If you have been reading up on any business or economics news, or just randomly encounter it on your social media news, perhaps the top story talks about the inflation rate in the Philippines.
Beginning April of 2022, with an inflation rate of 4.9%, the inflation rate has been incrementally rising.
According to Trading Economics, last September 2022, inflation was at its highest at 6.9%, surpassing the central bank’s target of limiting it below 6.7%. With pressure from the cost of real estate, transportation, alcoholic beverages, among others, it was food prices with the highest hike, currently 7.4% in September from 6.3% August.
Unfortunately, it does not seem like the light at the end of the tunnel is coming soon as the Philippine Statistics Authority (PSA) said that the inflation rate in the Philippines is likely to increase in October.
Presumably, the general public know that a high inflation rate is harmful for the economy and for their daily individual and household transactions. However, many are unaware of what the causes of inflation are.
It is imperative for you to know what factors into the rise and fall of the inflation rate because whether you want to buy a house and lot, or want to invest in the stock market, the inflation rate always influences you as a consumer or an investor.
So, what are the causes of inflation and what factors go into its rise and fall?
What is inflation?
Before diving into the causes, the first order of business is defining inflation.
Investopedia defines inflation as the “measure of the rate of rising prices of goods and services in an economy.” As prices of products and services increase, the purchasing power of your Philippine Peso (PHP) diminishes.
The rise in prices, expressed as a percentage, means that what a PHP 100.00 bill could buy today buys effectively less in the future.
The percentage is determined by the Consumer Price Index (CPI) which is the average change in prices that urban consumers pay for “a market basket” of goods and services over a specific period.
This “market basket” includes items food/grocery items like cereal, milk, and coffee as well as personal expenses like housing, gas, clothing, health care, communications, transportation, and more.
That said, the PSA uses the CPI to report the monthly inflation rate in the Philippines.
Now that the definition and computation of inflation have been explained, this article can now go into the factors that affect inflation.
Demand-pull inflation is when the demand for certain goods and services outpaces the economy’s ability to meet those demands. Once there is a shortage in supply, prices of goods and services are driven upward, causing inflation. This is the most common type of inflation.
This is where a classic inflation story occurs, where there is “too much money chasing too few goods and services.”
But what causes Demand-pull inflation?
First is a hyper-active economy. In this hyper-active economy, consumers are spending more and taking in more debt. This will steadily increase demand, thereby increasing prices.
Second, government activity can influence demand-pull inflation. For example, if a government exports more and spends more, their local currency devalues and prices go up, respectively.
Third, companies can also influence demand-pull inflation simply by increasing prices in anticipation of an imminent inflation.
Finally, there may be an excess in money supply. Some people, predominantly children, like to believe that printing money will solve problems. However, this goes back to the aforementioned adage where there is “too much money chasing too few goods and services,” leading to inflation.
The popular example of this is gasoline.
Gas prices have gone off the roof because of its limited supply. With pandemic restrictions eased, more people are on the road so while the demand for gasoline has gone up, the oil supply has not returned to pre-pandemic levels, hence the hike in oil prices.
The next cause of inflation is like demand-pull inflation.
Cost-push inflation is inflation due to the increase in wages (one reason why it is also called wage-push inflation), raw materials, and production costs.
Higher production costs can decrease the aggregate supply in the economy. So, considering the consumer’s demand does not change, an increase in production costs is felt by consumers leading to cost-push inflation.
What makes this inflation similar to demand-pull inflation is the decrease in aggregate supply leading to the increase in prices of goods and services. But what spells the differences between the two is what causes the inflation in the first place, hence their respective types of inflation.
For demand-pull inflation, it is demand focused. This is when consumers want more and more goods that production cannot keep up.
On the other hand, cost-push inflation is driven by supply prices. Since production costs are increased, that specific product’s price has been increased as well.
One example to use is a pencil-making company experiencing an increase in production costs, like rubber and lead being more expensive. With demand ceteris paribus, if a company does not increase the prices of its pencils, they will not profit and will be out of business soon.
Wage inflation refers to the increase of what is being paid to workers across all sectors.
According to Dean Baker, an American economist, “wages are a cost of production.” So, using the prior example, the pencil company must deal with increased production costs with more expensive pencils.
Another way wage inflation occurs is if prices are already increasing and the consensus is that prices will continue to increase. Because of the general expectations, workers may demand higher wages to either compensate for the increase in goods and services and maintain their standard of living or may simply just want to participate in prices increasing.
Wage inflation can lead to the two types of inflation mentioned above, namely, demand-pull inflation and cost-push inflation.
First, for demand-pull inflation, higher wages can lead to a higher demand for goods and services due to more money to spend, therefore resulting in demand-pull inflation.
Second, for cost-push inflation, if wages are a cost of production, then it follows that an increase in wages is an increase in production cost, which leads to cost-push inflation.
Regardless, higher wages are necessary for consumers to combat inflation by affording higher prices without their purchasing power being severely affected.
Inflation is normal in any economic system. It is common for prices to rise or for purchasing power to decline in an economy. This can happen due to an increase in demand, production costs, or wages.
The inflation rate in the Philippines is not a problem relative to just the Philippines; it is a global problem probably caused by the repercussions of the COVID-19 pandemic and the conflict of Ukraine and Russia. Some economists predict that the world will go into a recession.
Nevertheless, the best course of action to remain confidence in your assets and investments. Best believe that the recession is temporary and at some point, stock prices and real estate will rebound while goods and services will go back down to reasonable prices. In all, everyone’s purchasing power will increase soon.
In Bria Homes, despite the rise in prices, a house and lot from them would still be an excellent investment right now because not only will you be getting great value for your money, as mentioned above, real estate will rebound and rise eventually.
So, maintain financial resiliency until the globe rebounds financially.
By: Cholo Hermoso