Inflation Rate and

Purchasing Power of Peso

Inflation Rate

 is the rate at which the general level of prices for goods and services is
rising and, consequently, the purchasing power of currency is falling.
 is classified into three types: Demand-Pull inflation, Cost-Push inflation and
Built-In inflation.
 Most commonly used inflation indexes are the Consumer Price Index (CPI)
and the Wholesale Price Index (WPI).
Causes of Inflation
 Rising prices are the root of inflation, though this can be attributed to different
factors. In the context of causes, inflation is classified into three types: Demand-
Pull inflation, Cost-Push inflation and Built-In inflation.
 Demand-pull inflation occurs when the overall demand for goods and services
in an economy increases more rapidly than the economy's production
capacity. It creates a demand-supply gap with higher demand and lower supply,
which results in higher prices.
 Cost-push inflation is a result of increase in the prices of production process
inputs.
 Built-in inflation is the third cause that links to adaptive expectations. As the
price of goods and services rises, labor expects and demands more costs/wages
to maintain their cost of living. Their increased wages result in higher cost of
goods and services, and the spiral continues as one factor induces the other and
vice-versa.
Types of Inflation Indexes

 The CPI is a measure that examines the weighted average of prices of a

basket of goods and services which are of primary consumer needs. They
include transportation, food and medical care.
 CPI is calculated by taking price changes for each item in the
predetermined basket of goods and averaging them based on their relative
weight in the whole basket
 The WPI is another popular measure of inflation, which measures and
tracks the changes in the price of goods in the stages before the retail
level. While WPI items vary from one country to other, they mostly include
items at producer or wholesale level.
Effects of Inflation

 Inflation is both good and bad, depending upon which side one takes.
 individuals with tangible assets, like property or stocked commodities, may
like to see some inflation as that raises the value of their assets which they
can sell at a higher rate. However, the buyers of such assets may not be
happy with inflation, as they will be required to shell out more money.
 People holding cash may also not like inflation, as it erodes the value of
their cash holdings. Inflation promotes investments, both by businesses in
projects and by individuals in stocks of companies, as they expect better
returns than inflation.
Purchasing Power of the Peso

 a measure of the real value of the peso in a given period relative to a

chosen reference period. It is computed by getting the reciprocal of the CPI
and multiplying the result by 100
 Purchasing power loss/gain is an increase or decrease in how much
consumers can buy with a given amount of money. Consumers lose
purchasing power when prices increase, and gain purchasing power when
prices decrease.
 Causes of purchasing power loss include government regulations, inflation
 and natural and manmade disasters. Causes of purchasing power gain
include deflation and technological innovation.
 Inflation rate
(2012=100)
9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0
2011 2012
 Purchasing Power of Peso
1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018