INFLATION

Prepared by: Group 2,

MLS 2-D

Inflation
Definition
Four Main Types of
Inflation
Causes of Inflation
Effects of Inflation
Losers and Winners
in Inflation
Statistical Updates
Controlling Inflation

Inflation is a state in which the

value of money is falling and
the prices are rising.
- C. Crowther

What is Inflation?
The

rate at which the

general level of prices
for goods and
services is rising, and
subsequently,
purchasing power is
falling.

Economic Context
The

word Inflation
refers to general
rise in prices
measured against a
standard level of
purchasing power.

Four Main Types of

Inflation

Creeping Inflation
Creeping

or mild inflation is when prices

rise 3% a year or less.
According to the US Federal Reserve,
when prices rise 2% or less, it is
beneficial to the economy.
This sets the expectations that prices
will continue to rise.

Walking Inflation
Strong;

inflation is between 3%-10% a

year.
Harmful to the economy.

Galloping Inflation
Inflation

rises to 10% or greater.

Absolute havoc in the economy.
Must be prevented.

Hyperinflation
Prices

rise more than 50% a month.

Very rare.

Causes of Inflation

 Increase

in

overall
monetary
supply.
When

the total
amount of money
available increases,
the value of that
money decreases.

 Increased

labor

costs.
Greater

labor costs
drive up the cost of
prices as labor is
one of the most
significant factors in
overhead.

 Demand
Situation

pull.

when
prices of goods and
services increase
because there are
not enough goods
and services to
meet market
demand.

 Cost
When

push.

a vital product
has its supply line
interrupted or costs
dramatically
increased.
One perfect example
is: A rise in petroleum
prices leading to
increased costs in the
general economy.

Effects of Inflation

Negative Effects
Damaging

period of boom and bust

economic cycle.
It can discourage economic investment
and long term economic growth.
Inflation can make economy
uncompetitive.
Reduced value of saving.

Positive Effects
High

revenues and profit- a low

stable rate of inflation of say between
1% and 3% allows the businesses to
raise prices, revenues and profits.
Tax revenues- the government gains
from inflation through Fiscal Drag
Effects.

 Cutting

real value of debt- low stable

inflation is also a way of helping to
reduce the real value of a outstanding
debts.
Avoiding deflation- economy can
manage to avoid some of the dangers of
deflationary recession.

Socio-Political Effects
Price

increases make
people unhappy and
different groups in
society start blaming one
another for increases in
the cost of living.
When rents, service
charges, bus fares or taxi
fares are raised, the
frustration often causes
social and political
unrest.

Losers and Winners

Losers
Fixed

Income
Earners (including
pensioners)

Real

income of workers:
diminishes

 Savers
The

interest rate of savings deposit may

not cover the cost of inflations.
If money is withdrawn during the time
when prices are high, that money will
lose purchasing power.

 Creditors
The

same with Savers, by the time they

will receive the money payment they
also have less purchasing powers
Money they receive: cheap
Interest payment is less than the
Inflation rate

 Holders
Their

of Securities

money invested in securities

depreciates in terms of purchasing
power

Winners
Debtors
They

are paying back cheap pesos to

their creditors that have less purchasing
power.

Fixed
Land

Asset Owners

owners gain during inflation as the

value of land and other fixed assets
appreciate.

 Producers
The

income of producers increases

when inflation takes place.
As the price of commodities increases,
business firms gain higher returns.

Statistical Updates

Worldwide

Asia

Philippines

Region 6

Top 20 Countries with Highest

Inflation Rates

Controlling Inflation
Methods which have proved to be highly
effective in controlling inflation to large extents.

 Fiscal

Policies
Monetary Policies
Exchange Rates
Long-term means of controlling Inflation

Fiscal Policies
Fiscal

policies are effective in increasing

the leakage rates from the circular
income flow, thereby rejecting all
further additions into this particular flow
of income.
This brings about a reduction in the
Demand-Pull Inflation, in terms of
increasing unemployment and
slackening the economic growths.

 Fiscal

policies commonly employed:

Lowering the expenses on governmental
level.
A fall in the borrowing amounts in the
government sectors, on an annual basis.
High direct taxes, for reducing the
disposable income.

Monetary Policies
Policies

which can actually control the

rise in demand, by increasing the rates
of interest and reducing the supply of
real money.

 An

escalation in the interest rates

brings about a reduction in
collective demands:
A rise in the interest rate discourages
borrowing from both companies and
households. When interest rates
increase, it simultaneously encourages
the savings rate, owing to an escalation
in the opportunity cost of expenditure.

 Rise

in the interest rates is a very useful

tool for restricting monetary inflation.
Increase in the real rates of interest
decreases the demand for loans,
thereby limiting the growth of broad
money.

 There

may also be a fall in the

commercial investments, due to a rise in
the costs of borrowing money. This
exerts a direct influence on a handful of
planned investment-related projects,
which turn out to be unprofitable . This
leads to a fall in the collective demand.

 An

increase in the payment of mortgage

interests automatically decreases the
real 'effective' disposable income of the
house owners, as well as their spending
capacities. Escalation in the mortgage
costs also decreases the demand
generated in the housing markets.

Exchange Rates
An

escalation in the exchange rate is

possible by increasing the rates of
interest or buying money through the
central bank interferences in the foreign
exchange markets.

Short-term mean by which inflation

can be controlled through exchange
rates:
Income policies or direct wage controls:
Setting restrictions on the growth rate of
wages may decrease cost push inflation. On
governmental level, an attempt to influence
the growth of wage leads to limit the rise in
the pay in public sectors, as well as initiates
cash restrictions for making payments to
the employees of public sectors.

Long-term means of
controlling Inflation:
Supply-side
If

Reform Policy

more output is produced at a low per

unit cost, there are chances for the
economy to attain persistent economic
growth and development, without being
affected by inflation.

 Policy

regarding labor market

reforms:

If

an increase in the flexibility of the

labor market permits the commercial
firms to put a check on labor costs, it
can lead to a reduction in the pressures
created by Cost-Push Inflation.