What is inflation? What causes it? How does it affect us?

Inflation is the rate in which the general level of prices of goods and services increase.

Its computation is based on the Consumer Price Index (CPI), which measures the average price of the standard basket of goods and services consumed by a household: food products, electricity, gas, and clothing.

The rate in which the CPI changes refers to inflation. Many factors contribute to the inflation rate. Some of the top contributors of inflation include the prices of rice, vegetables, meat, electricity, gas, tobacco, among others.

As inflation rises, the value of the peso becomes lower, as people are able to buy less products and services for the same amount.

Prices of rice, energy, and transport specifically were mainly responsible for the higher-than-expected inflation in August 2018, the Bangko Sentral ng Pilipinas (BSP) said.

The government had initially set a target 2.0 to 4.0 percent inflation for 2018.

The Inter-agency Development Budget Coordination Committee (DBCC) later adjusted its inflation outlook to 4.0 to 4.5 percent as the inflation rate registered at a faster pace in the first five months of the year.

For the month of August, the Bangko Sentral ng Pilipinas (BSP), the country's central monetary authority, had a 5.9 percent forecast, but inflation soared to 6.4 percent, the fastest in over nine years since inflation came in at 6.6 percent in March 2009.

Price stability

Aside from measuring the increase in prices, inflation is an indicator of the country's price stability.

The BSP is mandated to promote price stability that will be conducive to economy growth.

"There is price stability when the general price level of goods and services in the country moves at a low and predictable rate thus preserving the value of your money," BSP said.

"Conversely, when prices rise substantially and unpredictably your money buys fewer goods and services," it added.

Individual prices and goods generally rise over time, affected by the supply and demand in the economy.

Inflation rates can either accelerate or slow down.

Inflation and growth

In an episode of Brigada, National Economic and Development Authority (NEDA) Director-General Ernesto Pernia said that the increase in prices is normal.

 

 

Fast growth of the economy can have an impact on the inflation because consumers demand more than what can be supplied.

"Normal talaga ang pagtaas ng mga bilihin. When the economy is growing, especially when it's growing fast talaga may inflation effect, kasi mas mabilis ang pagtaas ng demand kesa supply. It will take time for supply to adjust," he said.

The inflation also has a direct effect on the country's gross domestic product (GDP) growth rate, Pernia added.

 

 

He said that as inflation rates soar, the Philippines' GDP growth rate naturally drops.

The GDP measures the country's domestic levels of production.

"Ang direct effect ng inflation, ang inflation kasi maging deflator yun sa GDP growth rate. So kung mataas yung inflation kasi deflator yun, denominator, talagang bababa yung real growth rate of the economy," he said. —JST, GMA News