INFLATION
Organizational
Leadership
Chapter 8
Prepared by: MARK J. BONIFACIO
Inflation
Is the rise in the general level of prices
of goods and services in an economy
over a period of time.
Thus, if there is inflation
there is a general upward
movement in the prices of
goods and services in an
economy.
Therefore, we can translate that:
Purchasing
Price level
Power
increases
decreases
P500.00
= 50 year 2015
P500.00
= 50 year 2015
P500.00
= 70 year 2022
P500.00
= 70 year 2022
In measuring inflation, an aggregate
representation of prices of commodities is
needed.
Such a general price level is represented
through a price index.
3 ways to get the Price Index?
1. GNP Deflator
2. Producer Price Index (PPI)
3. Consumer Price Index (CPI)
1. GNP Deflator
GNP deflator is an economic metric that
accounts for the effects of inflation in the
current year's gross national product.
GNP Deflator formula
GNP Nominal GNP
Deflator = Real GNP
X 100
2. Producer Price Index (PPI)
The Producer Price Index (PPI) measures
the average change over time in selling
prices received by domestic producers of
goods and services
Producer Price Index formula
Current price of
basket market
PPI = Base price of
X 100
basket market
2. Consumer Price Index (CPI)
The Consumer Price Index measures the
overall change in consumer prices based on
a representative basket of goods and
services over time.
What is Basket of Goods?
The basket of goods
and services is meant
to represent a typical
family's spending.
In economics, the term
basket of goods refers to a
fixed set of consumer goods
or services, the prices of
which are used to measure
a nation's rate of inflation.
Consumer Price Index formula
Cost of market basket in year t
CPI = Cost of market basket in Base
X 100
year
Consumer Price Index formula
Hypothetical Data of Market Basket
Basket of Goods 2021 2022
Rice 40 50
Sugar 30 60
Oil 25 45
Fish 120 150
Meat (pork) 130 150
Total Weighted Price 345 455
Let’s compute!
Hypothetical Data of Market Basket
Basket of Goods 2021 2022
Rice 45 55
Sugar 38 65
Oil 30 48
Fish 110 150
Meat (pork) 150 155
Total Weighted Price Compute the CPI
To compute the inflation rate
CPI of current year – CPI of previous year
IR = CPI of previous year
X 100
To compute the inflation rate
CPIC– CPIP
IR = CPIP
x 100
Hypothetical Data of Market Basket
Basket of Goods 2020 2021 2022
Rice 30 40 50
Sugar 25 30 60
Oil 15 25 45
Fish 90 120 150
Meat (pork) 110 130 150
Total Weighted 270 345 445
Price
Solve:
Emily recently started tracking her monthly expenses to
understand how inflation is affecting her budget. In
January, her total expenses were P2,000. Over the next
six months, the total expenses increased to P2,300 in
July.
Calculate the inflation rate for this period and determine
the average monthly inflation rate.
Solve:
David is a college student who regularly buys a basket of
goods to meet his basic needs. In January, the total cost
of his basket of goods was P3,520. Over the next four
months, the cost of the same basket increased to P4,225
in May.
Calculate the inflation rate for this period and determine
the average monthly inflation rate.
THEORIES OF
INFLATION
Demand-pull Inflation
• The most popular type of
inflation, in which is a rise in the
general price level resulting
from an excess of aggregate
demand or the total spending.
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• Typically, demand-pull inflation
& images by Freepik and illustrations by Storyset
is associated with an economic
boom.
Demand-pull Inflation
• Demand-pull inflation occurs
because quantity demanded is
greater than quantity supplied
which tends to increases prices.
The demand-side is pulling
prices up with increased income
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and/or a change in consumer
& images by Freepik and illustrations by Storyset
preferences.
Cost – push Inflation
• The Cost-push inflation is an
excess of total spending is not the
only possible explanation for
rising price
• Cost-push inflation is a rise in the
CREDITS: This presentation template was created by
Slidesgo, including icons by Flaticon, and infographics
& images by Freepik and illustrations by Storyset
general level of prices resulting
from an increase in the cost of
product.
Cost – push Inflation
• We should remember however
that the source of cost-push
inflation is not always due to
the increased in price of oil.
Any sharp increase in cost of
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Slidesgo, including icons by Flaticon, and infographics
production of businesses can
& images by Freepik and illustrations by Storyset
be potential source of cost-
push inflation.
Potential source of cost-push inflation
• Rising labor cost perhaps due to an increased minimum wage
• Higher global price for component and raw materials including
imported energy and foodstuffs
• A depreciation in the external value of the exchange rate
which then causes a rise in imports prices
• An increase in indirect taxes such as higher VAT, etc.
INFLATION AND
THE Does anyone have any questions?
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POWER OF THANKS
MONEY
What is Purchasing Power?
Purchasing power is the value of a currency
expressed in terms of the number of goods
or services that one unit of money can buy.
PURCHASING POWER
• When inflation occurs, the price levels rise
meaning more money are required to buy
certain basket of goods.
• The Purchasing Power of Money indicates
how many market baskets of goods can be
purchased with one unit of money.
P500.00
= 50 year 2015
P500.00
= 70 year 2022
Purchasing
Price level
Power
increases
decreases
To compute the Purchasing Power of Peso
CPI of previous year
PPP = CPI of current year
X 100
Year Total Weighted CPI Inflation Rate Purchasing
Price Power
2017 1,300 110 ---- ----
2018 1,680
2019 1,890
Year Total Weighted CPI Inflation Rate Purchasing
Price Power
2017 1,300 110 ---- ----
2018 1,680 129 17.27%
2019 1,890 113 -12.4%
2020 2,230 118 4.42%
2021 2,680 120 1.69%
2022 3,110 116 -3.33%
Core inflation
• Is a widely used measure of the underlying trend or movement in
the average consumer prices. It is often used as a complementary
indicator to what is known as "headline or Consumer Price Index
(CPI) inflation. Core inflation measures the change in average
consumer price after excluding from the CPI certain items with
volatile price movements. By stripping out the volatile components
of the CPI, core inflation allows to see the broad underlying trend in
consumer prices.
• Core inflation is often used as an indicator of the long-term inflation
trend and as indicator of future inflation. It is usually affected by the
amount of money in the economy relative to production, of by
monetary policy
headline inflation
Headline Inflation
• Refers to the rate of change in the consumer price index, a measure of
the average price of a standard basket' of goods and services
consumed by a typical family. In the Philippines, the CPI basket is
composed of various consumer items as determined by the nationwide
Family Income and Expenditure Survey (FIES) conducted every three
years by the PSA.
• Headline inflation, therefore, captures the changes in the cost of living
based on the movements of the prices of items in the basket of
commodities and services consumed by the typical Filipino household