Mark Gabriel B.

Danga
2- PS2 Bachelor of Arts in Political Science Macroeconomics

Inflation in the
Philippines and
possible ways to
reduce its Impact
Introduction

What is Inflation?

Inflation is the decline of purchasing power of a given currency over time. A quantitative
estimate of the rate at which the decline in purchasing power occurs can be reflected in
the increase of an average price level of a basket of selected goods and services in an
economy over some period of time. The rise in the general level of prices, often
expressed a a percentage means that a unit of currency effectively buys less than it did
in prior periods.

Inflation can be contrasted with deflation, which occurs when the purchasing power of
money increases and prices decline.

The economic structure of the Philippines has changed very little over the past two and
a half decades and portrays much of a Latin American prototype economy: a dualistic
structure in which a small proportion of the labor force is employed in a capital-intensive
and highly protected manufacturing sector, while the larger share of the population is
employed in typically low-productivity agriculture and urban informal services. Over the
past twenty-five years there has been a continuous struggle to maintain macroeconomic
stability with growth being alternately limited by a foreign exchange constraint, a savings
constraint and a fiscal constraint. The period 1970-79 is crucial since it was at this time
that the Philippines accumulated a huge external debt burden which dictated the
structure of economic policy in subsequent years.

The Philippines’ inflation rate seems to have leveled off after peaking at more than 5
percent in 2018 and jumping up and down a few years prior. The Philippines are
considered “newly industrialized”, but the economy relies on remittances from nationals
overseas, and the services sector generates most of its GDP .

After switching from agriculture to services and manufacturing, the Philippines are now
an emerging economy, i.e. the country has some characteristics of a developed nation
but is not quite there yet. In order to transition into a developed nation, the Philippines
must meet certain requirements, like being able to sustain their economic development,
being very open to foreign investors, or maintaining a very high stability of the
institutional framework (like law enforcement and the government). Only if these
changes are irreversible can they be classified as a developed nation.

Ever since the switch to services and manufacturing, employment in these areas has
increased and the country is now among those with the highest employment in the
tourism industry worldwide. This transition was not entirely voluntary but also due to
decreasing government support, the liberalization of trade, and reform programs. Still,
agriculture is important for the country: As of 2017, more than a quarter of Filipinos are
still working in the agricultural sector, and urbanization has only increased very slightly
over the last decade.
Cause of Inflation in the Philippines

In the Philippines, the volatility of inflation has been caused by factors such as disturban
ces in agricultural food supply or movements in international oil prices. As a
result, the headline inflation rate may reach double-
digit levels, even though the prices of other CPI components show only mild increase.
Core inflation is an indicator of the underlying movement in consumer prices since it tak
es out the effect of temporary disturbances and shocks that cause prices to surge or de
cline,
independent of economic and monetary policy. Measuring core inflation helps policy
makers determine whether current movements in consumer prices represent shortlived
disturbances or are part of a more permanent trend. Such knowledge is important in
the formulation of economic policy, particularly monetary policy, which responds mainly
to broad‐based pressures on prices.

According to Kimberly Amadeo there are two main causes of inflation: Demand-pull and
Cost-push. Both are responsible for a general rise in prices in an economy. But they
work differently. Demand-pull conditions occur when demand from consumers pulls
prices up. Cost-push occurs when supply cost force prices higher.

You may find some sources that cite a third cause of inflation, expansion of the money
supply. The Federal Reserve explains that it's a type of demand-pull inflation, not a
separate cause of its own.

Demand-pull inflation is the most common cause of rising prices. It occurs when
consumer demand for goods and services increases so much that it outstrips supply.
Producers can't make enough to meet demand. They may not have time to build the
manufacturing needed to boost supply. They may not have enough skilled workers to
make it. Or the raw materials might be scarce.

The second cause is cost-push inflation. It only occurs when there is a supply shortage
combined with enough demand to allow the producer to raise prices.

There are several contributors to inflation on the supply side. For example, wage
inflation that increases salaries. It rarely occurs without active labor unions.

A company with the ability to create a monopoly is also a contributor to cost-push

inflation. It controls the entire supply of a good or service. The Sherman Anti-Trust Act
outlawed monopolies in 1890.

Natural disasters create temporary cost-push inflation by damaging production facilities.

That's what happened to oil refineries after Hurricane Katrina. The depletion of natural
resources is a growing cause of cost-push inflation. For example, overfishing has
reduced the supply of seafood and drives up prices.
Government regulation and taxation also reduce supplies. In 2018, U.S. tariffs reduced
supplies of imported steel. That created shortages in manufactured parts, with some
producers raising prices. In 2008, subsidies to produce corn ethanol reduced the
amount of corn available for food. This shortage created food price inflation.

When a country lowers its currency's exchange rates, it creates cost-push inflation
in imports. That makes foreign goods more expensive compared to locally produced
goods.

Effects of the Inflation

The Philippines witnessed the highest annual GDP growth in 31 years in 2007. With the
annual GDP growth of 7.3 percent, the Philippines outperformed Indonesia, Malaysia
and Thailand for the first time since 1998. While the Philippines were growing at a rate
significantly lower than its neighbors in the early 1990s, it kept up with the healthy
growth in the region in more recent years. Yet, the Philippines appear to have made
only marginal gains in poverty reduction in recent years. According to the estimates in
World Bank (2008), the poverty rate using the international poverty line of one dollar per
day per capita in purchasing power parity dropped from 13.5 percent in 2000 only to
13.4 percent in 2006 in the Philippines. In comparison, the proportion of people living
under the same poverty line dropped during the same period from 15.4 percent to 7.7
percent in China, 9.9 percent to 8.5 percent in Indonesia, 5.2 percent to 1.8 percent in
Thailand, and 15.2 percent to 4.9 percent in Vietnam. In these countries, the number of
poor people also diminished. However, it increased in the Philippines because the
population grew as much as 14 percent between 2000 and 2006—about three times
higher than the regional average of East Asia and the Pacific—during the period of time
when poverty rate declined very little. Inflation's effects on an economy are various and
can be simultaneously positive and negative. Negative effects of inflation include an
increase in the opportunity cost of holding money, uncertainty over future inflation which
may discourage investment and savings, and if inflation is rapid enough, shortages
of goods as consumers begin hoarding out of concern that prices will increase in the
future. Positive effects include ensuring that central banks can adjust real interest
rates (intended to mitigate recessions), and encouraging investment in non-monetary
capital projects.

High inflation can prompt employees to demand rapid wage increases, to keep up with
consumer prices. In the cost-push theory of inflation, rising wages in turn can help fuel
inflation. In the case of collective bargaining, wage growth will be set as a function of
inflationary expectations, which will be higher when inflation is high.
This can cause a wage spiral. In a sense, inflation begets further inflationary
expectations, which beget further inflation. Inflation can lead to massive demonstrations
and revolutions. For example, inflation and in particular food inflation is considered as
one of the main reasons that caused the 2010–2011 Tunisian revolution and the 2011
Egyptian revolution, according to many observators including Robert Zoellick, president
of the World Bank. Tunisian president Zine El Abidine Ben Ali was ousted, Egyptian
President Hosni Mubarak was also ousted after only 18 days of demonstrations, and
protests soon spread in many countries of North Africa and Middle East.

If inflation gets totally out of control (in the upward direction), it can grossly interfere with
the normal workings of the economy, hurting its ability to supply goods. Hyperinflation
can lead to the abandonment of the use of the country's currency, leading to
the inefficiencies of barter.

Conclusion

In conclusion, Inflation occurs when an economy grows due to increased

spending. When this happens, prices rise and the currency within the economy is
worth less than it was before. The currency essentially won’t buy as much as it
would before. When a currency is worth less, its exchange rate weakens when
compared to other currencies.

There are many methods used to control inflation; some work well, while others
may have damaging effects. For example, controlling inflation through wage
and price controls can cause a recession and cause job losses.

One popular method of controlling inflation is through a contractionary monetary

policy. The goal of a contractionary policy is to reduce the money supply within
an economy by decreasing bond prices and increasing interest rates. This helps
reduce spending because when there is less money to go around: those who
have money want to keep it and save it, instead of spending it. It also means
there is less available credit, which can reduce spending. Reducing spending is
important during inflation because it helps halt economic growth and, in turn, the
rate of inflation.

The second tool is to increase reserve requirements on the amount of money

banks are legally required to keep on hand to cover withdrawals. The more
money banks are required to hold back, the less they have to lend to consumers.
If they have less to lend, consumers will borrow less, which will decrease
spending.
The third method is to directly or indirectly reduce the money supply by enacting
policies that encourage the reduction of the money supply. Two examples of this
include calling in debts that are owed to the government and increasing the
interest paid on bonds so that more investors will buy them.