Inflation

Price stability

Price stability exists when average prices are constant over time, or when they are rising at a very low and predictable rate. Price
inflation occurs when average prices are rising above this low and predictable rate, and price deflation occurs when average prices
are falling. In both cases, the effects are potentially extremely harmful to a country’s economic performance and to the welfare of its
citizens. For this reason, price stability is commonly regarded as the single most important macro-economic objective.

The costs of inflation

Price inflation is regarded as a serious economic problem because it causes a number of significant costs to an economy, including
the following:

It erodes t he value of m oney and asse ts

A rise in the price level means, ceteris paribus, that money can buy fewer goods. If assets are stored in a monetary form, inflation
means that asset values fall. This explains why, during inflationary periods, individuals often choose to put their wealth into physical
assets, like property, rather than keep it in a monetary form in a bank account.

It redistribute s inc ome betwee n gr oups

Inflation can create a random redistribution of income given that inflation does not have an equal impact on individuals and groups.
For example, individuals who can protect their earnings or their assets from inflation will increase their income relative to those who
cannot.  Similarly, borrowers do better at times of rising prices because the real value of their repayments are reduced over time.
Lenders need to charge a higher interest rate to compensate for the falling value of the repayments to them, and for the loss of
liquidity suffered as the value of repayments fall.

It has a negative effect ive on t he  ba la nce of payments .

The balance of payments may deteriorate because domestic inflation stimulates import spending, given that imports appear
relatively cheaper, and dampens export sales, as exports appear more expensive abroad.

It cause s uncer tainty and falling  investment .

Firms respond to inflation for several reasons. Firstly, inflation dampens consumer confidence and spending and reduces
aggregate demand. Secondly, inflation increases costs and reduces competitiveness, which can lead to falling demand. Finally,
firms may anticipate that interest rates will have to rise to deal with inflation, and this undermines business confidence. Falling
confidence is likely to force firms to postpone capital investment.

It creates shoe le at her and me nu costs.

Shoe leather costs can be incurred during times of inflation when households and firms make an additional effort to seek out the
best deals. These costs are also called search costs, reflecting the increased time spent attempting to find the lowest available
prices. The Internet has made information freely and quickly available, and considerably reduced the problem of search costs. Menu
costs are costs associated with having to regularly re-price products to bring them in line with general inflation.

It can create  une mployment

Inflation can lead to a loss of jobs through its effect on costs. As costs rise firms may substitute labor with other factors, such as
new technology.

Inf lation distort s the  pr ice mec hanism

When average prices rise, the price mechanism cannot effectively fulfill its role as a resource allocating mechanism. Markets work
best when prices rise and fall, providing information about relative values, but if average prices rise continuously, with increases
outweighing decreases, resource allocation is distorted.  The distortionary effect is called inflation noise which can occur when
consumers and producers misperceive relative prices and costs. The effect is most significant when the rate of inflation is excessive.
When inflation rates approach zero, inflation noise is minimized.

It creates m oney illusion

Money illusion, also called inflation illusion, is a phenomenon that may arise when rising prices lead people to make irrational
decisions. For example, if wages rise, workers may decide to work longer hours, but if inflation erodes the value of the wage rise
they have been fooled into working longer.

The causes of inflation

Dem and pull inflat ion

Demand pull inflation usually occurs when there is an increase in aggregate monetary demand caused by an increase in one or
more of the components of aggregate demand (AD), but where aggregate supply (AS) is slow to adjust.

The commonest causes are demand shocks, such as:

1. Earnings rising above factor productivity.

2. Cheaper credit, following a reduction in interest rates.
3. Excessive public sector borrowing.
4. A housing boom creating equity withdrawal and a positive wealth effect.
5. Changes in the savings ratio.

The savings r atio

The savings ratio indicates the percentage of disposable GDP (national income) saved, rather than spent. Sudden changes in the
savings ratio are an indicator of future changes in spending and AD, and can be a prelude to inflation or deflation.

A rise in the savings ratio indicates a decline in consumer confidence, whereas a fall in the savings ratio indicates a rise in
confidence and spending, which can trigger an increase in the price level.
Cost-push inflation

Cost-push inflation occurs when an economy experiences a negative cost shock. Diagrammatically, the aggregate supply curve
shifts upward and to the left, causing the price level to rise, and aggregate demand to contract.

The comm on est causes are:

1. Oil price shocks, caused by wars or decisions by OPEC to restrict output.

2. Increases in farm prices following a series of poor harvests.
3. Rapidly rising wage costs.
4. A fall in the exchange rate, which increases the price of all imports.
5. Imported cost push inflation

Poor Economics lays out a middle ground

between purely market-based solutions to
global poverty, versus "grand development
plans." It rejects broad generalizations and
formulaic thinking. Instead, the authors help to understand how the poor really think and make decisions on such matters
as education, healthcare, savings, entrepreneurship, and a variety of other issues. They advocate the use of observation,
using rigorous randomized controlled testing on five continents, and most importantly by actually listening to what the poor
have to say. Often the answers are startling and counter-intuitive, but make the utmost sense when circumstances are
understood. In addition, the universal traps of Ignorance, Ideology, and Inertia often stymie policies and institutions, but
may be avoided.
From this empirical approach, the authors believe that the best strategies for eradicating poverty can emerge. However,
they resist laying out a broad set of conclusions. Instead they draw some simple yet powerful lessons, and believe that
small changes can have big effects. The authors conclude on the optimistic note that we are all part of the solution.

Poverty and inequality in the Philippines remains a challenge. In the past four decades, the proportion of households living
below the official poverty line has declined slowly and unevenly.

Economic growth has gone through boom and bust cycles, and recent episodes of moderate economic expansion have had limited
impact on the poor. Great inequality across income brackets, regions, and sectors, as well as unmanaged population growth, are
considered some of the key factors constraining poverty reduction efforts.
Note: See more recent data on the Philippines on the dashboard Philippines: By the numbers on ADB's Data Library.

Causes of Poverty

The main causes of poverty in the country include the following:

 low to moderate economic growth for the past 40 years;

 low growth elasticity of poverty reduction;
 weakness in employment generation and the quality of jobs generated;
 failure to fully develop the agriculture sector;
 high inflation during crisis periods;
 high levels of population growth;
 high and persistent levels of inequality (incomes and assets), which dampen the positive impacts of economic expansion;
and
 recurrent shocks and exposure to risks such as economic crisis, conflicts, natural disasters,and "environmental poverty."

Key Findings

The report's key findings include the following:

 Economic growth did not translate into poverty reduction in recent years;
 Poverty levels vary greatly by regions;
 Poverty remains a mainly rural phenomenon though urban poverty is on the rise;
 Poverty levels are strongly linked to educational attainment;
 The poor have large families, with six or more members;
 Many Filipino households remain vulnerable to shocks and risks;
 Governance and institutional constraints remain in the poverty response;
 There is weak local government capacity for implementing poverty reduction programs;
 Deficient targeting in various poverty programs;
 There are serious resource gaps for poverty reduction and the attainment of the MDGs by 2015;
 Multidimensional responses to poverty reduction are needed; and
 Further research on chronic poverty is needed.

The report comprehensively analyzes the causes of poverty and recommends ways to accelerate poverty reduction and achieve more
inclusive growth. In the immediate and short term there is a need to enhance government's poverty reduction strategy and involve
key sectors for a collective and coordinated response to the problem. In the medium and long term the government should continue
to pursue key economic reforms for sustained and inclusive growth.
Inflation
Inflation is defined as an increase in the overall price level. Please note that inflation does not apply to the price level of just one
good, but rather to how prices are doing overall. A consumer facing inflation that occurs at the rate of 10% per year will able to buy
10% less goods at the end of the year if his or her income stays the same. Inflation can also be defined as a decline in the real
purchasing power of the applicable currency.

Consumer Price Index (CPI)

The CPI represents prices paid by consumers (or households). Prices for a basket of goods are compiled for a certain base period.
Price data for the same basket of goods is then collected on a monthly basis. This data is used to compare the prices for a particular
month with the prices from a different time period.

Example:
The inflation rate is computed by subtracting the CPI of last year's prices from the CPI value for this year, dividing that difference by
last year's CPI value and then multiplying by 100.

So if the value of the price index for the current year is equal to 165, and last year's value was 150, the rate would be calculated as:

Inflation rate = (165 - 150) X100= 10

150

CPI Sources of Bias

The CPI is not a perfect measure of inflation. Sources of bias include:

·Quality adjustments - quality of many goods (e.g., cars, computers, and televisions) goes up every year. Although the Bureau of
Labor Statistics is now making adjustments for quality improvements, some price increases may reflect quality adjustments that are
still counted entirely as inflation.

·New goods - new goods may be introduced that will be hard to compare to older substitutes.

·Substitution - if the price goes up for one good, consumers may substitute another good that provides similar utility. A common
example is beef vs. pork. If the price goes up, and the price of pork stays the same, consumers might easily switch to pork. Although
the CPI will go higher due to the price increase in beef, many consumers may not be worse off. Also, when prices go up, consumers
may effectively not pay the higher prices by switching to discount stores. The CPI surveys do not check to see if consumers are
substituting discount or outlet stores.