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INFLATION

GROUP 2: MLS 2F
BULACLAC, MC Chelsea
LASERNA, Cita Mae
MONSALE, Antoinette Marie
TANTENGCO, Precious

Inflation
Definition
Types of Inflation
Creeping Inflation
Walking Inflation
Galloping Inflation
Hyperinflation
Demand Pull Inflation
Cost Push Inflation
Causes of Inflation
Rising Wages
Import prices
Raw Material Prices
Profit Push Inflation
Declining productivity
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Higher taxes
Rising house prices
Printing more money
Effects of Inflation
Positive Effects
Negative Effects
Statistics
Inflation Rate of the World
Inflation Rate in Asia
Inflation Rate in the Philippines
Solutions to Inflation
Monetary policy
Higher interest rates and slowing
money supply
Fiscal policy
Fixation of exchange rates

WHAT IS INFLATION?
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INFLATION
is a sustained increase
in the cost of living or
the average / general
price level leading to a
fall in the purchasing
power of money

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Types of Inflation
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Creeping Inflation
Creeping or mild inflation is when prices rise 3% a

year or less
According to the U.S. Federal Reserve, when prices
rise 2% or less, it's actually beneficial to economic
growth.

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Walking Inflation
This type of strong, or pernicious, inflation is between

3-10% a year
It is harmful to the economy because it heats up
economic growth too fast
People start to buy more than they need, just to avoid
tomorrow's much higher prices

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Galloping Inflation
When inflation rises

to 10% or greater
Money loses value so
fast that business and
employee income
can't keep up with
costs and prices
Foreign
investors avoid the
country, depriving it of
needed capital.
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Hyperinflation
It is when the prices skyrocket more than 50% -- a

month
Very rare
Usually due to unrestrained printing of fiat currency
Most examples of hyperinflation have occurred when
the government printed money recklessly to pay for
war.

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DEMAND PULL INFLATION


Demand for a good or service increases so much that

it outstrips supply
A growing economy can create some inflation as
people feel confident about the future and spend
more
Discretionary fiscal policy
Marketing and new technology

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DEMAND-PULL INFLATION

It's simply when demand


for a good or service
increases so much that it
outstrips supply. If sellers
maintain the price, they will
sell out. They soon realize
now have the luxury of
raising prices, creating
inflation.

if demand is growing faster


than supply, prices and
inflation will increase over
time.

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COST-PUSH INFLATION
This isn't as common
as demand-pull inflation,
because it only occurs
when there is a shortage
of supply combined with
enough demand to allow
the producer to raise
prices

higher costs at
companies leads to higher
selling prices in order to
maintain margins, resulting
in rising inflation.

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WHAT ARE THE CAUSES?

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Cost push
inflation can
be caused by
many factors
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Rising wages are a key cause of


cost push inflation because wages
are the most significant cost for
many firms. (higher wages may
also contribute to rising demand)

1. Rising
Wages
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One third of all goods are imported in


the UK. If there is a devaluation then
import prices will become more
expensive leading to an increase in
inflation. A devaluation / depreciation
means the Pound is worth less,
therefore we have to pay more to buy
the same imported goods.

2. Import
prices
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The best example is the price of


oil, if the oil price increase by 20%
then this will have a significant
impact on most goods in the
economy and this will lead to cost
push inflation.

3. Raw
Material Prices
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4. Profit
Push
Inflation
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If firms become less


productive and allow costs
to rise, this invariably leads
to higher prices.

5. Declining
productivity
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If the government put up taxes,


such as VAT, this will lead to higher
prices, and therefore CPI will
increase.

6. Higher
taxes
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MONETARY EXPANSION
Over-expansion of the money supply

Not just cash, but also credit, loans and mortgages


Money supply increase through Expansionary Fiscal

Policy or Expansionary Monetary Policy.


Cause for inflation in housing prices in 2005-2006
When the money supply expands, it lowers the value
of the dollar

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Rising house prices do not


directly cause inflation, but they
can cause a positive wealth effect
and encourage consumer led
economic growth. This can
indirectly cause demand pull
inflation

Rising house
prices
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If the Central Bank prints more money, you


would expect to see a rise in inflation. This
is because the money supply plays an
important role in determining prices. If
there is more money chasing the same
amount of goods, then prices will rise.
Hyperinflation is usually caused by an
extreme increase in the money supply

Printing more
money
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Inflation is famous for its negative effects


and destruction
but

It has some positive


aspects as well
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POSITIVE
EFFECTS

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Increase in production due to inflation


Increases the employment opportunities in
the country
Enhances the process of economic
development
Increases the economic activities that may
cause to inventions and innovations.
Profit of the producers also in increases
when there is normal inflation
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NEGATIVE
EFFECT
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It is difficult for consumers to purchase more


goods.
It generates very bad effects on the poor labour
force
Inflation reduces the living standard and
It is harmful for creditors

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STATISTICAL UPDATE
Inflation Rate of the World

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Global inflation rate comparisons


from 2004 - 2014

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The global regions with the highest year-on-year


inflation rate in 2014 are the Middle East and North Africa,
as well as Africa Sub-Sahara. The nations in the world with
the highest inflation rates in 2014 were Venezuela and
Sudan.
As a result of a global economic downturn, the lack of
a sufficient central bank, and the rise in interest rates, the
cost of living in the Middle East has also become much
higher than in industrialized countries. The inflation rate in
industrialized countries in 2014 was just over 1.7 percent.
Meanwhile, the inflation rate in the Middle East and North
Africa amounted to more than 7.6 percent.
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Due to economical progress following the global

financial crisis, developed countries in the European


Union and the euro area set forth economic strategies
to strengthen their economy and maintain a stable
economy. In addition, stagnant worker wages and a
hesitation from banks to easily distribute loans to
ordinary citizens have also caused the inflation rate in
the euro zone to be relatively low. Despite having
been harshly impacted by the global financial crisis,
Greece has one of the lowest inflation rates in 2014 in
comparison to the previous year.

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Top 20
Countries
with the
highest
inflation
rate in 2014
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Higher inflation rates

Third world or developing

countries (lack a sufficient central


bank)
Stable inflation rates
More industrialized countries and
emerging markets

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STATISTICAL UPDATE
Inflation Rate of Asia
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STATISTICAL UPDATE
Inflation Rate of the Philippines
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food and non-alcoholic index 4.8%


alcoholic beverages and tobacco 3.9%
clothing and footwear 3.1%
furnishing, household equipment and routine
maintenance of the house index 2.2%
restaurant and miscellaneous goods and services
1.5%
housing, water, electricity - -1.1%
gas and other fuels and transport indices at - -0.5 %
communication - -0.1%

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Solutions on How to Reduce


Inflation
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Following measures can take part


in reduction of inflation:
Reducing government spending by using monetary

policy
Setting higher interest rates and slowing money supply
by the central banks can control inflation
Reducing demand, by taxation through fiscal policy
Fixation of exchange rates

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Monetary Policy
Changing the rate of growth of demand for money

Maintained through actions such as increasing the

interest rate, or changing the amount of money banks


need to keep in the vault (bank reserves)
Affects Interest Rates

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Higher interest rates


The result is that consumers

have more money to spend,


causing the economy to grow
and inflation to increase.
As interest rates are increased,
consumers tend to have less
money to spend. With less
spending, the economy slows
and inflation decreases.

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Slowing money supply


Money supply grows too fast, the rate of inflation will

increase; if the growth of the money supply is slowed


too much, then economic growth may also slow.

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Taxation through fiscal policy


Government adjusts its
spending levels and tax
rates to monitor and
influence a nation's
economy
Find a balance between
changing tax rates and
public spending
Taxation leads to:
Balancing of budget
Additional revenue

Sharing of wealth
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Fixation of exchange rates


Regulate the transfer of foreign currency reserves

Depletion and reduction of the foreign currency

reserves will be prevented

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End!
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