Economics inflation

I N F L A T I O N

Causes of InflationKinds of Measuring the

InflationLosers and Winners in

Inflation

IntroductionThe increase in price level is a problem to

any country regardless of the prosperity of the country.

Inflation - the situation of rapid general increase in the price level. Inflation is also one of the economic indicators – meaning it indicates the current situation of the economy of a country.Hyperinflation – the over increase of the price of the products

Kinds of Measuring Price Increase

1. Wholesale Price Index and Retail Price IndexWholesale Price Index and Retail Price Index measure the changes of price in intermediate goods, crude materials and finished products in wholesale and retail market.

*Intermediate goods – products which are need to be processed to become finished products.

*Finished Products – the outcome of the production.


2. Producer Price IndexProducer Price Index

measures the change of price from the perspective of the seller.


3. GNP Deflator or GNP Implicit Price

There is a big difference between the price of the products in previous and current year. The GNP deflator is used to determine the value of GNP of the previous year with the formula


3. GNP Deflator or GNP Implicit Price

GNP Deflator = _Nominal GNP_ x 100Real GNP

*GNP or Gross National Product – the total value of the products and services made by the citizens of a country in a year.


4. Consumer Price Index (CPI)CPI shows the percentage of changes of the price of the products which are commonly bought by the people.

Ways of Measuring the CPIThere are procedures in computing the CPI. The products which are included in the market basket are used to compute the CPI.

*Market Basket – a group of products which are primary needs of the people.


4. Consumer Price Index (CPI)1. Weighted Price - Price multiply by the

Weight.Products Weight in

klPrice

2007 2008Rice 50 22.00 24.00

Sugar 7 26.00 28.00Chicken 15 100.00 115.00

Meat 10 115.00 130.00Fish 21 80.00 95.00

Cauliflower 8 32.00 36.00


4. Consumer Price Index (CPI)2. Total Weighted Price - To determine the TWP of the year 2007 and 2008, all Weighted Price

should be added.Products Price

2007 2008Rice Php

1,100.00Php 1,200.00

Sugar 182 190Chicken 1,500 1,725

Meat 1,150 1,300Fish 1,680 1,995

Cauliflower 90 105Total Weighted

Price7,758 8,759


4. Consumer Price Index (CPI)3. Computing the CPI

The summation of the Total Weighted Price will be used to compute for the CPI in the year 2007 and 2008 with the formula:

CPI = ______TWP (Current Year)______ x 100

TWP (Based or Previous Year)


4. Consumer Price Index (CPI)3. Computing the CPI

Using the data from the table:

CPI = __8,759__ x 1007,758

CPI = 1.1290281 x 100CPI = 112.9

*The Base year is being announced by the National Economic Development (NEDA). It changes in accordance to the year when the changes of price in the market are normal.


Computing the Inflation RateIn order to compute for the Inflation

or Deflation, either of these formulas are being used:

Inflation = ___CPI Present Year__ -1x100 CPI Previous Year

OrInflation = _CPI Present Year – CPI Previous

Year_ x 100CPI Previous Year


Computing the Inflation RateEXAMPLECPI 2006 =129.8CPI 2007 =137.9

Inflation of 2007 = _137.9– 129.8_ x 100 129.8

= _8.1_ x100 129.8

=0.062x100=6.2%


Computing the Inflation Rate That means the price of the products which are commonly bought by the consumer increases by 6.2% from 2006 to 2007.

If the answer is positive, that is inflation; if negative, that is deflation.

Deflation – the decrease of price level of the products in the market. This happens only in few instances because the general price of the products is always increasing.

Classifications of Inflation

Inflation means there is sustained increase in the price level. The main causes of inflation are either excess aggregate demand (economic growth too fast) or costly push factors (supply side factors)

Classifications of Inflation1. Cost-Push

One of the basis in setting the price of products is the expenses of production. These are the salaries of the workers, the increase of price of the intermediate goods and the hoping of the sellers to have a bigger profit.

Classifications of Inflation2. Demand Pull

The Demand Pull Inflation happens when the demand of products and services is higher than the supply available at the market.

*Aggregate Demand – overall demand of all sectors.

*Aggregate Supply – overall products which are willing to supply by the businessmen for the economy.

Classifications of Inflation3. Structural Inflation

The inability of some sector to align with the level and number of aggregate demand to aggregate supply, the competition between the Filipino wage earners and Filipino profit earners and the competition between the private and public sectors are causing the structural inflation.

Causes of Inflation

Inflation

Military Expenses Oil DeregulationExternal Debt

Production Expenses

Monopoly and Cartel

Losers in Inflation1. Retired people

High inflation rate often means wage increases, but that won't benefit those who are retired as their pot of retirement money already is set.

Losers in Inflation2. Credit card debt holders

Most credit cards have a variable interest rate tied to a major index such as the prime rate. Because of this, credit card holders experience quickly climbing rates and higher payments in an inflationary environment.

Losers in Inflation3. People with Fixed Income

Salary earners whose income are rising at less than the rate of inflation.

Winners in Inflation 1. People who own Real Estate

When inflation increases, the value of their properties typically increases so they get wealthier

Winners in Inflation2. Speculators

These are the businessmen of real estate business and buy-and-sell. They bought the products for a cheaper price and sell it with higher price.

Winners in Inflation3. Borrowers

When the interest of debt is lower than the level of inflation the borrowers will benefit from it.

Reference/s

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Economics inflation