ANALYSIS

Inflation is one of the most important macroeconomic variables and the most feared by
the economic actors, including the Government, because it can bring bad influence on the
structure of production costs and the level of welfare. And the wider effects such as instability,
economic growth, the declining of competitiveness, the interest rate, uneven income distribution
and unemployment is increasing. Some of the countries that have experienced hyperinflation
showed that poor inflation would lead to social and political instability, and did not create the
economic growth (Sukirno, 2004). Inflation is used as one of barometer tool to measure the
health rate of an economy. Inflation that is too high will decrease the level of social welfare.
Conversely, too low inflation reflects the economy which does not run maximally which impact
on slowing economic growth, stagnant job creation, and increased poverty community.

The Philippine Statistics Authority (PSA) releases inflation data every 1st week of the
month for the public to be aware of just how much prices have changed compared to a year
ago.

Inflation can be caused by excess/pull request (liquidity/money/currency) occurs due to

excessive total demand which is usually triggered by a flood of liquidity in the market resulting in
a high demand and trigger changes in the price level. Increasing the volume of the medium of
exchange or liquidity associated with the demand for goods and services resulting in increased
demand for factors of production. The increasing demand for production factors causing prices
to rise. While inflation insistence costs (cost push inflation) occurs due to the scarcity of
production and/or also includes the scarcity of distribution. The lack of launch of distribution flow
or the reduction of production provided from the average normal demand could trigger a price
increase in accordance with the legal validity of the demand-supply. The cause of inflation may
be driven either by supply or demand. Supply-driven or cost-push inflation happens when the
cost of producing goods, the prices of raw materials and wages go up. In this scenario, there
are fewer goods being produced due to the high costs of production, yet demand remains
consistent. On the other hand, demand-pull inflation occurs when people's demand outpace the
ability of industries to supply goods.

The effect of inflation to the people is you need to pay more for the same goods and
services. One could also think of inflation as a reduction of the value of money, as consumers
are able to purchase less than before. As inflation rises, the value of the peso diminishes more
quickly. Elevated prices of goods hit hardest those consumers who have not received salary
increases over time. In effect, people have to constantly get a raise to keep up with the prices of
goods. High inflation is also not good for people who have long-term investments in banks, as it
may erode the value of money.

Inflation is not bad all the time because the government wants inflation, but only within
an acceptable range. For instance, economic managers want inflation for 2018 to 2020 to settle
between 2% and 4%. The problem, however, is that inflation in 2018 continues to shoot up
beyond the target range. Revising monetary and trade policies, as well as providing subsidies to
the poor, are only some of the ways by which the government can restrain inflation within the
acceptable range. Inflation, especially when it is demand-driven, is an indicator that people have
more money to spend and reflects a growing economy. The government is also avoiding
deflation, or the decline of prices of goods. While it may sound good, deflation is an indicator of
anemic or poor economic activity. Low consumption slows down the economy, which would
then lead to fewer jobs and opportunities.

Standard of living is largely based on two factors: your income and your expenses.
Inflation occurs when day-to-day expenses rise. An imbalance in the relationship between
supply and demand causes inflation. Prices rise as increasing numbers of people compete to
buy a limited number of goods.

Periods of inflation are common in functioning free market economies. However, inflation
can have a profound effect on your standard of living due to how your purchasing power
declines.

Inflation can hurt your standard of living by cutting the purchasing power of your income
while increasing your daily expenses. You may have to take on debt to get by, which can have
interest charges that further harm your finances.

Economists and government officials use a variety of methods to track inflation, but the
Consumer Price Index is commonly used as a measure of inflation in the United States. The
CPI charts fluctuations in the prices being paid by urban consumers for food, housing,
education, clothing and various services. CPI data do not include income taxes, although they
do include sales and excise tax.
Inflation causes the CPI to rise, while deflation has the opposite effect. Historically,
prices gradually rise over time, but inflation becomes a concern when prices rise rapidly.
Inflation affects your standard of living because it can reduce your spending power. Retirees are
often greatly affected by inflation because many retirees live on a fixed income. While their
pension income remains flat, prices rise. Consequently, their disposable income is reduced as
day-to-day expenses consume an ever growing portion of their income.
Wage earners experience the same problem if wages stay flat or if inflation outpaces
wage increases. You avoid the ravages of inflation if your income level rises at a pace that
exceeds the rate of inflation.

When faced with inflation, you can either curb your spending or borrow the funds needed
to maintain your current standard of living. If you choose the latter, debt payments eventually
erode your earnings in much the same way as inflation. You can combat a small decrease in
your spending power by eliminating discretionary expenses such as gym memberships or
magazine subscriptions. A more dramatic loss of spending power could force you to move into a
smaller home or to rely on public transportation rather than a personal vehicle.

Hyperinflation occurs when price hikes spiral out of control. In such an economy, you
may exhaust your entire budget buying basic essentials such as food and water.

Governments attempt to combat inflation by raising interest rates. As borrowing costs

rise, consumers and businesses have less disposable income. As demand for goods dries up,
retailers slash prices to offload surplus inventory.
Governments can also address inflation by manipulating currency prices. This affects the
cost of imports and exports. If a particular currency increases in value, the cost of imports
decreases, and this helps to bring down inflation.

However, governments have no control over energy prices and commodities. An

increase in the cost of oil has a knock-on effect that causes transportation costs to rise.
Businesses' profit margins shrink, so companies raise prices. Any subsequent measures taken
by the government serve to treat the symptoms rather than the root cause of inflation.