NOTES ON INFLATION

This is to answer the common questions posted in the Discussion (some classes did not post questions,
though). It will also take the place of our lecture and supplement the slides I uploaded. Please study both
the slides and this note.

HOW TO MEASURE INFLATION

To measure inflation, various indices like the Consumer Price Index (CPI), Producer Price Index (PPI) and
Retail Price Index, etc. Among these, the most commonly used is the CPI. The CPI uses a hypothetical
"basket of goods". For example, let's say the basket contains food, medicine, transportation, utilities,
etc. If for the year 2019, that basket costs a family P30,000/month and the following year, the same
basket costs P30,500, the percentage increase in the prices is the inflation rate.

To compute for CPI:

CPI = cost of the market basket for the given year/cost of the market basket for the base year x 100

From the example: 30,500/30,000 x 100 = 101.67. There was a 1.67% increase in prices.

CAUSES OF INFLATION

Inflation can be either “demand-pull” or “cost-push”. Demand-pull inflation is caused by an increase in

the total (aggregate) demand for goods and services. This is commonly observed during Christmas
season where prices tend to be higher because people have greater demand for commodities, induced
by their higher (or additional) income during the season. Cost-push inflation is a result of higher input
costs like higher prices of electricity, gasoline, other material, even currency depreciation 1.

EFFECTS OF INFLATION

People can be divided into winners or losers due to sudden increases in prices (inflation).

Winners
Debtors (Because the real value of their debts
decreases. This is why interest is charged to
compensate for lost value of money over time.)
Flexible income earners
Those who pay fixed mortgage (same reason as
debtors)
Losers
Lenders (The value of what they will receive as
payment will no longer be the same (less)
because of inflation.)
Fixed income earners (think of having fixed
allowance or baon and prices continue to
increase)
Fixed pension/allowance earners

HOW DO WE EXPECT THIS COVID-19 CRISIS TO AFFECT INFLATION?

1
I will this discuss this further under Foreign Exchange Rate.

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The current crisis on COVID-19 has made the government put the entire country under the State of
Calamity. The entire country is on the state of calamity which means there is an automatic price freeze
for basic commodities. Thus, there is not much expected movement in the prices.

HOW CAN INFLATION BE CONTROLLED?

Inflation can be controlled through either or both fiscal and monetary policies. Discussion on these
policies (separate note) will explain it further.

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