PRICES AND CONSUMERS INFLATION Rising prices are a cause for worry among most Filipinos, especially those

belonging to the average family whose material welfare is reduced with the rise in prices of basic commodities. INFLATION is defined as any sustained or continuous increase in prices. Inflation is inevitable in any economy. To some extent, it is healthy, for it encourages business and provides the impetus for striving for full employment. However, inflation becomes an economic evil when it is excessive and unanticipated. In 1974, when worldwide inflation was its height, the inflation rate hit a fantastic 34.4%. In 1984, because of excesses and mismanagement under the Marcos regime, inflation rose to an even higher 50%. Such high rates of increase caused much suffering among Filipino masses. INFLATION RATE: 1974 34.4% 1984 50% PRICE INDEX A slight increase in the price of a prime commodity can seriously reduce his material welfare and that of his family. That is why we have to be constantly aware of what is happening to the so called PRICE INDEX as reported by the National Statistics Office. The PRICE INDEX is a convenient way of summarizing the different rates of increase in the prices in different items that enter into the market basket of Filipino families. CONSUMER PRICE INDEX (CPI) The CONSUMER PRICE INDEX(CPI) is essentially a statistical measure of the general price level. Inflation is the rate of change of the level of the general price level. Thus, inflation is measured as the percentage change in CPI, although we can use the other price indices. All the goods and services purchased by the average family in a period of, say, one month is called the MARKET BASKET of the family. What makes the CPI truly relevant is that it tells us how much more or less, the family needs to purchase a fixed basket of goods from one period to another. Suppose in 1979, the total price of purchasing the fixed market basket by a low income family was Php 800. In 1989, the price of exactly the same basket could have jumped to Php 2,000. The price indices for the two years would be as follows (1979 is chosen as the base year); YEAR RATIO OF PRICE PRICES INDEX 1979 Php 100.00 800.00 1989 2,000.00 250.00 Formula for Calculating the Annual Percentage Rate Inflation in CPI = CPI Current year CPI Prior year x 100 CPI Prior year

1989 = 2,000 8000 x 100 800 = 1,200 x 100 800 = 150 % The price index tells a simple story. The average family found its market 150% more expensive in 1989 than in 1979. Put differently, prices rose by 150% from 1979 to 1989 for the low-income families. The Shrinking Peso Since the value of the peso depends on the amount of goods and services it can purchase for its owner, its value is eroded as the Consumer Price Index goes up. CONSUMER PRICE INDEX AND PURCHASING POWER OF THE PHILIPPINE PESO Period CPI (2000=100) Purchasing Power 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 83.1 90.8 96.2 100.0 106.8 110.0 113.8 120.6 129.8 137.9 1.2 1.1 1.04 1.0 0.94 0.91 0.88 0.83 0.77 0.73

Inflation and Income Rising prices are not harmful as long as INCOMES RISE AS FAST. The capitalists and business entrepreneurs are the ones who ordinarily benefit from inflation. High prices can lead to high profits for them. As prices goes up very fast, some Filipinos are tempted to hoard prime commodities in order to make a killing in selling them at the right time. Others stockpile certain supplies of prime goods as canned milk and rice because they want to protect themselves from even higher prices in the future. The Causes of Inflation If the government allows the money supply to increase too rapidly, inflation would inevitably follow. The reason for this is the inability of our producers to immediately increase the supply of goods and services in the market as the demand for them goes up. There are two possible causes of inflation: Demand-Pull and Cost-Push.

Demand-pull Inflation Demand-pull results from a more rapid increase in income than the increase in production, or a situation where excess demand arises. It is called demand -pull because when money income rises rapidly, demand also tends to expand rapidly. If production does not catch up, the excess demand will pull prices up. Cost-push Inflation Rapid price increases may be induced by a sudden increase in the cost of production in the major producing sections of the economy. Oil-push Inflation The October 1973 Middle East conflict caught the world flat-footed with the surge of the import price of a single commodity crude oil. At that time, the Philippines relied on at least 90% of its total energy requirements on crude oil. Since production costs of firms would inevitably rise, the inflation that followed could most aptly be termed an Oil push. The impact was devastating. Higher transport and manufacturing costs led to increase in food prices and consumer goods. Overall domestic prices had to shoot up accordingly. Apart from inflation that was in our backyard, inflation from other countries was being passed on to us in the form of higher import prices. The interdependence of world economies facilitates the transmittal of inflationary pressures from one country to another. The increase in oil prices in 1973 and 1974 is a perfect example of this. Apart from the domestic inflation it caused, import costs likewise went up as the production costs of our trading partners drastically.

PREPARED BY: Queenie S. Jangca