General Definition of Inflation

Inflation refers to the increase in the overall prices of goods and services over time. This implies that the value of money goes down or can buy less than it used to. For example, if a cup of coffee cost 50 pesos last year and now costs 55 pesos, this increase is a result of inflation. When prices climb, the same amount of money can buy fewer goods and services, eroding the purchasing power of money.

Inflation happens due to various reasons. One common cause is when there's a higher demand for products than the available supply. Think of it as more people wanting to buy a certain product, but there aren't enough of those products available, which leads to higher prices. Another reason could be the increased costs of making products. For instance, if the cost of raw materials goes up, the price of the final product is likely to increase as well.

In contrast, deflation Deflation Deflation signifies a decrease in general price levels, increasing money's purchasing power but potentially slowing economic activity and increasing the real debt burden read more » represents a decrease in the general price level of goods and services. While it may initially seem beneficial, deflation can lead to decreased consumer spending. As people anticipate lower prices in the future, they tend to delay purchases, which can reduce business revenue, leading to cuts in wages or jobs and potentially triggering a cycle of economic stagnation.

It is essential to understand inflation as it affects everyone. When prices rise, the value of money changes, impacting how much we can purchase with our money. A little inflation is normal and can indicate a healthy economy, but too much or too little can lead to various economic challenges.


Inflation Measurements

When it comes to gauging inflation in the Philippines, a few key indicators are essential for understanding how prices change over time. One of these is the Consumer Price Index Consumer Price Index (CPI) he Consumer Price Index (CPI) tracks the price change of a diverse basket of goods and services, indicating inflation levels and guiding economic policy. read more » or CPI. The CPI in the Philippines is a basket comprising various goods and services that are common in Filipino households. This basket includes everyday items such as rice, meat, fish, vegetables, electricity, and transportation costs. By monitoring how the prices of these items change, the CPI provides insight into the cost of living and how it evolves, typically on an annual basis.

In media and economic reports, 'headline inflation' and 'core inflation' are also often mentioned. Headline inflation Headline Inflation Headline Inflation is the total measure of inflation in an economy, reflecting the price change of a broad set of goods and services, significantly influenced by food and energy prices. read more » in the Philippines takes into account all items within the CPI basket, including those with highly variable prices like food staples and energy costs. This measure can fluctuate significantly, especially when there are sudden changes in prices of these items. For instance, a sharp increase in the cost of rice or fuel can dramatically affect the headline inflation rate, reflecting immediate economic pressures faced by Filipinos.

Core inflation Core Inflation Core Inflation measures the long-term inflation trend, excluding volatile items like food and energy, providing a clear view of the inflation that's directly influenced by economic policies read more » , on the other hand, strips out certain volatile items, typically food and energy prices. In the Philippine context, this might mean excluding the price changes of rice, which is a staple food, or oil, given its critical role in transport and manufacturing. Core inflation aims to provide a more consistent view of inflation by focusing on the long-term trend in prices, minus the short-term volatility. It gives policymakers and economists a clearer picture of underlying inflation trends, free from the immediate impact of sudden price changes in these key areas.


Philippine Inflation Rates ( 1960 to 2024 )

The chart below shows the headline inflation rate in the Philippines from 1960 to 2024 . This graph helps us see the changes in prices over the years and gives us an idea of how much the cost of living has gone up or down. By looking at these changes, we can better understand how different times in our country have affected the prices of the things we buy every day.

Philippine Inflation in 2023

The inflation rates in the Philippines for 2023 were shaped by a mix of domestic and global events. Throughout the year, notable increases in the prices of essential food items like onions and rice were observed. Additionally, gasoline prices saw significant fluctuations, influenced in part by international scenarios, including the Russia-Ukraine and Israel-Palestine situations and other supply demand dynamics. These global events potentially affected oil prices and import costs, contributing to the overall inflationary trend in the Philippines for the year.

The table below shows the recorded inflation rate for each month in 2023, with the overall full-year inflation rate standing at 6.0%. 

The data shows a challenging start to 2023, with inflation rates significantly exceeding the government's target range of 2-4%. The highest inflation rate was recorded in January at 8.7%, reflecting considerable economic pressure. However, by the end of the year, there was a notable shift, with December's rate cooling down to 3.9%, finally aligning more closely with the government's target.


Effect on Purchasing Power

Effect on Deposits

When we put our money in the bank, we often think about the interest it will earn. However, it's also important to think about inflation, which is how much prices for things like food and rent go up over time. Inflation can affect the real value of the money you save. Here's a simple way to look at it: if your bank is giving you a small amount of interest on your savings, but the prices of things you need to buy are rising faster, then the money you've saved isn't worth as much as it used to be. In other words, even though the amount in your bank account goes up, you might not be able to buy as much with it as before.

 For example, let's say you have 10,000 pesos in the bank, and it earns 2% interest in a year. Now you have 10,200 pesos, which sounds good. But if the cost of everything you need to buy has gone up by 4% because of inflation, your 10,200 pesos will not go as far as 10,000 pesos did last year.

This is important for everyone, especially for people who are saving for the future, like for retirement. You want to make sure that your money will still have good buying power when you need it.

The chart below illustrates the changes in the value of a bank deposit over time in the Philippines, along with the adjusted real value when considering the impact of inflation. This visual representation helps us understand how the purchasing power of money saved in bank accounts changes due to inflation.

Factors that contribute to the Inflation

Inflation in the Philippines is influenced by a variety of factors.  Among these, the country's vulnerability to natural calamities is one of the significant contributors. Such events can severely disrupt agriculture and infrastructure, leading to supply chain interruptions and shortages that push prices upward.

An equally significant contributor to inflation is the country's reliance on imported goods, particularly oil. Being heavily dependent on imports means that any global price changes have profound effects. Increased costs in oil lead to higher expenses in transport and production, which then cascade into rising consumer prices across multiple sectors.

Exchange rate fluctuations can also contribute to inflation in the Philippines. Given the country's reliance on imported goods, a depreciation of the peso against other currencies can increase import costs, which may lead to higher inflation.

Inflation is also influenced by seasonal supply and demand changes. For example, during holiday periods, the demand for certain products and consumer goods often increases. If supply cannot meet this rise in demand prices can go up. These seasonal supply and demand dynamics also play role in shaping the country's overall inflationary trends.


Rice Prices

Rice prices in the Philippines play a significant role in understanding inflation, as rice is a staple in the Filipino diet. The fluctuations in rice prices over the years have had a noticeable impact on inflation and, by extension, on the everyday lives of Filipinos.

The cost of rice is influenced by a variety of factors. Locally, the production of rice is affected by weather conditions and agricultural practices. Natural calamities like typhoons and El Nino can disrupt farming, leading to reduced harvests and higher prices. On the global front, the Philippines' dependence on imported rice means that international market prices also influence local rice costs.

The chart below shows the changes in rice prices over time. It highlights the fluctuations and provides insights into how various local and international factors have influenced the price of this essential commodity in the Philippines.
The chart also shows how changes in rice prices might relate to overall inflation over several years as it can be noticed that times of rising rice prices often coincide with increasing inflation.

The cost of gasoline in the Philippines is influenced by both global and local factors. On the global stage, oil prices are subject to international market conditions, including supply and demand trends, geopolitical tensions, and production decisions by major oil-exporting countries. Since the Philippines imports a substantial portion of its fuel, these global movements directly impact local gasoline prices.

Locally, government taxes and policies also affect gasoline prices. Excise taxes, value-added tax (VAT), and other levies on fuel contribute to its final price at the pump. Changes in these taxes can lead to immediate adjustments in gasoline prices.

Changes in gasoline prices can have a noticeable impact on daily life of average citizens. Higher gasoline prices can lead to increased costs for commuting and transportation, which, in turn, affect household budgets. Businesses, especially those reliant on transportation and logistics, face higher operational costs when fuel prices rise, often passing these additional costs on to consumers.

 

The Role of the Bangko Sentral ng Pilipinas (BSP) in Managing Inflation

The Bangko Sentral ng Pilipinas Bangko Sentral ng Pilipinas (BSP) The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Philippines, responsible for maintaining monetary stability, supervising the banking sector, managing currency issuance, and guiding the country's economic policy read more » plays a crucial role in controlling inflation by setting specific targets to ensure the economy remains stable. These targets, typically ranging from 2% to 4% in recent years, guide the BSP's decisions to keep inflation at a level that supports sustainable growth and maintains the value of the Philippine peso. The idea behind setting these targets is to keep inflation neither too high nor too low. High inflation leads to rapidly increasing living costs, while too low inflation can signal insufficient economic growth.

One of the primary tools the BSP uses to control inflation is the adjustment of interest rates. When inflation starts exceeding the target range, suggesting prices are rising too fast, the BSP may respond by increasing interest rates.

Raising interest rates makes borrowing money more expensive. For individuals, this means loans and credit become costlier, which generally leads to less borrowing and spending. For businesses, higher borrowing costs can result in reduced investments in expansion and production. This overall decrease in borrowing and spending can slow down the economy's pace, which in turn helps to control and reduce the rate at which prices are rising. At the same time, higher interest rates make saving money more attractive. Banks offer higher returns on savings, leading people to deposit more money instead of spending it. This increase in savings further reduces the amount of money circulated for purchases, contributing to the slowing down of price increases.

Conversely, if inflation is lower than the target, indicating slow economic growth, the BSP might lower interest rates. This makes borrowing cheaper, encouraging both individuals and businesses to spend and invest more. Such actions can stimulate economic activity and gently push inflation towards the target range.

The BSP's actions extend beyond interest rate adjustments when managing the money supply and inflation. They also involve other financial strategies, such as buying or selling government securities.


Key Takeaways

References

Defintion of Terms and Analysis

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