For those who have taken any economics class, this word has probably been thrown around during class discussions. For those who haven’t, you might have seen or heard of this term in the news or on social media. Especially now that we are at the halfway point of the year, many economic institutions and pundits have released statements regarding this. But before we discuss the main topic of this article as seen in the title and know more about the inflation rate in 2022, it is important to answer some key questions for an easy understanding of the topic at hand: What is inflation? How does it affect me? And what are the factors of inflation?
What is Inflation?
From a layman’s point of view, the ordinary meaning of inflation is an act of making something much larger than it is. It is usually used to describe the process of blowing air into a balloon in order for it to reach its maximum size without bursting or popping. In a sense, such an ordinary definition can be somewhat related to the definition of inflation with respect to the economy. In short, inflation means that your 20 peso bill today buys less than it used to.
Inflation is the reduction of a given currency’s purchasing power. A quantifiable approximation of the rate at which the decline in purchasing power happens can be seen in the rise of the average price level of selected goods, commodities, and services in an economy over some period of time. The increase in prices, which is often stated in percentage, necessarily means that a unit of currency effectively purchases a fewer amount of goods, commodities, and services than it did in preceding periods. Conversely, deflation occurs when the purchasing power of a particular currency increases and prices decline.
Simply put, inflation is the rate at which the value of a particular currency, in our case the Philippine Peso, is falling and, consequently, the general level of prices for goods, commodities, and services is rising.
Another term that one must be familiar with is the Consumer Price Index or CPI. This is because such is used in the computation of an economy’s inflation rate and its currency’s purchasing power. The CPI gauges the change in the normal retail prices of a fixed basket of goods and services commonly bought by ordinary households relative to a base year. It is a chief statistical series utilized for economic analysis and examination and as a monitoring indicator of government economic policy. The inflation rate is the yearly rate of change or the year-on-year change of the CPI expressed in percent.
Aside from using CPI in the aspect of inflation, such is also a key component in the computation of personal consumption expenditures (PCE) in the determination of the gross national product (GNP). It can also be used as the basis to adjust wages in labor-management contracts or collective bargaining agreements, as well as pensions and retirement benefits.
How does inflation affect me?
News regarding inflation rates is mentioned so often in the media which is why it is important to know some basics about inflation and how it affects an individual. In order to have a comprehensive discussion on this answer, a micro and macro-level analysis is warranted. On a micro level, or on an individual level, inflation heavily affects people. This is manifested through the mundane of things. Let’s say for example the food that we eat in our local open space restaurants, or what in colloquial terms karinderya. Usually, a typical Filipino meal is composed of a viand or two, and rice. Six years ago, a single viand would only cost you Php 30-40. But now, a single viand would set you back a good Php 70-100. To some, it might not be such a drastic increase. However, to a minimum wage earner, those additional pesos may constitute such a burden, especially when they don’t have any corners to cut in the first place.
The cost of living in the Philippines is really cheap compared to other neighboring countries. But despite that, a lot of Filipinos are still struggling to put meals three times a day on their table. With the continuous rise of inflation in the country, the poorest of the poor in the country might be the ones who will be directly and most affected by the rise of prices of basic commodities such as but not limited to food and water, housing, healthcare, education, gas, utilities, transportation, and other daily expenses.
The term cost of living is defined as the amount of monetary resources that are needed to secure the daily expenses of a household in order to sustain a certain standard of living. As the price of basic commodities arises, will the ordinary Filipinos ever achieve to live comfortably?
What factors affect inflation?
Ordinarily, the Bangko Sentral ng Pilipinas (BSP) releases its baseline forecasts at the beginning of each year to create appropriate monetary policies for the whole year. However, there are several factors that are beyond their control that can disrupt the inflation rates. Factors such as unexpected changes in agricultural product prices and oil prices, government policy changes, or a catastrophe. Furthermore, there are other factors that can drive prices or inflation in an economy. A rise in inflation normally results from either an increase in production costs or an increase in demand for products and services.
One type of inflation is the so-called cost-push inflation which happens when the cost of the factors of production, such as raw materials and wages, increases, and sellers are left with no choice but to increase their prices or ‘push’ them in order to continue to make a profit or just to make a break-even on their costs, or sometimes they even lose some money because they cannot push anymore their prices. However, in this scenario, the demand for goods remains unchanged while the supply of goods declines due to the higher costs of producing them. And as a result, the added costs of production are the reason why the sellers need to push their prices up and the burden is being passed onto their consumers in the form of higher prices for the finished products/goods. Possible cost-push inflation can be seen in rising commodity prices such as oil since they’re major production inputs.
1. Oil Prices
The volatility of oil prices has a directly proportional relationship with inflation. Once oil prices hikes, inflation rates will also rise because almost all industries use oil. And this leads to rising as well on production costs that the burden will now be shifted to the consumers, increasing the prices of goods and services. If you ever heard of the ongoing Russia-Ukraine war on the news, just so you know it has continuously affected the Philippines since last March 2022. The inflation rate in 2022 continues to rise, the highest increases in the indices of transport, food and non-alcoholic beverages, housing, water, electricity, gas, and other fuels have been recorded highest.
2. Agricultural Product Prices
The volatility of agricultural product prices has also effects on the inflation rate in 2022 in the Philippines. Of course, the oil price hikes, so as the food prices as well, an industry that uses oil to transport their good to the different parts of the country, which, in turn, drives the headline inflation up.
3. Calamities or Catastrophes
Another factor that affects inflation is calamities or catastrophes. It’s a well-known fact that the Philippines is frequently visited by severe typhoons. It has always left the country in a pure devastating state. And thus, the aftermath of any strong typhoon has always kept commodity prices high. Infrastructure damages and telecommunications outages after a typhoon often causes disruptions and affects fuel and commodity prices resulting from the scarcity of food, drinking water, and other essential goods.
Read Also: 10 Fuel-Efficient Cars in the Philippines
The Demand-Pull Inflation
Another type of inflation is demand-pull inflation which happens when there is strong consumer demand for a scarce good. Prices tend to increase if there is a surge in demand for a wide breadth of goods across an economy. When unemployment is low, and wages are rising, the consumer tends to spend more, having the confidence that they can pay. When available items are becoming fewer, consumers are willing to pay more in order to obtain the product. And the result of that is higher prices due to demand-pull inflation.
What is expected of the Philippine inflation rate for the second quarter of 2022?
The analysts forecast that the inflation rate will further accelerate and is expected to settle above the target range of 2-4% in 2022, as reported by the BSP. The inflation rate in 2022 last May, rose to 5.4 percent, which is the highest since December 2018. This rise is largely driven by the adverse impact of the ongoing Russia-Ukraine conflict on global oil and food prices, which could lead to the continued emergence of second-round effects such as higher energy prices, transport costs, and wage hikes. Moreover, the inflation rate in 2022 is also expected to settle close to the upper end of the target in 2023 before decelerating in 2024.
The continuous rise in inflation is primarily due to elevated prices of global non-oil commodities such as food and agricultural products and metals, continued shortage in domestic pork supply, higher fish prices, and possible jeepney fare hikes due to higher oil prices. Who would have thought that oil prices could rise up to almost one hundred pesos? Almost every week, we see another hike in the price of fuel. But, despite the fact that gasoline prices are currently at all-time highs, there are still ways that you can do in order to save whatever there is to save if any. You can try some ways on boosting fuel efficiency and some best practices, such as increasing fuel efficiency, conserving energy, and preserving fuel in commercial vehicles, that you can do to maximize the use of your car while gasoline prices are currently at all-time highs.
Read Also: 2022 Gas Price Fluctuation: Why Does it Go Up and Down?
But, this is just the effect of the Russia-Ukraine conflict on global oil. Moreover, the possibility of the reimposition of quarantine measures, because COVID-19 cases in some places are resurging, slower global economic recovery can result and thus, may weaken demand and could slow down inflation.
Despite a continuous rise in the inflation rate in 2022, the country’s economy is seen to grow faster within the government’s target range of 7-9%. Growth in the economy is seen to accelerate in quarter 2 as the community quarantine restrictions continue to ease. Mobility is not a problem anymore, goods can be transported easily, although there is currently an all-time high in fuel prices. However, this growth could also be tempered by the possible slower growth of the global economy in the succeeding quarters of the year because Covid-19 cases are reemerging in some countries. But, nonetheless, the economy is forecasted to remain strong in 2023 growing within a target of 6-7%
Inflation affects almost every industry in the economy as if it has a domino effect. Inflation can affect you directly when it accelerates faster than bank interest rates which can chip away at your savings. But for real estate properties, inflation can be perceived as a positive sign. When commodity prices rise, land values and rent prices as well increase, making a profit for property investors. Plus, there are tons of benefits of buying real estate now, such as passive income, equity, and monthly rents. Real estate investments are a good idea to invest your money because real property increases in value over time, unlike other investments.