INFLATION BEATING STRATEGIES: THE CASE OF SELECTED

BUSINESSMEN IN TAGBILARAN CITY

An Undergraduate Thesis Presented to the Faculty

Of the College of Business and Accountancy
Holy Name University
Tagbilaran City

by

Florissa Ivy B. Bolacoy

Luchelle E. Bunani
Marlou Mae C. Sy

October 2017
 APPROVAL SHEET

This thesis entitled, “INFLATION BEATING STRATEGIES: THE CASE OF

SELECTED BUSINESSMEN IN TAGBILARAN CITY”, prepared and submitted
by Florissa Ivy B. Bolacoy, Luchelle E. Bunani and Marlou Mae C. Sy, in partial
fulfilment of the requirements for the degree of Bachelor of Science in Business
Administration major in Financial Management, has been examined and
recommended for acceptance and approval for oral examination.

DR. ERNESTO GOLOSINO, CMITAP

Content/Technical Adviser
Faculty, College of Business and Accountancy

PANEL OF EXAMINERS

Approved by the Committee on Oral Examination with a grade of

PASSED.

DR. JEMMA J. JAY, CPA

Chairman
Dean, College of Business and Accountancy

MRS. MA. EMILY NAVALES, MBA Faculty, College of Business and

Member Accountancy
MR. LEOMAR B. VIRADOR, CPA, CMITAP
Member
Faculty, College of Business and
Accountancy
 Accepted and approved in partial fulfilment of the requirements for the
degree in Bachelor of Science in Business Administration Major in Financial
Management.

DR. ROSEMARY G. ZACAL

Chair, Business Administration Department
October 2017

DR. JEMMA J. JAY, CPA

Dean, College of Business and Accountancy
October 2017

4
 CHAPTER I

THE PROBLEM AND ITS SCOPE

INTRODUCTION

Rationale

Inflation is an economy-wide sustained trend of increasing prices from one

year to the next. It erodes the true value of money. If not guarded well, anyone

will fall trap to its cunning design. Businesses are likely to be hit by inflation since

it would mean an increase in the cost of production and would be very tough to

update prices regularly. Resources are locked in fixed interest rates for a given

period for businesses with fixed incomes. As inflation grows over the years, the

interest rate one might have is worth more presently than in the future, thus

eroding the value of one’s money.

The significance of this research will benefit businessmen by becoming

cognizant and plot in advance by having early savings and investments. Making

businessmen aware on the impacts brought about by inflation in attaining

financial goals would enable businessmen to discover and apply strategies that

could beat inflation.

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 Based on the causes of inflation, several theories have been developed by

economists. The demand-pull theory of inflation is an outcome of strong

consumer demand relative to supply. According to Monetarists, led by Milton

Friedman, excess demand is the direct result of the oversupply stocks of money.

It is the increase in money supply that is responsible for the inflation in the

economy. Thus, inflation is a monetary phenomenon.

The concepts in the preceding paragraph triggered the interest of the

researchers to uncover if the selected businessmen in Tagbilaran City utilized

investment schemes which will beat the inflationary pressures brought about by

price volatilities.

Theoretical Background

In today’s volatile markets, many people are planning for future financial

stability and fleeing to safe investments, but this could turn sour if the cost of

living increases because of inflation. According to Johnson (1972), inflation is

often described as the increase in the prices of goods and services over a given

period of time and usually measured by Consumer Price Index (CPI). Moderate

inflation is often times related to economic growth, while high inflation indicates

an overheated economy.

Businesses and consumers spend more money on goods and services when

an economy is growing. As the economy grows, demand outpaces the supply of

goods causing producers to raise their prices and as a result, inflation rate

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increases. For the past 10 years, the highest inflation rate recorded by Bangko

Sentral ng Pilipinas (BSP) was in 2008 (8.3%) and the lowest in 2016 (1.8%).

Despite the fact that the yearly inflation level is within the objectives set by the

BSP, the quick repercussion is the negative effect of buyers' purchasing power.

BSP’s indicator when there is inflation is the increase in average prices of goods

and services typically purchased by consumers. But there are also other factors

resulting in inflation.

Inflation arises from different factors. Based on the study of Harriot (2000),

the basic reason for inflation is excessive liquidity. This means too much money

is circulating or competing to buy the available goods at existing prices. Allowing

more money in circulation causes an increase in demand for goods and services,

and if not matched by higher production, prices are bid up. This pattern harms

the society in general because the purchasing power of the currency will be

diminished.

An article entitled impact of inflation on business which is similar to the

findings of Harriot’s (2000) argued that the increased price of products and

services happens when inflation is present. When inflation rises, the monetary

value decreases in terms of percentage. Apparently, inflation is caused by

demand-pull factors or cost-push factors. These factors are in consonance to the

doctrine advanced by Keynes.

Keynes (1936), mentioned about cost-push on his “General Theory” as

one of the causes of inflation, wherein there is a rise in the cost of production as

a result of employees’ pressure to raise wages; this is to sustain employees from

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the continuing rise of the basic needs, thus, this would cause an increase in the

prices of output.

Moreover, studies of Peterson and Ford (2017) is congruent to the study of

Keynes’ cost-push inflation, that the main cause of the inflation is the increase in

wage rates that have surpassed labor productivity gains. The increased wages

shows an increase in the input cost for businessmen which in turn call for higher

selling prices of goods and services to cover these costs.

Furthermore studies of Dyken, Pidun and Stelter (2010) also pointed out that

inflation adds time and effort for businessmen to change prices frequently and

that the frequently increase of prices is a result to an increase in menu costs. If

proprietors opt not to increase the prices of commodities relative to the increase

in menu costs, this would give business owners negative returns.

Keynes (1940) added and emphasized the demand-pull as one main cause

of inflation. Demand-pull inflation happens when the value of demand goes up

and outstrips the value of supply. This arises when the economy is booming. This

means that individuals have high purchasing power, causing a rise in demand for

goods and services, hence will lead to inflation. These conditions have an

adverse effect on the money supply in the market.

Based on the study of Milton Friedman (1963) a renowned monetarist, it

was pointed out that the cause of inflation is because of expanding money

supply. As the demand for goods and services rise and outpaces supply, this

gradually increases the quantity of money circulating in the economy and the key

for Friedman is the use of monetary policy to control inflation. If this continues,

8
the value of a country’s currency will be weakened and other countries are less

willing to invest.

The preceding argument made Wolla (2015) cite an advantage of a

country having weak currency, that it is good for businessmen who trades

internationally as the products that they sell would mean for international

consumer really cheap, however, businesses who sells imported goods, it would

mean for a call to pay more money than the usual. And to protect importers from

the verge of loss, importers will have to increase prices for goods and services.

Currently, BSP uses monetary policy as its way of monitoring and stabilizing

prices in the Philippines.

One of the pillars of BSP is price stability through the conduct of monetary

policy. Price stability is the BSP’s primary mandate that refers to low and stable

inflation and preserves purchasing power. As too much money is circulating in

the economy due to excessive demand, BSP’s way of slowing down inflation is

by implementing contractionary monetary policy.

Contractionary monetary policy is where the BSP increases policy interest

rates, then the banks will follow the interest rates set by BSP. This policy

encourage individual to save money in the financial institution (i.e. banks) as it

provides a high-interest rate thus making money in circulation (M1) becomes

money in the banks (M2). At the same time discourages borrowers to borrow

funds from financial intermediaries because of very high-interest rates, thus

helping in too much money in circulation.

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 On the contrary, expansionary monetary policy is applied by BSP when too

low money is in circulation. The expansionary monetary policy decreases interest

rates and encourages borrowers to borrow funds from banks making money in

the banks flow in the economy. And this discourages savers and would probably

pool out all their savings from the banks.

On the other hand, pricing power according to the study of Marn and Rosiello

(1992), is the most effective means for increasing profitability. This helps beat

inflation by increasing the prices of commodities, but this strategy has a

downside when the owner of the business keeps on beating inflation by

countering it with the high price of the commodity it will directly shy away

customers because the power of the buyer is also reduced by the price increase

of the seller. In the end, it will drive out buyers, thus the effort of the investor to

beat inflation may have miscalculated effect and that is lower profitability, if not a

business loss.

The previous argument is in consonance to the view of Michael Kresh

(2006) who pointed out that it is good to save money for the future, beating

inflation is necessary to afford future retirement. This is only true when the

investment designed to beat inflation will indeed have a higher return than

inflation. Kresh also argued that inflation should be the number one concern of

businessmen and accumulate funds in long-term to beat the rate of inflation. The

succeeding are tips based from an article entitled four low-risk inflation

strategies, to achieve financial safety in the future.

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 First, strike a balance between safety and return. Choosing low-yielding

investments would easily protect businessmen from the danger of loss of

principal. But Kresh added that one cannot have a real rate of return without

taking some sort of risks. The higher the risk an investment has, the higher the

return. It is imperative to evaluate the amount of risk that an investor can afford

so that any strategy could be made as well.

Second is to invest in a Treasury Inflation-Protected Securities (TIPS). TIPS

would be the safest bet because these bonds rise along with inflation rate. There

will be an automatically price-adjust in accordance with inflation as measured by

the CPI. In other words, businessmen’s investment is shielded from inflation.

In relation to the previous tip, Kresh suggested that if businessmen are to

buy TIPS to beat inflationary pressures, better buy it through Mutual Funds or

Exchange-traded funds (ETFs), as TIPS through a mutual fund pay out earnings

in a form of a dividend rather than having the growth in the bond. Although TIPS

gives very low-interest rates, it will give businessmen a real rate of return over

time, since this kind of bond will pay the rate of inflation plus the interest rate that

is promised in bonds.

The third is to invest in stocks. Stocks have the potential to give returns that

are higher than the inflation rate. Many say that if there is inflation, companies

can increase prices of goods and services, which in turn increases the revenue

of a company. As revenue increases, it would result to an increase in dividends

and stock prices. Therefore, businessmen have nothing to worry because the

earnings and revenue increase along with inflation.

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 Similarly, Baldwin introduced strategies to beat inflation in an article entitled

seven ways to beat inflation. However, this does not mean that businessmen

must embrace all of these ways because some are costly to afford. One may

choose any of these that could fit one’s financial capabilities. Owning a real

estate is one of the ways to beat inflation as advocated by Baldwin. Real estate

tends to increase its value over time higher than the increase in the cost of living,

therefore covering up the rise in the cost of living caused by inflation.

In accord to the earlier article, another article entitled how to beat inflation-

tour guide to sound financial planning, states that one can benefit financially by

investing in a real estate, which is renowned for its inflation-beating history,

because it is a long-term investment that moves along with inflation, thus making

it a strong candidate for this type of goal. If businessmen have sufficient funds to

buy a house in cash now, then it eliminates the possibility of losing one’s

purchasing power in the future. Agreed by Mercandante in an article entitled six

ways to brace your investments for inflation, which in a portfolio it should contain

a real estate if and only if the investor foresees that inflation is to happen in the

future to prevent loss on investments. However, if real estate is costly for

businessmen, one can invest in stocks in long term.

Owning stocks, is another way to beat inflation in the article seven ways to

beat inflation as introduced earlier. It was argued that stocks beat inflation over

long periods and is agreed by several authors in many different articles. Christine

Benz agreed in an article Our Picks for Inflation Protection, that stock is a way to

12
gird ones portfolio against the perils of inflations. The returns are variable unlike

with investments that provide fixed returns, hence creating higher returns than

bonds. Making investor's returns less affected by inflation.

Parallel to the prior arguments about owning stocks as means of beating

inflation, an article about racing past inflation recommended that in order to beat

inflation one must start saving early and invest in growth assets such as stocks

and real estate, for inflation always exists in developing countries. Krishnan, chief

executive officer of Entrust Family Office Investment Advisors, added that

beating inflation is the biggest aim of investment. That is why when investors

build a portfolio, the return that investors expect must be much higher than the

inflation rate. Nevertheless, this is only applicable in the long-run.

Base from an article entitled Ron Baron: Long-Term Investments Are the

Way to Go, Baron mentioned that in order to get a higher return, one must invest

(stocks) and hold for the long term and rebalance one’s portfolio when a market

provides opportunity. When the market falls, investors must add stocks to their

portfolios every year in order to lower prices and gain from market recovery. In

this way, global markets will be able to recover losses in the long run.

On the other hand, if business owners find it risky to invest in such investments

like stocks and real estate, there are other investments that are less risky like the

TIPS as described in an article earlier.

Risk and return are inherently interrelated, but some risks can be diversified

away by diversifying in a right way so one can increase the potential returns

accompanied with reduced risk. Likewise diversifying away specific risks in

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mutual funds, by investing in other asset classes such as bonds and real estate

one can diversify away some market risk of equities. Asset allocation is the key

driver of returns says Rahul Shah, vice-president of Equity Advisory Group.

In addition, owning resource funds and owning resource stocks as a way of

beating inflation for Baldwin still suggests that one must invest in stocks. The

difference is that the former suggests to invest one’s money into a mutual fund.

According to the studies of Hossain, Rahman and Rajib (2013) mutual fund is

where a fund manager pools money to the investors and invest it in stock market.

While the latter suggests that one must invest in stocks that are owned by

companies related to natural resources (i.e. mining and oil).

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 THE PROBLEM

Statement of the Problem

This study is conducted to determine the activities done by selected

businessmen in order to protect themselves against inflation. More specifically

this paper sought to answer the following questions:

 What is the profile of the selected respondents?

 What is the level of awareness of respective respondents in terms of the

effects of inflation to their investments?

 What are the investment techniques used by respondents in order to

protect themselves against the adverse effects of inflation?

Significance of the Study

Businessmen

Their knowledge in this study will guide them in choosing proper

investments so that they will end up getting a return which is higher than the

prevailing inflation rate.

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Government

It will benefit the government in general because the result of the study will

become an instrument for government institution to educate the public about how

to beat inflation.

Students

Through this study, students will be aware and be guided on the adverse

effects of inflation and will be able to decide on how to hedge against future

inflations.

Scope and Limitation

The study is conducted to determine the business practices of selected

respondents in order to beat inflation. This study is not a catch all study which will

give the full view of all investors in the entire province. The respondents is limited

only to selected number of respondents based on a certain statistical method.

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 RESEARCH METHODOLOGY

Research Design

This study used quantitative type of research. Under quantitative type of

research, the random sampling method using slovin’s formula as it is helpful in

gathering information and other facts needed to determine the investment

strategies used by selected businessmen in beating inflation in Tagbilran City.

Random sampling is a method of selecting a sample (random sample) from a

statistical population in such a way that every possible sample that could be

selected has a predetermined probability of being selected. To facilitate the

gathering of data, a survey was come out through the use of a self-made

questionnaire with items formulated in the light of the problem.

Research Environment

This study will be conducted in selected business establishments in

Tagbilaran City whose owners apply investment strategies to beat inflation.

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Research Participants

The researchers decided to choose selected business owners since they

are more knowledgeable of the possible consequences of inflation into the

business and what actions must be done.

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