Realin, Julian Edward R.
BPAS – 1B
“Inflation”
Historical Context
Inflation rates rose sharply in the Philippines during 2018. Understanding the
demand and Supply sources of inflation pressures is key to monetary policy
response. Qualitatively, Indicators have pointed to evidence of inflation pressures
from both sides in 2018, with the Supply factors, by and large, associated with
commodity-price shocks and demand factors Deduced from gleaning at the wider
non-oil trade deficits seen in the Philippines. Quantitatively, we deploy a semi-
structural model to decompose the contributions of various Shocks to inflation. My
main findings are (1) supply factors (mainly global commodity Prices) played a
prominent role in explaining the rise in inflation in 2018; (2) demand factors Also
contributed to inflation in a non-negligible way, justifying the need for tighter
monetary Policy in 2018; (3) the size of the estimated output gap (an important
indicator of demand Pressures) could be larger, when considering the widening
trade deficits in 2018; and (4) a Delayed monetary policy tightening can be costly in
terms of higher inflation rates, requiring Larger and more aggressive interest rate
hikes to bring inflation under control, based on a Counterfactual exercise
Important Factors of Inflation
Exogenous Supply Shocks:
Events like global commodity price fluctuations and disturbances in agricultural food
supply can significantly impact inflation.
Monetary Policy:
The BSP’s monetary policy decisions play a crucial role in managing inflation,
particularly in the context of inflation targeting.
Fiscal Policy:
Government fiscal policies, including spending and taxation, can also influence
inflation, although the impact is often less direct than that of monetary policy.
Global Factors:
International events, such as oil price hikes and changes in global economic
conditions, can also impact inflation in the Philippines.
Regional Factors:
Specific regional factors, such as agricultural supply disruptions or consumer
spending patterns, can also contribute to inflation variations across different
regions.
Impacts of Inflation
In an inflationary environment, unevenly rising prices inevitably reduce the
purchasing power of some consumers, and this erosion of real income is the single
biggest cost of inflation. Inflation can also distort purchasing power over time for
recipients and payers of fixed interest rates.
1. Reduced Purchasing Power:
Inflation erodes the value of money, meaning consumers need more currency to
buy the same amount of goods and services.
2. Lowered Savings:
The real value of savings diminishes during inflation, as the purchasing power of
those savings declines over time.
3. Increased Borrowing Costs:
Central banks often raise interest rates to combat inflation, making borrowing more
expensive for businesses and individuals.
4. Economic Inequality:
Inflation can disproportionately impact low-income individuals and families who
struggle to keep up with rising costs.
5. Investment Uncertainty:
Inflation can create uncertainty in the business environment, leading to reduced
investment and potentially slower economic growth.
In addition to these, inflation can also lead to increased costs for businesses,
potentially impacting exports and overall economic competitiveness.
Key Takeaways
Inflation can increase home prices and interest rates – bad news for buyers but
good news for homeowners and sellers.
Inflation is the rate at which prices increase over time – typically a year.
Factors contributing to increased inflation include increased production costs, higher
demand, the housing market and monetary policy.
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