Effect of High Inflation Rates on Middle Class Filipinos

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As the Covid-19 Pandemic’s end is in sight according to the recent evaluation of the World Health Organization, many economies grab this opportunity to start opening up the market and encourage economic activities to recover from its aftermaths due to lockdowns and the supply chain interruptions it caused. However, most of the governments across the globe now are now facing another challenge that is the increasing prices of basic commodities in the market. This not-so-unprecedented high inflation is influenced partly by the ongoing pandemic and fueled by other international and local circumstances. Bria Homes will guide you through the fundamentals of inflation, its causes, and its effects especially to the middle class in the Philippines.

According to the International Monetary Fund, Inflation refers to the rate of increase in prices over a given period of time. Since the income of the majority of the population could not keep up to the rate of the inflation, many resorted to saving their income and became diligent in spending. This indeed, limits the purchasing power of consumers and in turn, forces the producers to reduce production by limiting their spending to various factors of production like the raw materials, labor, and capital. On a macroeconomic scale, enterprises’ decision to limit their production will result in fewer government revenues from taxes levied from the business and workers’ income taxes. And the decrease in consumers’ propensity to spend also affects other avenues of government incomes like value added tax and excise tax which are collected from all consumer items.

Read Also: Understanding Value Added Tax (VAT) Exemption in the Philippines | Understanding the Capital Gains Tax in the Philippines

In a global market, the high inflation is caused by a rise in surging energy and food prices. Intensified by the ongoing war in Ukraine, the global energy supply is greatly affected. For 2022, the rate is forecast to average 7.7% and expected to improve in the 2nd quarter of 2023.

The Philippines is not spared from the inflation crisis like many of the countries are facing. The Bangko Sentral ng Pilipinas (BSP) has the mandate to maintain low and stable inflation to promote and induce balance and sustainable economic growth in the country through sound monetary policy. According to the BSP’s Monetary Policy Report released last August 2022, the country’s high inflation rate in said month has breached the target of 2% to 4% with 6.3% – this is slightly better than July rate of 6.4%.

Read Also: Philippines Inflation Rate for June 2022 Hits 6.1-Percent

Causes of High Inflation in the Philippines

According to the Philippine Statistics Authority (PSA), With the country’s August inflation rate, the average rate now for 2022 stood at 4.9 percent – above the original forecast for 2022 of 3.7%. As a measure to have a more realistic forecast and target, the BSP adjusted last July the 2022 inflation average to 4.5%. The PSA said that the primary factors that influence the current high inflation rate in the Philippines are food and transportation costs whose indexes were at 14.6% and 6.3%, respectively. Other factors identified by the PSA are provided below:

          a. Alcoholic beverages and tobacco, 9.3 percent;

          b. Clothing and footwear, 2.8 percent;

          c. Housing, water, electricity, gas and other fuels, 6.8 percent;

          d. Furnishings, household equipment, and routine household maintenance, 3.4 percent;

          e. Health, 2.5 percent;

          f.  Recreation, sport and culture, 2.4 percent;

          g. Education services, 3.8 percent;

          h. Restaurants and accommodation services, 4.2 percent; and

          i.  Personal care, and miscellaneous goods and services, 3.3 percent.

Read Also: Gas Price Update in the Philippines for July 2022 | 2022 Gas Price Fluctuation: Why Does it Go Up and Down?

This increment in the prices of basic commodities truly erodes the purchasing powers of the Filipinos. As a matter of fact, the PSA said that the real value of 1 peso in June 2022 is just .87 if adjusted to the prices of goods and services in 2018.  As such, the BSP resorted to adjusting the interest rate to control the soaring inflation and improve the public’s propensity to spend and help stimulate economic activities. For the meantime, everyone is advised to be cautious of their spending and save some cash to continue meeting the basic needs and other unprecedented circumstances and/or emergencies.

Another avenue to combat inflation is by having other additional sources of cash flow. Having side hustles will help you relieve the burdens of the high inflation in the Philippines. Remember that if your income can keep up with the increasing prices in commodities, the current high inflation would alleviate the limiting and unwanted effects of high inflation in the Philippines.

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Effects of Inflation to the Filipino Middle Class

Recent economic research suggests that, though all are greatly affected by high inflation, the middle class is being hit harder by inflation than the very rich or even the very poor. The middle income Filipinos play a crucial role in economic development and are regarded as drivers of growth. That is why the growing middle class Filipinos have been seen as a key player in the positive outlook and performance of the Philippines in the past two decades.

However, the income of the middle class Filipinos could not keep up with the high inflation rate in the Philippines this year. According to the Policy Note no. . 2018-18 (December 2018) of the Philippine Institute for Development Studies (PIDS)in 2017, the middle class Filipinos are divided into lower, middle, and upper middle classes whose income ranges from PHP 19,040 to PHP 114,240. Unfortunately, the projected increase in the income of workers in the Philippines was at 5.6% for 2022 (IF EVERYTHING REMAINS THE SAME AS 2021). This projection (in need of further research) does not change, it is below the inflation rate in August which was at 6.1%.

Example on how the middle class greatly affected by the inflation, as mentioned earlier, one of the major components in the high inflation rate in the Philippines last August was the increase in transportation cost. Prior to the pandemic, the minimum fare in the public jeepney in Metro Manila was just Php 9.00 however, the country has already experienced 3 fare hikes within the year. First was on June 9 with Php 10.00, followed by July 15 increase to Php 11.00, and lastly, on September 16 with Php 12.00 minimum fare.

Despite the inefficiency of public transport, the majority of Filipinos use it. In fact, according to the Social Weather Stations study released in 2021, 72% of Filipinos struggle to commute to work. Many of those who avail public transport are middle class. This is just one of the examples on how inflation hurts most especially the middle class Filipinos. This is true not just in the Philippines but also around the world.

Read Also: The Effect of Inflation on Real Estate

Though high and uncontrolled inflation rates affect the real estate market, Bria Homes’ capable agents and brokers will help find the best solutions and deals for your own quality and affordable house and lot or condominium unit. Interested? Contact Bria Homes now!