight inflation.

 These policies faired poorly in the past, leading governments to look elsewhere to
control the economy.
 Governments may pursue a contractionary monetary policy, reducing the money
supply within an economy.
 The U.S. Federal Reserve implements contractionary monetary policy through higher
interest rates and open market operations.
  The Fed used reserve requirements to manage the nation's money supply but dropped
these limits until further notice.

Conclusion

If economic activity is high, rates are likely to increase to encourage savings and make
borrowing more expensive and, in this way, suppress economic activity to avoid an overheating
economy and resulting runaway inflation.