INFLATION

Inflation is the rise in the general prices of goods and services over time. When inflation occurs,
each unit of currency buys fewer items than before, meaning the value or purchasing power of money
goes down.
 Causes:
 High consumer demand – When many people want to buy products at the same time (like
food, gadgets, or clothes), sellers raise the prices because demand is higher than supply.
 Example: During holidays, prices of ham or gifts often go up because more people want
to buy them.
 Limited supply – If there are fewer goods available but people still want to buy them, sellers
raise prices.
 Example: When onions were limited in the market, prices skyrocketed.
 Too much money in circulation – When a country prints too much money, the value of that
money decreases, causing prices to rise. When the government prints too much money,
there’s more cash in people’s hands. But if the number of products stays the same, prices rise
because money becomes less valuable.
 Example: If everyone suddenly had ₱10,000 more, stores might increase prices since
more people can afford to buy more.

 Increased Production Costs:

Higher costs of raw materials, labor, or other inputs can lead to businesses passing those
costs onto consumers through higher prices. When it becomes more expensive for
companies to produce goods because of higher costs of materials, fuel, or wages, they
usually raise the prices of their products so they can still earn profit.
 Example: If fuel prices rise, transportation and delivery costs go up, so grocery prices
increase too.
 EFFECTS
 Reduced Purchasing Power:
The value of money decreases, meaning consumers can buy less with the same amount of
money. When prices go up, the money you have can’t buy as much as it used to. This means
you need more money to buy the same products.

 Example: If ₱100 used to buy 2 kilos of rice, now it might only buy 1.5 kilos.

 Erosion of Savings:
The value of savings declines as prices rise, making it harder for people to save for the
future. As prices rise, the money people save loses its value. What you saved last year might
not be enough to buy the same things today.

 Example: If you saved ₱500 for a new pair of shoes, but now that same pair costs
₱700, your savings aren’t enough anymore.
 Uncertainty and Instability:
 High inflation can create economic uncertainty, discouraging investment and saving. When
inflation is high, people and businesses feel unsure about the future. They may stop investing,
spending, or saving because they don’t know what prices will be like tomorrow.
 Example: A store owner might hesitate to expand their business because prices of
goods and rent keep changing.

 Redistribution of Wealth:
Those with fixed incomes (like pensioners) may suffer more as their income doesn't keep up
with rising prices. People who earn a fixed income—like retirees or workers with a set salary
—are affected more because their earnings don’t increase along with prices. Meanwhile,
those with businesses or flexible income might still keep up.
 Meanwhile, those with businesses or flexible income might still keep up.
 Economic Impacts:
 Inflation reduces the value of money, making everyday items more expensive.
= When prices rise, the same amount of money can buy fewer goods and services. This
affects everyone, especially families on a budget.
 A small amount of inflation is normal and can encourage spending and investment.
= Mild inflation shows that the economy is growing. It motivates people to spend or invest
money instead of just saving it, which keeps businesses active.
 However, very high inflation (called hyperinflation) can make money almost worthless, harming
the economy.
= When inflation is out of control, the value of money drops so much that people can’t afford
basic needs. It leads to poverty, unemployment, and economic collapse.
 Monetary Policy Response:
 To fight inflation, central banks like the Bangko Sentral ng Pilipinas may increase interest rates.
This makes loans more expensive and reduces spending.
= When prices rise too fast, the central bank tries to slow things down. One way they do this is
by raising interest rates.
Why?
When interest rates go up, it becomes more expensive to borrow money like getting loans, and
more rewarding to save money in the bank. This means people and businesses will spend
less.
 Example: If the interest on loans increases, fewer people will buy cars or build houses,
and companies may delay big projects. This helps cool down the economy and control
inflation.
Deflation
Deflation is the decrease in the general prices of goods and services over time. Unlike inflation,
where prices go up, deflation means prices are going down. This sounds like a good thing at first,
after all, who wouldn’t want cheaper items? But when prices keep falling, it can lead to serious
problems in the economy. It usually happens when there is less spending, too much supply, or limited
access to money and credit.
 Causes:
 Too much supply – When companies produce too many goods but there are not enough
people buying them, they are forced to lower prices to sell their products.
 A factory produces thousands of new phones, but people are not interested in buying
them. To avoid losses, stores lower the price of the phones to attract more buyers.
 Low demand – If people are not spending, maybe because they lost their jobs or are saving
money out of fear for the future, businesses struggle to make sales. To try to attract buyers,
they reduce their prices.
 Example: During a recession, families stop going out to eat. Restaurants lower their
prices to try to get customers, but many still stay home to save money.
 Less money or credit available – When banks are not lending as much or people don’t have
enough cash, overall spending in the economy drops. If people and businesses can't borrow
money, they won't spend or invest as much. This weakens the economy and pushes prices
downward.
 Economic Impacts:
1. While lower prices may sound good, deflation can hurt the economy.

2. People might delay purchases, expecting prices to fall more, which slows business sales.
 Example: A student wants to buy a new smartphone, but news says prices may drop
more next month. They delay the purchase. If many people do this, it slows down the
whole economy.
3. Businesses earn less, may lay off workers, and this can lead to a recession.
 As prices fall, businesses earn less for their products. If the income is not enough to
cover costs like wages and rent, they may lay off workers or shut down.
4. Also, debt becomes harder to pay off because the value of money goes up. Even though the
amount of debt stays the same, the value of money increases during deflation. So people and
businesses need to pay back loans using money that is now worth more, making debt
repayment more difficult.
= Example: A farmer borrowed ₱50,000. But now, due to falling crop prices, he earns less
money. That same ₱50,000 is now harder to pay back because his income has dropped while
the debt stays the same.
 Monetary Policy Response:
 To address deflation, central banks may lower interest rates to encourage borrowing and
spending. Central banks reduce interest rates to make borrowing cheaper. When interest rates
 are low, people and businesses are more likely to take out loans to buy things or invest, which
helps boost spending and increase demand.
= Example: If the interest on a housing loan drop from 6% to 3%, more people may decide to
buy houses because the loan is more affordable. This increase in spending helps the economy
recover.

REDISTRIBUTIVE EFFECTS OF INFLATION

Inflation affects people differently, depending on their income, wealth, and economic activities. These
effects are called redistributive effects because inflation can shift purchasing power from one group
to another.
Here are the main redistributive effects of inflation:
1. Fixed-Income Earners vs. Flexible-Income Earners
 People with fixed incomes (like pensioners or minimum wage workers) suffer during inflation
because their income stays the same while prices go up.
 People with flexible or adjustable incomes (like business owners or commission-based
workers) may benefit because their earnings can increase with inflation.
2. Borrowers vs. Lenders
 Borrowers gain during inflation. They repay loans with money that is now worth less than
when they borrowed it.
 Lenders lose because the money they get back has less purchasing power.
3. Savers vs. Investors
 Savers are at a disadvantage because inflation reduces the value of the money saved,
especially if interest rates are low.
 Investors in assets like real estate or stocks may benefit, as the value of these assets often
rises with inflation.
4. Producers vs. Consumers
 Producers may benefit if they can raise prices faster than their costs increase.
 Consumers lose because they have to pay more for goods and services.
5. Urban vs. Rural Populations
 Urban workers relying on fixed salaries may struggle more.
 Rural populations, especially farmers, might benefit if the prices of agricultural goods rise.
To summarize, inflation redistributes wealth and income in society, benefiting some while
disadvantaging others. Understanding these effects helps policymakers create fair economic policies.
After learning about inflation and deflation, and how inflation redistributes wealth by affecting different
groups unequally, it becomes important to understand how governments try to control or reduce
inflation. When inflation gets too high, it can hurt the economy—making basic needs more expensive
and reducing the value of money. That’s why measures to curb inflation are necessary. These are
the actions taken to stabilize prices and protect people’s purchasing power.
Measuring to curb inflation refers to the actions or policies taken by the government or central bank
to reduce or control inflation. These are usually called anti-inflationary measures and are aimed at
stabilizing prices and maintaining the value of money.
Here are the main measures used to curb inflation:
1. Monetary Policy
 The central bank (like Bangko Sentral ng Pilipinas) increases interest rates to make borrowing
more expensive and saving more attractive.
 This reduces spending and investment, which helps lower inflation.
2. Fiscal Policy
 The government reduces its spending and/or increases taxes to lessen the amount of money
circulating in the economy.
 Less government spending and higher taxes mean people have less money to spend, which
helps slow down price increases.
3. Supply-Side Measures
 The government may support increased production of goods (especially essential items) to
balance supply and demand.
 This can include giving incentives to farmers, reducing import taxes, or helping businesses
grow.
4. Price Control
 Sometimes, the government may temporarily set price ceilings on essential goods to stop them
from rising too quickly.
 However, this is only a short-term solution and can lead to shortages.
5. Controlling Money Supply
 Central banks may limit the printing of money and use tools like open market operations
(buying or selling government bonds) to reduce excess money in the system.
In summary, measures to curb inflation are tools used to manage how much money is circulating and
how goods are priced, so that inflation stays at a healthy level.
 CALCULATING THE PURCHASING POWER OF THE PESO AND INFLATION RATE
To calculate the Purchasing Power of the Peso (PPP) and the Inflation Rate, you’ll need the
Consumer Price Index (CPI) values for two periods—usually the current year and the base or
previous year.
Based on the Philippine Statistics Authority (PSA) guidelines, here's how to calculate the Inflation
Rate and the Purchasing Power of the Peso (PPP):

The inflation rate measures the percentage change in the average prices of goods and services over
a specific period, indicating how much prices have increased or decreased.
Formula:
Inflation Rate (%)=(CPIcurrent period−CPIprevious period)/ CPIprevious period)×100

Example:
 CPI in 2024: 120
 CPI in 2023: 110
Inflation Rate=(120−110)/110×100=9.09%

Interpretation:
 Inflation Rate of 9.09% means that the average prices of goods and services in 2024 have
increased by approximately 9.09% compared to 2023.
 This also indicates that for every ₱100 spent on goods and services in 2023, the same items
would cost ₱109.09 in 2024. So, there has been a price increase over the year.
What does this mean for consumers?
 A 9.09% inflation rate suggests that the cost of living has increased by 9.09%. People need
more money to buy the same goods and services they purchased in the previous year.
 If your income hasn’t increased by this same rate, your purchasing power is reduced. This
means you can buy fewer goods or services with the same amount of money.
The 9.09% inflation rate shows that prices have risen over the year, and consumers need more
money to maintain the same standard of living. This can particularly impact those on fixed incomes
or those whose wages don't adjust with inflation.

Purchasing Power of the Peso (PPP)

PPP indicates the real value of the peso in a given period relative to a base year, showing how much
goods and services one peso can buy compared to the base year.
Formula:
PPP=100/CPIcurrent period
Example:
 CPI in 2024: 120
PPP=100/120=0.83
This means that ₱1.00 in 2018 is equivalent to ₱0.83 in 2024, indicating a decrease in purchasing
power.
The 100 is constant because it represents the base year in the Consumer Price Index (CPI) system.
In the CPI system:
 The base year is always assigned a value of 100.
So, when calculating the Purchasing Power of the Peso (PPP), the 100 helps you see how much
purchasing power has changed relative to the base year, where the value of the peso was considered
at its full value (₱1 = full value).

As inflation increases, the purchasing power of the peso decreases, meaning you can buy less with
the same amount of money.

CONCLUSION:
As an individual, it’s a must to value the importance of being financially smart and socially aware.
Prices won't always stay the same, so it’s important to learn the value of saving, budgeting, and
understanding the forces that shape our financial world. Inflation teaches us to be prepared for
change, to plan ahead, and to appreciate the value of money and hard work. As future professionals
and citizens, we must also understand how inflation affects different groups in society and how
thoughtful policies and actions can help protect the most vulnerable. With this knowledge, we can be
more responsible individuals who make wise choices not just for ourselves, but for our families and
communities as well.
ACTIVITY:
INSTRUCTION: For this task, think of a product or service that you personally used to buy a few
years ago, something simple and part of your usual spending, like a favorite snack, a tricycle or
jeepney fare, a bottle of soft drink, school supplies, or even a mobile data promo. Recall how much it
used to cost when you first started buying it and then compare it to how much it costs today. Create a
simple comparison table with the name of the item, the “then” price, and the “now” price. Afterward,
write a short reflection (5–7 sentences) describing how the price change made you feel, whether it
affected how often you buy it now, and what you think caused the price to change over time. Write
your answer in a ½ crosswise. A minimum of 5 items/services. Submit your work on April 22, 2025
during our face-to-face meeting and failure to pass on time will have their points deducted.
Here's a sample of comparison table:
PRODUCT/SERVICES PRICE BEFORE PRICE NOW
BOTTLED WATER (500ML) 10 PESOS 20 PESOS
JEEPNEY FARE 8 PESOS 13 PESOS
BALLPEN 5 PESOS 10 PESOS