Title: Inflation
1INFLATION
- By Prescious Ann Joy Eleuterio
- Lauren Julleza
- Nicole Aira Bilbao
2- In economics, inflation is a sustained increase
in the general price level of goods and services
in an economy over a period of time. When the
price level rises, each unit of currency buys
fewer goods and services.
3- Inflation is defined as a sustained increase in
the general level of prices for goods and
services. It is measured as an annual percentage
increase. As inflation rises, every peso you own
buys a smaller percentage of a good or service. - (Investopedia,2013)
4CAUSES OF INFLATION
5- Inflation means there is a sustained increase in
the price level. The main causes of inflation are
either excess aggregate demand (economic growth
too fast) or cost push factors (supply side
factors)
6Â Demand Pull Inflation
- If the economy is at or close to full employment
then an increase in AD leads to an increase in
the price level. As firms reach full capacity,
they respond by putting up prices, leading to
inflation. Also, near full employment, workers
can get higher wages which increases their
spending power
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8Â Cost Push Inflation
- If there is an increase in the costs of firms,
then firms will pass this on to consumers. There
will be a shift to the left in the AS.
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10Cost push inflation can be caused by many factors
11Â Rising Wages
- If trades unions can present a common front then
they can bargain for higher wages. Rising wages
are a key cause of cost push inflation because
wages are the most significant cost for many
firms. (higher wages may also contribute to
rising demand)
12Import Prices
- If there is a devaluation then import prices
will become more expensive leading to an increase
in inflation. A devaluation / depreciation means
the Peso is worth less, therefore we have to pay
more to buy the same imported goods.
13Raw Material Prices
- The best example is the price of oil, if the oil
price increase by 20 then this will have a
significant impact on most goods in the economy
and this will lead to cost push inflation.
14Profit Push Inflation
-
- When firms push up prices to get higher rates of
inflation. This is more likely to occur during
strong economic growth.
15Declining productivity
- If firms become less productive and allow costs
to rise, this invariably leads to higher prices.
16Higher taxes
- If the government put up taxes, such as VAT and
Excise duty, this will lead to higher prices, and
therefore CPI will increase. However, these tax
rises are likely to be one-off increases. There
is even a measure of inflation (CPI-CT) which
ignores the effect of temporary tax
rises/decreases.
17Effects of Inflation
18Effects on Redistribution of Income and Wealth
- Debtors and Creditors
- During periods of rising prices, debtors gain
and creditors lose.
I would like to borrow 100.00 please Mr. Crabs,
to buy Gary a new bed
Ok, I will lend you 100.00 but in one year you
must pay back 6 interest
meow
19Meanwhile
- Who will be
better off in a years time, - Mr. Crabs or
- SpongeBob?
-
Prices in bikini bottom are rising at 10!
20Heres your 106.00 Mr. Crabs
But. Prices have rose by 10, if I wanted to buy
a new cash register a year ago I would only have
to pay 100.00, now I have to pay 110
21Effects on Redistribution of Income and Wealth
- Salaried Persons
- Salaried workers such as clerks,
- teachers, and other white collar persons lose
- when there is inflation. The reason is that
- their salaries are slow to adjust when prices
- are rising.
- Equity Holders or Investors
- Persons who hold shares or stocks of companies
gain during inflation. For when prices are
rising, business activities expand which increase
profits of companies. As profits increase,
dividends on equities also increase at a faster
rate than prices. But those who invest in
debentures, securities, bonds, etc. which carry a
fixed interest rate lose during inflation because
they receive a fixed sum while the purchasing
power is falling.
22Effects on Redistribution of Income and Wealth
- Businessmen
- Businessmen of all types, such as producers,
- traders and real estate holders gain during
periods - of rising prices. Take producers first. When
prices - are rising, the value of their inventories rise
in the - same proportion. So they profit more when they
- sell their stored commodities.
- Fixed Income Group
- The recipients of transfer payments such as
pensions, unemployment insurance, social
security, etc. and recipients of interest and
rent live on fixed incomes. Pensioners get fixed
pensions. Similarly the renter class consisting
of interest and rent receivers get fixed
payments.
23Effects on Redistribution of Income and Wealth
- Government
- The government as a debtor gains at the expense
of households who are its principal creditors.
This is because interest rates on government
bonds are fixed and are not raised to offset
expected rise in prices. The government, in turn,
levies less taxes to service and retire its debt. -
24 Effects on Production
- Misallocation of Resources
- Inflation causes misallocation of resources
when producers divert resources from the
production of essential to non-essential goods
from which they expect higher profits. - Reduction in Production
- Inflation adversely affects the volume of
production because the expectation of rising
prices along-with rising costs of inputs bring
uncertainty. This reduces production.
25 Effects on Production
- Fall in Quality
- Continuous rise in prices creates a
- sellers market. In such a situation, producers
- produce and sell sub-standard commodities
- in order to earn higher profits. They also
- indulge in adulteration of commodities.
- Reduction in Saving
- When prices rise rapidly, the propensity to
save declines because more money is needed to buy
goods and services than before. Reduced saving
adversely affects investment and capital
formation. As a result, production is hindered.
26 Effects on Production
- Government
- Inflation affects the government in various
ways. It helps the government in financing its
activities through inflationary finance. As the
money incomes of the people increase, government
collects that in the form of taxes on incomes and
commodities. So the revenues of the government
increase during rising prices.
27Other Effects
- Net Exports
- When prices rise more rapidly in the
- home country than in foreign countries,
- domestic products become costlier
- compared to foreign products.
- Encourages Speculation
- Rapidly rising prices create uncertainty among
producers who indulge in speculative activities
in order to make quick profits. Instead of
engaging themselves in productive activities,
they speculate in various types of raw materials
required in production.
28Other Effects
- Unemployment
- Â When the cost of goods and services
- go up, companies have higher overhead costs
- and consumers purchase less. This can lead
- to a downturn in the economy where jobs are
- the first casualty.
- Political
- Rising prices also encourage agitations
- and protests by political parties opposed
to - the government. And if they gather momentum
and become unhandy they may bring the downfall of
the government. Many governments have been
sacrificed at the altar of inflation.
29 SOLUTIONS to
30The government can help reduce inflation by
applying the following policies
- Fiscal Policy
- Monetary Policy
- Supply side Economic Policy
- Direct Control Policy
31Fiscal Policy
- Â is the means by which a government adjusts
its spending levels and tax rates to monitor and
influence a nation's economy. It is the sister
strategy to monetary policy through which a
central bank influences a nation's money supply.
32Monetary Policy
- involves altering base interest rates, which
ultimately determine all other interest rates in
the economy, or altering the quantity of money in
the economy. Many economists argue that altering
exchange rates is a form of monetary policy,
given that interest rates and exchange rates are
closely related.
33Supply Side Economic Policies
- seek to increase productivity, competition and
innovation all of which can maintain lower
prices. These are ways of controlling inflation
in the medium term. - A reduction in company taxes to encourage greater
investment. - A reduction in taxes which increases risk-taking
and incentives to work a cut in income taxes
can be considered both a fiscal and a supply-side
policy. - Policies to open a market to more competition to
increase supply and lower prices. -
- Rising productivity will cause an outward shift
of aggregate supply.
34Direct controlsÂ
- a control that is directly imposed upon the
manufacturing, pricing, and distribution of
specific goods in contrast with an indirect or
general control (such as a credit and fiscal
policy) that affects the economy in its entirety
and specific goods only indirectly
35Philippine Inflation Rate for 2015
36Source Philippine Statistic Authority