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Understanding Inflation: Causes and Effects

This document discusses inflation by defining it as an increase in the overall price level of goods and services in an economy over a period of time. It then provides details on how inflation is measured using indices like the Consumer Price Index (CPI) which tracks the prices of goods in a typical market basket. The document also outlines the main causes of inflation as either demand-pull or cost-push factors and describes the different winners and losers when inflation occurs. Finally, it notes that the COVID-19 crisis is expected to have little impact on inflation currently due to price freezes on basic commodities under the state of calamity and that inflation can be controlled using fiscal and monetary policies.

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Mark Watney
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106 views2 pages

Understanding Inflation: Causes and Effects

This document discusses inflation by defining it as an increase in the overall price level of goods and services in an economy over a period of time. It then provides details on how inflation is measured using indices like the Consumer Price Index (CPI) which tracks the prices of goods in a typical market basket. The document also outlines the main causes of inflation as either demand-pull or cost-push factors and describes the different winners and losers when inflation occurs. Finally, it notes that the COVID-19 crisis is expected to have little impact on inflation currently due to price freezes on basic commodities under the state of calamity and that inflation can be controlled using fiscal and monetary policies.

Uploaded by

Mark Watney
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

NOTES ON INFLATION

This is to answer the common questions posted in the Discussion (some classes did not post questions,
though). It will also take the place of our lecture and supplement the slides I uploaded. Please study both
the slides and this note.

HOW TO MEASURE INFLATION

To measure inflation, various indices like the Consumer Price Index (CPI), Producer Price Index (PPI) and
Retail Price Index, etc. Among these, the most commonly used is the CPI. The CPI uses a hypothetical
"basket of goods". For example, let's say the basket contains food, medicine, transportation, utilities,
etc. If for the year 2019, that basket costs a family P30,000/month and the following year, the same
basket costs P30,500, the percentage increase in the prices is the inflation rate.

To compute for CPI:

CPI = cost of the market basket for the given year/cost of the market basket for the base year x 100

From the example: 30,500/30,000 x 100 = 101.67. There was a 1.67% increase in prices.

CAUSES OF INFLATION

Inflation can be either “demand-pull” or “cost-push”. Demand-pull inflation is caused by an increase in


the total (aggregate) demand for goods and services. This is commonly observed during Christmas
season where prices tend to be higher because people have greater demand for commodities, induced
by their higher (or additional) income during the season. Cost-push inflation is a result of higher input
costs like higher prices of electricity, gasoline, other material, even currency depreciation 1.

EFFECTS OF INFLATION

People can be divided into winners or losers due to sudden increases in prices (inflation).

Winners Losers
Debtors (Because the real value of their debts Lenders (The value of what they will receive as
decreases. This is why interest is charged to payment will no longer be the same (less)
compensate for lost value of money over time.) because of inflation.)
Flexible income earners Fixed income earners (think of having fixed
allowance or baon and prices continue to
increase)
Those who pay fixed mortgage (same reason as Fixed pension/allowance earners
debtors)

HOW DO WE EXPECT THIS COVID-19 CRISIS TO AFFECT INFLATION?

1
I will this discuss this further under Foreign Exchange Rate.

Page 1 of 2
The current crisis on COVID-19 has made the government put the entire country under the State of
Calamity. The entire country is on the state of calamity which means there is an automatic price freeze
for basic commodities. Thus, there is not much expected movement in the prices.

HOW CAN INFLATION BE CONTROLLED?

Inflation can be controlled through either or both fiscal and monetary policies. Discussion on these
policies (separate note) will explain it further.

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