The term "inflation" describes a long-term, widespread increase in the cost of goods and services throughout the economy, reducing consumers' and businesses' purchasing power. To put it another way, your money (or whatever currency you use to make purchases) will not be as effective as it was yesterday.
Annual inflation in a healthy economy typically ranges between two percentage points, which economists view as a sign of pricing stability. When inflation is within acceptable limits, it can also have a positive impact. For example, it can stimulate spending when the economy is slowing down and needs a boost, which will increase demand and productivity. On the other hand, when inflation starts to outpace wage growth, it may be a sign that the economy is in trouble.
Inflation in the Philippines
According to WorldData.info, In the Philippines, the consumer price inflation rate fluctuated over the course of the previous 61 years between 0.7% and 50.3%. 3.9% was calculated as the inflation rate for 2021.
The average annual inflation rate was 8.5% between the years of observation in 1960 and 2021. The overall price rise was 12,625.67%. A product that cost 100 pesos in 1960 would now cost 12,725.67 pesos.
Consumers are the ones who are most directly impacted by inflation, but businesses are also impacted. Here is a quick breakdown of the ways that consumers and businesses are impacted by inflation differently:
When the cost of goods they purchase, like food, utilities, and gasoline, goes up, households or consumers have less purchasing power.
When prices rise for production inputs like raw materials like coal and crude oil, intermediate goods like flour and steel, and finished machinery, businesses lose purchasing power and run the risk of seeing their margins erode.
Cause and Effect of Inflation
Know the causes and effects of inflation in the country.
Causes of Inflation in the Philippines
At its core, inflation is caused by an imbalance between supply and demand. More specifically, inflation occurs when the total amount of goods demanded at any given price level rises more quickly than the total amount of goods supplied at that price level, according to the former Fed chair Ben Bernanke and Andrew Abel in their textbook on macroeconomics.
Supply shocks, which significantly disrupt a crucial economic input like energy, frequently cause inflation. For instance, if many oil fields stop producing oil as a result of war, energy costs will rise. Since energy is a necessary component of almost every other good, the cost of other goods also increases. This is frequently referred to as "cost-push inflation."
The money supply is the next factor. As Moss explains, increasing the money supply will typically lead to inflation. In the book, he states that "consumers frequently find new reasons to buy things" when they have more money in their pockets and bank accounts. "However, if the supply of goods and services has not increased in the interim, the rising demand for goods by consumers will only drive up prices, fueling inflation. When "too much money is chasing too few goods," as economists sometimes claim, inflation increases. This is known as "demand-pull inflation."
Effects of Inflation in the Philippines
1. Consumers with lower incomes typically spend a greater percentage of their total income on necessities than those with higher incomes, leaving them with less of a safety net against the erosion of purchasing power brought on by inflation.
This is what economists mean when they say that a higher marginal propensity to consume is correlated with lower incomes.
2. High inflation makes saving less appealing because it gradually reduces the purchasing power of savings. Consumer spending and business investment may increase as a result of that possibility.
As a result, unemployment frequently declines initially as inflation increases. The Phillips curve, which expresses the relationship, was developed in response to historical observations of the inverse correlation between unemployment and inflation. Higher inflation can temporarily increase demand while lowering inflation-adjusted labor costs, resulting in job growth.
3. Inflation is notoriously allergic to growth stocks, which tend to be more expensive. As a result, inflation discounts the present value of growth stocks' future cash flows more severely than it does for high-duration bonds. Stocks in the consumer and technology sectors have lagged during previous high or rising inflation periods.
How to hit back inflation?
A silent budget killer, inflation.
As the purchasing power of money falls, everything increases, including your groceries and gas prices. In a good year, it reduces your purchasing power by 2% to 3%; however, these days, inflation is hovering around 8%, which is a level we haven't seen in 40 years.
The best way to deal with rising inflation is to get back to the fundamentals:
- Be aware of what you're spending your money on.
- Have a long-term investment strategy.
- Think about ways to increase your income.
You can take the following steps to lessen the impact of inflation on your life.
Create a budget
The basis of any good financial strategy is a budget, as you've probably already heard. You could better prepare for life's unexpected turns by being aware of your income and outgoing expenses. You don't record your spending, do you? In that case, it is impossible for you to know how much leeway you have in uncertain economic times. You can keep tabs on your spending by creating a budget.
Invest, invest, invest
According to Samuel Deane, founder of Deane Wealth Management, investing your available cash flow is one way to "keep up with or even outpace inflation."
You might start to doubt yourself when you observe rising interest rates, a declining stock market, or skyrocketing inflation. But to deal with ups and downs, a solid, diverse investment strategy should immediately be set up.
Reduce your expenses
You can offset some costs by carefully examining your bills, eliminating anything you don't need, and attempting to lower or negotiate the remaining amounts. When we first buy something, like insurance, we frequently shop around for the best price, but over time the price increases, and you need to continue to compare prices, she claims.
Typical expenses that could be decreased or cut include:
Costs for necessities like housing, energy, food, and transportation increase as a result of inflation. If your budget is tight, plan to reduce expenses wherever possible.
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