• Economics of inflation

    Ej Lopez

    Ej Lopez

    ECONOMICS 101 tells us that inflation is the general increase in the prices of basic commodities in the market. It is generally measured in percentage; say a 10 percent inflation rate makes the price of a can of sardines, which previously cost 10 pesos, to rise to 11 pesos. At first glance, a passive consumer may ignore a mere peso increase in the price of goods, but the far-reaching implications of this is aggravated by the fact that even a small increase in the price of a basic commodity, such as fuel for instance, may have a domino effect on other goods in a monitored basket.

    Compounding the misery is the fact that the consumer’s purchasing power is depressed by the increase in price levels. This situation makes people’s lives worse instead of better. The cliché that the only thing you can’t escape in this world are death and taxes should be modified to include inflation. Inflation is hard on people but particularly harder on those who are fixed-income earners, like most of us who live on a day-to-day basis.

    Philippine inflation
    The highest inflation rate recorded over the past 12 years, according to trading economics.com, was in 2008 (7.55 percent) and the lowest in 2012 (1.90 percent). As for this year, it is expected to hit an average of around 4 percent, which is more than 2 percent higher than the lowest recorded in 2012. Although this year’s inflation level is within the targets set by the Bangko Sentral ng Pilipinas (BSP), the immediate repercussion is the negative impact to consumers’ buying capacity. If we look at the cost of money based on our Consumer Price Index (CPI), with the base year at 2005 (P100), the same amount of money in 2010 has depreciated by 27.1 percent (100 pesos’ worth of goods in 2005 would cost 127.1 pesos in 2010). To put it another way, 100 pesos in 2005 would have a value of only 72.9 pesos in 2010 because of inflation.

    Unfortunately, the salaries and wages of the people generally cannot cope up with the rate of price increases. Consider that the minimum wage of P429-P466 implemented a year ago (October 2013) was a measly increase of 30 pesos from the minimum wage in November 2012.

    Barring any sudden economic changes, inflation is expected to reach its peak by the end of this year presumably because of the expected inflow of money from year-end windfalls, such as employees’13th month pay, bonuses, incentives, etc.

    Plus factor of inflation
    The general perception about inflation is that it is damaging to the economy. Although the effect of inflation is far more damaging than its benefits, we have to look at the long-term benefits as well. The course of inflation phenomenon gives rise to other economic occurrences like currency exchange rates, local stock movements, national income accounts and the like.

    Inflation has a two-pronged effect on investors and businesses. Exporters stand to gain from rising inflation because of the higher value of the peso vis-à-vis the US dollar, therefore higher profits from exported products. Also, a higher inflation rate will benefit debtors who borrow money sans interest rate. “Macroeconomically”, a higher inflation rate, despite giving rise to prices, is computed in terms of growth brought about by high prices. Increased cost or prices may be interpreted as a sign of a growing economy and therefore a developing market.

    For how can you measure growth and development without an increase in prices? Regardless of its repercussions, the increase in prices of commodities is here to stay, just like death and taxes. Through the years we cannot ignore the fact that our standards of living have improved, either gradually or dramatically. This phenomenon is always accompanied by high prices because there is always a price you have to pay for improvement or innovations.

    For as long as our purchasing power and income can cope up with the increase in the prices of our commodities, inflation should not be a problem. Coping with price increases is always an economic challenge that brings out the best in our budgeting competence. As the saying goes, “kapag maikli ang kumot, matutong mamaluktot (paraphrased—When the night is long and short is the sheet, learn to curl up under it).”

    For comments e-mail: doc.ejlopez@gmail.com.


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