INFLATION: WHY IT MATTERS

In Partial Fulfillment
for the subject
BA 203 MACRO-MICRO ECONOMICS (ASEAN/GLOBAL ECONOMICS FOR MANAGEMENT)
Graduate School
St. Michael’s College

Submitted to
PROF. SHERYLL MARIE ARUTA, DM

By

JUNAIDA A. MUSTAPHA

JUNE 2023
 INTRODUCTION

Among the many conditions/consequences caused by the pandemic, inflation in the

economy is now a major concern of the government. In spite of the weakened Philippine

economic growth in 2020 and 2021, inflation has gone up to 4.5% in 2020 and another 4.5% in

2021. The Bangko Sentral ng Pilipinas (BSP) and the National Economic Development

Authority, have made announcements explaining these developments and what they are doing to

contain the rate of inflation in the coming years. Given that the pandemic is not over, that the

government is overspending, that the BSP is infusing more liquidity into the financial system,

that production is constrained, and the supply chain disrupted, this will not be an easy task and

will be difficult to achieve. (Almendras, 2022)

Inflation is the overall rise in prices of goods and services over time, as well as the

decline in the purchasing power of money. This is often measured yearly and expressed as an

increase in percentage from the prior year. Inflation rates in the majority of nations have been

consistently measured using a standard formula in terms of the component of commodities and

the revisions of the base years since the end of World War II, with the foundation of the World

Bank and the International Monetary Fund (IMF). Consumers are always aware of the price

hikes for basic goods or how much less their food budgets can buy, even without the official

government statistics on inflation.

While everyone is influenced by inflation, the less wealthy classes are particularly hard

hit since they have less options for increasing their income to keep up with the rising costs. The

middle class may be able to withstand an annual inflation rate but they will still complain and

vote the administration out at the next election.

 BODY

Price inflation is brought on by rising demand that cannot be satisfied by existing

supplies and/or rising production costs, also known as a demand-pull and/or a cost-push. The

market's excess liquidity or oversupply of money drives up demand, and producers may need

some time or may not be able to boost supply. This is why the BSP restricts government

borrowing and implements other monetary policies that restrict bank lending in order to control

the money supply. Governments must also limit budget deficits since spending by the

government expands the money supply. (Freeman, 2022)

The Philippine inflation quickened to a three-year high of 6.1% in June 2022, with the

national statistics agency forecasting that inflation will likely climb in the following

months. According to the Philippine Statistics Authority (PSA), this is the country’s highest

recorded inflation since October 2018 when inflation was at 6.9%.  President Ferdinand

Marcos Jr. at a July 5 press conference, however claimed that the 6.1% inflation rate was “not

that high.” “I think I will have to disagree with that number,” Marcos said. However, the

skyrocketing prices of basic commodities — as reported by the government itself — have been

forcing Filipino consumers to tighten their belts further. 

In simple words, inflation means that for the same amount of money, Filipino consumers

can purchase fewer goods. Government statisticians and economists draw a connection between

it and the falling purchasing power of money.

Economists generally agree that inflation is neither inherently good nor bad. Often, it’s a

sign of economic recovery. At the moment, for example, it’s largely driven by the unprecedented
COVID-19 pandemic—an amalgamation of low interest rates set by the Federal Reserve, direct

government stimulus to both consumers and businesses alike, and pent-up demand for specific

goods and services as the world reopens and resumes some semblance of normalcy (Davis, 2021)

People's expectations about future inflation are known as inflation expectations. Because

they influence how people act in the present, these expectations regarding inflation in the future

are significant. To better understand inflation expectations, Scott Ruesterholz, a portfolio

manager at Insight Investment, suggests a thought experiment: Imagine that you’re planning to

buy a new car one year from now. In more normal times, when annual inflation is around the 2%

level preferred by the Fed, you’d happily wait 12 months to buy a new car. There would be no

reason to move up your plans because you’re not expecting the price of cars to change very

much in a year. But what if you noticed that the sticker price of new cars is rising pretty quickly?

After monitoring the situation for a while, you might stop and ask yourself if it made more sense

to buy a car right now, rather than waiting for months while prices kept gaining. If you and a

host of other automobile shoppers started buying cars all at once to get ahead of rising prices,

automakers would take notice of the surging demand and further increase their prices. Higher car

prices would contribute to even higher rates of inflation.

There are a number of underlying variables that could affect costs. For instance, prices

may increase when the amount of money in circulation rises in comparison to the size of an

economy, whether as a result of an increase in government spending or an excess of money

printed by the central bank. Likewise, occurrences like wars or natural catastrophes that increase

manufacturing costs or block the economy's ability to produce things can also cause prices to
rise. Demand-pull inflation, which happens when there is too much money relative to the

economy's capacity to generate goods and services, can be seen in both of those scenarios.

The rate at which prices change can have an impact on a variety of economic factors,

including people's purchasing power, economic growth, and the cost of borrowing money. One

important aspect of fostering a strong, sustainable economy is comprehending and effectively

managing inflation.
 CONCLUSION

An economy is affected by inflation on a global scale. What you can buy now will

decrease over time as prices climb. One of the primary benefits of investing your money is the

ability to prevent, or at least stay up with, inflation and maintain the purchasing power of your

money. Because it has an impact on prices and their standard of living, consumers are concerned

about inflation. Businesses pay close attention to the cost of the raw materials that go into their

products as well as the salaries that need to be paid to their staff. Taxes, government spending,

interest rates, and other things are all impacted by inflation. An economy is thought to benefit

from low, consistent, or predictable inflation rates. It denotes development and a strong demand

for goods and services.

Businesses must hire more employees as they produce more goods and services to meet

up with demand, which typically results in higher employment and wage increases. The cycle

continues as those employees make purchases for their wants and needs. However, inflation that

is too high or too low is problematic because it makes it difficult to control supply and demand

as well as economic growth. This brings out how crucial investing is. Money in your savings

account will earn interest from the bank, but often, that interest rate won't even come close to

beating the inflation rate. Because of this, investing your money makes sense if you have the

means to do so in order to increase its worth over time. You'll be able to continue making the

same number of purchases of goods and services. It's crucial to include in a reasonable inflation

rate for future spending when making a strategy to achieve your financial objectives to ensure

that you're setting aside enough money to cover your demands.

REFERENCES:

Almendras, Ruben (2022). Inflation and the Filipinos. Retrieved from

https://www.philstar.com/the-freeman/opinion/2022/01/18/2154550/inflation-and-filipinos

Cuyco, Jan (2022). That high: What you need to know about inflation in the Philippines.

Retrieved from https://interaksyon.philstar.com/trends-spotlights/2022/07/06/221496/inflation-

philippines-explainer/

Tepper, Taylor (2021). What are inflation expectation and why do they matter now. Retrieved
from https://www.forbes.com/advisor/investing/inflation-expectations/

 Tiffany Lam-Balfour  and  Arielle O'Shea (2023). Current Inflation Rate: What It Is and Why It

Matters. Retrieved from https://www.nerdwallet.com/article/investing/inflation