INLFATION

INFLATIONPrepared by: Group 2, MLS 2-D

1Inflation

DefinitionFour Main Types of InflationCauses of InflationEffects of InflationLosers and Winners in InflationStatistical UpdatesControlling InflationInflation is a state in which the value of money is falling and the prices are rising.- C. CrowtherWhat is Inflation?The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Economic ContextThe word Inflation refers to general rise in prices measured against a standard level of purchasing power.

Four Main Types of InflationCreeping InflationCreeping or mild inflation is when prices rise 3% a year or less.According to the US Federal Reserve, when prices rise 2% or less, it is beneficial to the economy.This sets the expectations that prices will continue to rise.

Walking InflationStrong; inflation is between 3%-10% a year.Harmful to the economy.

Galloping InflationInflation rises to 10% or greater.Absolute havoc in the economy.Must be prevented.

HyperinflationPrices rise more than 50% a month.Very rare.

Causes of Inflation

Increase in overall monetary supply.When the total amount of money available increases, the value of that money decreases.

12Increased labor costs.Greater labor costs drive up the cost of prices as labor is one of the most significant factors in overhead.

Demand pull.Situation when prices of goods and services increase because there are not enough goods and services to meet market demand.

Cost push.When a vital product has its supply line interrupted or costs dramatically increased.One perfect example is: A rise in petroleum prices leading to increased costs in the general economy.

Effects of Inflation

16Negative EffectsDamaging period of boom and bust economic cycle.It can discourage economic investment and long term economic growth.Inflation can make economy uncompetitive.Reduced value of saving.Positive EffectsHigh revenues and profit- a low stable rate of inflation of say between 1% and 3% allows the businesses to raise prices, revenues and profits.Tax revenues- the government gains from inflation through Fiscal Drag Effects.Cutting real value of debt- low stable inflation is also a way of helping to reduce the real value of a outstanding debts.Avoiding deflation- economy can manage to avoid some of the dangers of deflationary recession.

Socio-Political EffectsPrice increases make people unhappy and different groups in society start blaming one another for increases in the cost of living. When rents, service charges, bus fares or taxi fares are raised, the frustration often causes social and political unrest.Losers and Winners

LosersFixed Income Earners (including pensioners)Real income of workers: diminishesSaversThe interest rate of savings deposit may not cover the cost of inflations.If money is withdrawn during the time when prices are high, that money will lose purchasing power.

CreditorsThe same with Savers, by the time they will receive the money payment they also have less purchasing powersMoney they receive: cheapInterest payment is less than the Inflation rate

Holders of SecuritiesTheir money invested in securities depreciates in terms of purchasing powerWinnersDebtorsThey are paying back cheap pesos to their creditors that have less purchasing power.Fixed Asset OwnersLand owners gain during inflation as the value of land and other fixed assets appreciate.

ProducersThe income of producers increases when inflation takes place.As the price of commodities increases, business firms gain higher returns.

Statistical Updates

Worldwide

Asia

Philippines

Region 6

Top 20 Countries with Highest Inflation Rates

Controlling InflationMethods which have proved to be highly effective in controlling inflation to large extents.Fiscal PoliciesMonetary PoliciesExchange RatesLong-term means of controlling InflationFiscal PoliciesFiscal policies are effective in increasing the leakage rates from the circular income flow, thereby rejecting all further additions into this particular flow of income.This brings about a reduction in the Demand-Pull Inflation, in terms of increasing unemployment and slackening the economic growths. Fiscal policies commonly employed:Lowering the expenses on governmental level.A fall in the borrowing amounts in the government sectors, on an annual basis.High direct taxes, for reducing the disposable income.

Monetary PoliciesPolicies which can actually control the rise in demand, by increasing the rates of interest and reducing the supply of real money.

An escalation in the interest rates brings about a reduction in collective demands:A rise in the interest rate discourages borrowing from both companies and households. When interest rates increase, it simultaneously encourages the savings rate, owing to an escalation in the opportunity cost of expenditure.Rise in the interest rates is a very useful tool for restricting monetary inflation. Increase in the real rates of interest decreases the demand for loans, thereby limiting the growth of broad money.There may also be a fall in the commercial investments, due to a rise in the costs of borrowing money. This exerts a direct influence on a handful of planned investment-related projects, which turn out to be unprofitable . This leads to a fall in the collective demand.An increase in the payment of mortgage interests automatically decreases the real 'effective' disposable income of the house owners, as well as their spending capacities. Escalation in the mortgage costs also decreases the demand generated in the housing markets.Exchange Rates

An escalation in the exchange rate is possible by increasing the rates of interest or buying money through the central bank interferences in the foreign exchange markets. Short-term mean by which inflation can be controlled through exchange rates:Income policies or direct wage controls: Setting restrictions on the growth rate of wages may decrease cost push inflation. On governmental level, an attempt to influence the growth of wage leads to limit the rise in the pay in public sectors, as well as initiates cash restrictions for making payments to the employees of public sectors.

Long-term means of controlling Inflation:Supply-side Reform PolicyIf more output is produced at a low per unit cost, there are chances for the economy to attain persistent economic growth and development, without being affected by inflation.Policy regarding labor market reforms:If an increase in the flexibility of the labor market permits the commercial firms to put a check on labor costs, it can lead to a reduction in the pressures created by Cost-Push Inflation.