Measuring Inflation

Lesson 14
 Price Increase

 Is a perennial problem of the economy. It affects the

economic decisions of households, business firms, and
even the government.
 Price increase is a part of everyday life.
 The continuing increase in the general price level of goods
and services is called Inflation. It is a problem which many
countries in the world experience and face.
Cost-push

 Mandatory increase in wages, increased cost of raw materials, breakdown or damage to

machineries and equipment, and the producer increasing the price of his products to
compensate for the increased cost of production to maintain profit level while still
supporting the demand, causes the prices of goods and services to increase.
 CAUSES
OF
INFLATION
 Demand-pull
 All sectors of the economy have their own demands.

 The demands of these sectors comprises the aggregate

demand of the economy. The demand pull inflation
happens when the sectors desire to buy products and
services more than the available supply in the market.
 In short, it is the condition where aggregate demand is
more than the aggregate of supply.
 Structural Inflation

 The increase in the normal price of commodities is a result

of an imbalance and abrupt increase of demand and supply
of the different sectors of the economy.
 There is competition between the private and public sectors
in getting their share of the country’s resources.
 Every action and movement of each economic sector
causes and increase in the price of commodities. This is
called structural-inflation.
 Reasons for Inflation
 Some people believe that price increase is asign that the economy
is developing. As the economy is doing well, inflation cannot be
controlled nor avoided.
 Sometimes inflation causes the poor to become poorer in some
countries. The hoarding of goods, which causes inflation, happens
when the market is controlled by a monopoly or a cartel.
 The main concern of business is profit. Businessmen and producers
prefer exporting raw materials and other products rather than
putting them in the market for local consumption.
People who benefit from Inflation
 People without fix income

The incomes of individuals sometimes move in accordance with price

change. Their income may increase rapidly at a higher rate than that of
inflation.
 Debtors

Debtors benefit during a price increase particularly if

interest rates of loans are lower than the inflation rate.
 Speculators

Businessmen who are inclined to buy products with unstable prices

speculate that their price can increase rapidly and easily.
People who are hurt from Inflation
 Creditors

Individuals who give loans experience losses if there is inflation. The interest on
loans may not be enough to cover the price increase.
 Individuals who save

Saving money is a good and meaningful activity of man. But during inflation,
the money in the bank depreciates in value due to the low interest of the bank.
 People with fixed Income

Workers and employees who receive fix income every month even during a
price increase are negatively affected by inflation.
 Instruments in Measuring Price Indexes

 Price index is a number that compares the prices of present

year to the prices of base year.

1. Wholesale Price Index or Retail Price Index

2. GNP Deflator or GNP Implicit Price Index

3. Consumer Price Index

 1. Wholesale Price Index or Retail Price
Index
 It shows and calculates the differences in the value of
finished products, intermediate peoducts and crude
materials in wholesale and retail trading.

 Wholesale is the price for every piece of goods.

 2. GNP deflator or GNP Implicit price index

 It is the average price index used to adjust the current GNP/GNI

deflator is being used to know the value of GNP based on the
previous year.

 Formula: GNP/GNI = GNP/GNI at Current priceat Constant

prices
GNP/GNI Deflator
 3. Consumer Price Index
 The most popular instrument in measuring inflation.
 The CPI measures the average percentage in the change of retail
prices of goods and services usually purchased by consumers,
particularly the urban families.
 It describes the present living condition of consumers according to
changes in price. The CPI measures goods and services which are
included in the market basket of goods
 The importance of CPI
 CPI is a vital instrument used in describing the economy. Through it, the cost of
living can be approximated.

 The CPI is used to determine the Purchasing Power of Peso (PPP) or the equivalent
value at base year 2000; prices of goods and services that a peso could buy at current
prices. It computes the actual amount of the peso in an assigned time compared to a
preferred year.

 As the CPI increases, the purchasing power of peso decreases.

 Purchasing Power of Peso = 1 × 100
CPI

• It is used to determine the real value of the peso compared to a

base year.

• Purchasing power of peso shows the ability of peso to buy goods

and services.

• The more CPI increases, the PPP decreases.

 Effects of Inflation

HIGH PRICES

MORE
MORE PRODUCTION WORKERS

HIGH WAGES
 The Reasons and Solutions of Inflation
REASONS
1. Monopoly and Cartel
2. Loan Payment
3. Import Dependence
4. Excess money in circulation
5. Export Orientation
6. High production cost
7. Middleman
RESULTS
Price is manipulated and
controlled
The amount is not utilized for the
development of the industries
Oversupply of imported products
Increase in demand
Shortage of supply in the local
market
Decrease in supply
The price of goods is increasing
POSSIBLE SOLUTIONS
Enforce penalty to the members
of cartel.
Set aside a small part of the
national budget for debt services.
Utilize and maximize the local
resources
Improve a tight money policy
Give priority to the needs of the
local market.
Increase production by
maximizing the use of resources
Impose price control