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CHAPTER I

THE PROBLEM AND ITS BACKGROUND

Introduction

Inflation in a general manner affects the behavior of every people. Our choice to

purchase a single product will vary for the reason that the cost of the same product we

bought a month ago may be different from its current price, which basically is a result of

inflation. Inflation is the rising price of goods and services over time. (Amadeo, K.,

2018). In short, inflation increases our cost of living. Once our cost of living increases,

our power to purchase certain goods and services will decrease since it decreases the

value of our Philippine Peso.

In the Philippines, inflation are being managed and handled by the Bangko

Sentral ng Pilipinas (BSP), with the main goal of limiting and normalizing the rate of

inflation in order not to affect the living of the Filipino people and for the economy to run

smoothly. Section 3 of Republic Act 7653 or the New Central Bank Act, signed in 1993,

stated that the BSP’s primary objective is “to maintain price stability conducive to a

balanced and sustainable growth of the economy. It shall also promote and maintain

monetary stability and the convertibility of the peso.” A change in the government ruler

also plays an important role in the increase or decrease of inflation rate. If the projects

and programs affecting the importation, exportation, employment, production of goods

and services and other external factors like security and order amongst others are not

controlled and maintained, drastic change in the inflation rate may follow. Noticeable

inflation increases were observed during the time of then-presidents Ferdinand Marcos,

Cory Aquino and Gloria Arroyo dating back to 1970s which were affected by various
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factors like the devaluation of the peso, massive government spending, skyrocketing

world oil prices, pernicious policies of debt-driven growth, crony capitalism, multiple

coup attempts, global rice crisis, and a series of typhoons. According to economist JC

Punongbayan, Under the Rodrigo Duterte administration, the country’s high inflation

rates are caused not just by rising world oil prices. Added by Rappler, other factors also

contribute to it, such as the effect of the tax reform law on the price of petroleum

products, the weakening peso, and the people’s expectations of inflation.

According to the Philippine Statistics Authority (PSA), the country’s inflation rate

rose from 6.4% in August to 6.7% in September 2018 which is the highest in over 9 years

and also the 9th consecutive monthly inflation rate increase starting from January 2018.

Government economic managers and some businessmen have said the recent inflation

levels are “mere hiccups” and are “manageable”, and some have even attempted to drag

previous administrations into the increasing inflation issues to justify the current

numbers.

Recently, we were greeted by truly shocking news: the Philippines inflation rate

which measures how fast prices are rising, reached a whopping 6.4% in August

(Punongbayan, J., 2018). This drastic increase in the rate is not only the highest in 9.4

years, it also exceeded government’s upper forecast of 6.2%, and is way above the

government’s 4% target in 2018. In addition, data also shows that this enormous 6.4%

rate is also the highest in all ASEAN countries. In relation to this, we can also notice that

when President Duterte came into office, the inflation rate of the Philippines was always

in the middle, but these days, we’re on top of everyone else. What could probably be the

reason why the Philippines experience this sudden change compared to other neighboring
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countries? And what could possibly be the action to be done, to at least remediate and

normalize again the inflation rate in our country?

Statement of the Problem

The general problem of the study is the effect of inflation during the Duterte

Administration.

Specifically, the study sought to answer the following:

1. What do you think are the possible reason for the drastic increase of inflation rate

in the Philippines during the Duterte Administration?

2. Do you have any suggestion on how will the government remediate the drastic

increase in the inflation rate?

Significance of the Study

The study is deemed beneficial and significant to the following groups and

institutions:

Future Researchers. They will find this study useful and may use as a reference

if they want to conduct a broader approach in relation to the topic of this research.

Government. The current government may also find this research beneficial in a

way that they can use the insights of his people who got to experience the effects of

inflation.

Scope and Delimitations of the Study

This study is limited to the realized effects and possible perceived causes of

drastic increase of inflation rate during the Duterte Administration. The study covered the

employees of Metropolitan Medical Center in G. Masangkay St., Sta. Cruz, Manila.

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CHAPTER II

THEORETICAL FRAMEWORK

This chapter deals with the presentation of related theories, studies and literature,

which provided the basic framework for this study. This section also includes the

presentation of research paradigm in response to the research questions raised in the first

chapter. Furthermore, the list of variables with definitions that are used in this study is

also included in this paper.

Relevant Theories

Different economists have presented different theories on inflation. The

economists who have provided the theories of inflation are broadly categorized into two

labels, namely, monetarists and structuralists.

Monetarists associated inflation to the monetary causes and suggested monetary

measures to control it.

On the other hand, structuralists believed that the inflation occurs because of the

unbalanced economic system and they used both monetary and fiscal measures together

for sorting out economic problems.

Market-Power Theory of Inflation. In an economy, when a single or a group of

sellers together decide a new price that is different from the competitive price, then the

price is termed as market-power price. Such groups keep prices at the level at which they

can earn maximum profit without any concern for the purchasing power of consumers.
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According to the advanced version of market power theory of inflation,

oligopolists can increase the price to any level even if the demand does not rise. This hike

in price levels occurs due to increase in wages (because of trade unions) in the

oligopolistic industry.

The increase in wages is compensated with the hike in prices of products. With

increase in the income of individuals, their purchasing power also increases, which

further results in inflation.

Apart from this, some economists concluded that fiscal and monetary policies are

not applicable in practical situations as these policies are not able to control rise in prices

levels. These policies would work only when prices rise due to an increase in demand.

Moreover, these policies cannot be applied to oligopolistic rise in prices, which is

due to increase in the cost of production. Monetary policy can reduce the rate of inflation

by raising the interest rate and regulating the credit flow in the market. However, it would

have no effect on the oligopolistic price as the cost is transferred to the prices of goods

and services.

Conventional Demand-Pull Inflation. The market power theory of inflation

represents one extreme end of inflation. According to this theory inflation exists even

when there is no excess in demand. On the other end, the conventional demand-pull

theorists believed that the only cause of inflation is the excess of aggregate demand over

aggregate supply.
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In full employment equilibrium condition, when demand increases, inflation

becomes unavoidable. In addition in full employment condition, the economy reaches to

its maximum production capacity. At this point, the supply of goods and services cannot

be increased further while the demand of products and services increases rapidly. Due to

this imbalance between demand and supply, inflation takes place in the economy.

Structural Theories of Inflation. Apart from the two extreme ends mentioned in

the above, there is a middle group of economists called structural economists. According

to structural theory of inflation, market power is one of the factors that cause inflation,

but it is not the only factor. The supporters of structural theories believed that the

inflation arises due to structural maladjustments in the county or some of the institutional

features of business environment.

Mark-up Theory. Mark-up theory of inflation was proposed by Prof Gardner

Ackley. According to him, inflation cannot occur alone by demand and cost factors, but it

is the cumulative effect of demand-pull and cost-push activities. Demand-pull inflation

refers to the inflation that occurs due to excess of aggregate demand, which further

results in the increases in price level. The increase in prices levels stimulates production,

but increases demand for factors of production. Consequently, the cost and price both

increases.

In some cases, wages also increase without rise in the excess demand of products.

This results in fall in supply at increased level of prices as to compensate the increase in
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wages with the prices of products. The shortage of products in the market would result in

the further increase of prices.

Therefore, Prof. Gardner has provided a model of mark-up inflation in which both

the factors, demand cost, are determined. Increase in demand results in the increase of

prices of products as the customers spend more on products.

On the other the goods are sold to businesses instead of customers, then the cost

of production increases. As a result, the prices of products also increase. Similarly, a rise

in wages results in increase in cost of production, which would further increase the prices

of products.

So according to Prof Gardner, inflation occurs due to excess of demand or

increases in wage rates; therefore, both monetary and fiscal policies should be used to

control inflation. Though, these two policies are not adequate to control inflation.

Bottle-Neck Inflation. Bottle-neck inflation was introduced by Prof Otto

Eckstein. According to him, the direct relationship between wages and prices of products

is the main cause of inflation. In other words, inflation takes place when there is a

simultaneous increase in wages and prices of products. However, he believed that wage

push or market-power theories alone are not able to provide a clear explanation of

inflation.

After analysis of inflationary situation, Prof Eckstein says that the inflation occurs

due to the boom in capital goods and wage-price spiral. In addition, he also advocated
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that during inflation prices in every industry is higher, but few industries show a very

high price hike than rest of the industries.

These industries are termed as bottle-neck industries, which are responsible for

increase in prices of goods and services. In addition, Prof. Eckstein advocated that

concentration of demand for products of bottle industries results in inflation.

Related Studies

Presented below are the related studies pertaining to inflation and comparison of

inflatioin in the Philippines to other ASEAN countries.

“Our results show that while inflation in all three countries is affected by

different external factors, Malaysia and Singapore avoided high inflation despite high

levels of economic growth through ‘tight’ monetary policy. In contrast, the Philippines

had high inflation, even with a stagnant economy, due to ‘loose’ monetary policy and the

monetization of government debt.” (Alba, J., et.al , April 1998)

The above mentioned citation is true because in general, the cause of inflation in

developed countries is broadly identified as growth of money supply. In developing

countries, in contrast, inflation is not a purely monetary phenomenon. Beside, factors

typically related to fiscal imbalances such as higher money growth and exchange rate

depreciation arising from a balance of payments crisis dominate the inflation process in

developing countries.

Recent Inflation Scenario in the Philippines. .After witnessing an unprecedented

peacetime inflation of 50.32% in 1984, many Filipino thought that they have seen the
 9

worst, especially when, in the two consecutive years of 1986 and 1987 under the

democratic space provided by the Aquino government, inflation fell to an annual average

of 0.80% in 1986 and 3.9 in 1987 (Yap, 1996). True enough, for the following decades –

1990s to 2000s- average annual inflation did not even go past the 20% mark.Economic

analysts and politicians attribute these inflation figures to sound economic fundamentals,

but some economists, particularly the central bank authorities, acrive these to sensible

monetary programming.

Conceptual Framework

This shows the research paradigm for the perceived causes of Inflation Rate

during the Duterte Administration. It represents the Input-Process-Output (I-P-O) model

in analyzing the inflation and its causes.

Figure 1. Schematic Diagram of the Conceptual Model of the Study

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The frame of conceptual framework shows the input of the study which consists

of the classroom discussion of the topic; and the articles and references related to

lilterature and studies of causes of Inflation during Duterte Administration.

The second frame represents the process in which includes systematic procedures

for conducting the study. These includes research about the topic and the history of

movement of inflation for the past years, and interview with the selected sample size on

the perceived causes of drastic increase in the inflation rate during Duterte

Administration.

Lastly, the third frame represents the output, which consists of the perceived

causes of drastic increase in inflation rate identified by the respondents of this research.
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CHAPTER III

RESEARCH METHODOLOGY

This chapter discussed the method of research, the description of respondents,

sources of data, data gathering instruments and procedures.

Methods and Techniques of the Study

This study used the descriptive research design to realize its objectives. The

researchers believed that descriptive research can provide an in-depth analysis of the

perceived causes of increase of Inflation rate during Duterte Administration. This study

did not test specific relationships between variables but it had provided information about

the trend and attributes with the goal of reaching a better understanding of the causes of

increase of Inflation rate during the Duterte Administration.

The researchers employed descriptive qualitative research method. The data

collection involved text information from the interview questionnaires.

Creswell (2003) defined qualitative research as approach in which the inquirer often

makes knowledge claims based primarily on construction of knowledge out of

experiences or experiences from perspectives or both.

Population and Sample of the Study

To gather the necessary data needed for the study, the researchers selected ten

(10) selected Managers under the Administrative Division of Metropolitan Medical

Center, in which they all refused to be mentioned in this research. The interview to the

different Managers and Heads in the various areas/departments under the Administrative

division provides valuable result to the assessment of the perceived causes of increase of

inflation rate during the Duterte Administration.

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Research Instruments

For this study, an interview was conducted which started from October 22 up to

October 26, 2018. The researchers produced a list of questions to be asked during the

interview which focused on their perceived causes of the drastic increase of Inflation rate

during the Duterte Administration.

Data Gathering Procedure

The researchers used primary data which were collected from the interviews, The

interview was done in a manner that the day-to-day operation and work of the

respondents won’t be affected. During the interview, it was discussed to the interviewee

that all personal information and or political views and opinions will be strictly

confidential and will be for academic and research purposes only. In addition, with the

agreement of each interviewee, the researchers’ audio recorded the complete interview

and transcribed for analysis.

Data Processing and Statistical Treatment

The researchers transcribed the recorded interviews for analysis and managed it

closely to ensure quality of the recorded audio. The researchers read the transcribed

interviews several times to obtain a sense of the overall data. At the same time, the

researchers wrote short phrases, ideas or key words, in the margins to facilitate the

analysis. The researchers ranked the interpreted data by concept and established the

interpretation for the qualitative data.

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CHAPTER IV

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

This chapter presents the data analysis, interpretation and presentation there-to on

the study of the perceived causes of the increase of inflation rate during Duterte

Administration. The data are categorized based on how it was presented on the first

chapter.

Question 1. What do you think are the possible reason for the drastic

increase of inflation rate in the Philippines during the Duterte Administration?

The following discusses the causes and effects of inflation during the Duterte

Administration.

First, as mentioned in the above statements, one of the factors that affects the

inflation rate are from the combination of international and domestic products,

particularly the importation of Oil, which is obviously continuing to rise its price

worldwide. Philippines being one of the countries with no substantial oil production, are

forced to import oil. Researches shows that compared to other neighboring ASEAN

Countries, we are the one of the biggest importers of oil.

Considering the increase in prices of Oil in our country, an increase in price

equates to increase in prices of all goods and services. This increase has a domino effect

where the rise of one factor lit-up the rise of other factors. Higher prices of commodities

means lesser purchasing power for the consumer.

Second cause of high inflation rate in the Philippines are the existing crisis in the

tighter supply of many agricultural products, rice specifically. We have heard from the
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news that the President flatly denied that there’s any problem in the supply of Rice in the

country. But in connection with this, we have also heard from the news that some regions

in the country experienced double-digit inflation rate for a specific month which happens

to be the highest inflation rate for rice. Actually, it’s not only rice but also vegetables,

fish and sugary goods.

These goods which were affected by high inflation rate are included in our basic

needs. These are the goods we take in order to survive. For the people who do not belong

to the marginal group will not be affected by the rising price of these, but those people

who belong to the minimum wage earner and belong to the category of “poorest of the

poor” will be the most affected one. The increase in price means lesser purchasing power

for the average consumers.

Third possible cause of high inflation rate is the continuous decrease in the value

of Peso. According to the news, it has been 12.2 years since the value of our peso became

the lowest. In addition, our currency has been one of t weakest in ASEAN today. Because

we pay imports in foreign currencies, a weaker peso necessarily makes imports costlier.

As such, oil becomes costlier too, as well as all the other goods and services in the

economy that rely on it. (Punongbayan, J., 2018). If we’ll take a look at it closely,

currently, the widening trade gap between our imports and exports of products only

equates to we are paying more dollars than we are earning, and the abundance of peso

only equates to its weakening value. Another contributing factor to the gap between our

import and export are the raw materials (basically iron and steel) which were used in the

Duterte Administration’s infrastructure push “Buil, Build, Build”. Therefore, we can say

that this project is partly to be blame in the weakening value of Peso. This is not
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necessarily bad, but as indicated in the statements above, weak peso makes import

costlier in general.

Finally, another reason of the drastic increase of inflation rate is because of the

implementation of Tax Reform for Acceleration and Inclusion Law (TRAIN Law). If

we’ll take at it at one glance, we can say that this TRAIN Law has a good effect since

bigger pay will be take home by the employees since tax that are supposed to be collected

on income tax are imposed on other commodities. But taking this TRAIN Law as a whole

and looking at it in a bigger picture, we can say that its effects are not good. Why? As an

example, taxes on income being paid by taxable employees are decreased, and part of the

lost government income will be collected on by increasing the taxes on Sin Tax (taxes on

tobacco, alcoholic beverage and others), taxes on winning (lottery), and Gasoline. As

mentioned earlier, gasoline considering as the cost driver for all goods and services, an

increase in its price will only means an equal increase in the prices of goods and services

that rely on it. And again, the higher the price, the lesser the purchasing power of the

people.

Question 2. Do you have any suggestion on how will the government

remediate the drastic increase in the inflation rate?

Below are the recommended solutions and alternative courses of action in order to

normalize the inflation rate during the Duterte Administration:

First, considering that all given causes and effects almost arises or were the effect

of the implementation of TRAIN Law, I believe it is right to say that there must be some

amendments and adjustments that must be made in order to control and the continuing
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increase of the inflation rate. In connection with this, the nearing implementation of oil

price hike on the following years must also be put on hold, to arrest runaway inflation

immediately. Instead of oil price increase, the government may recover the lost income

by raising interest rates, and hastening the importation and distribution of rice

nationwide.

Second, for rice, government can mop up its errors by importing more rice, fast-

tracking the distribution of imported rice, and passing the rice tariffication bill. In

addition, Duterte will also give us a favour by immediately firing the inept officials who

brought about this needless rice crisis.

Third, since inflation affects the behaviour of the consumers, the economic

managers must rein in people’s expectations about future inflation. They can do this by

regaining the people’s trust and showing us all they’re on top of the economic situation.

To summarize all the statements stated above, Duterte Administration including

the economic managers must do something about this and acknowledge that the effects of

this high inflation rate is not fine and that they must do something about it before its tool

late for everyone.

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CHAPTER V

SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

This chapter presents the summary of the findings, the conclusions based on the

results obtained, analysed and interpreted data presented in the previous chapter and

recommendations of the study on the perceived causes of increase in the inflation rate

during Duterte Administration.

Summary of Findings

From the research problems and the result of the interview, the major findings can be

summarized below:

1. What do you think are the possible reason for the drastic increase of inflation

rate in the Philippines?

Out of ten (10) interviewed Managers of Metropolitan Medical Center, the

perceived causes of the drastic increase of Inflation Rate during the Duterte

Administration are: a) Importation of Oil where price is increasing in the world

market. b) The importation of Rice and other agricultural products, c) the

decreasing value of Peso compared to dollar and lastly d) the implementation of

TRAIN LAW and the Build, Build, Build project of the government.

2. Do you have any suggestion on how will the government remediate the

drastic increase in the inflation rate?

From the result of the interview, it was summarized that as per the

interviewee,
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The suggestions are: a) Amendment of the recently implemented TRAIN Law, b)

fast tracking of the imported and distribution of Rice and the passing of the rice

tariffication bill, and since inflation affects the behaviour of the consumers c) the

government and economist must regain the trust of the people.

Conclusion

In view of the foregoing, the following conclusions were draws:

1. That the perceived causes of drastic increase of inflation rate during the

Duterte Administration based from the interviewee are:

a. Importation of Oil and its increasing prices in the world market

b. Importation of Rice and other agricultural products

c. Decreasing value of Peso

d. Implementation of TRAIN Law and (Build, Build, Build)

2. The suggested ways to remediate the inflation rate are”

a. Implemented TRAIN Law must be amended

b. Passing of the Rice Tariffication Bill

c. Regaining peoples trust and confidence

Recommendations

In light of the findings and conclusions of the study, the following

recommendations were drawn:

1. In order to control the continuing increase of the inflation rate, since some of

the areas that is identifiably causes the shoot of inflation, certain law,

amendments and adjustments must be made by the government.

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2. Regardless of the positive and or negative effects of inflation and how people

perceived it, the government must do something about this matter before it’s

too late for all of us.

3. The researcher also recommends that a future study should be made in relation

to this matter in order for the people to have an awareness on how we must

deal with the increasing rate of inflation in the near future.

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BIBLIOGRAPHY

A. Published Dissertations

Mutuc, Eugene B. (2017) The Economics of Rice Farming in Bulacan,

Bulacan State University, Philippines

B. Electronic Sources

Rufino, Cesar C. (2010) Forecasting Philippine Monthly Inflation Using

TRAMO/SEATS, De La Salle University, Philippines

Chaudhary, et.al..(2016) Exchange Rate and Foreign Trade: A Comparqative Study of

South Asian and South-East Asian Countries, Islamabad, Pakistan

Than, et.al.. (2015) Threshold Effects of Inflation on growth in the ASEAN-5

countires: A Panel Smooth transition Regression approach, University of Economics Ho

Chi Minh, Ho Chi Minh Vietnam

Karahan, O. (2012) The relationship between Inflation and Inflation Uncertainty:

Evidencec from the Turkish Economy, Balikesir University, Turkey