What is inflation? The question is being concerned and wondered by many people. Do you know all about inflation yet? How do they affect the economy of the countries around the world?
To put it simply, inflation is the devaluation of money, making life more difficult in the place where it occurs. That is when you only need to buy a basic item like bread, milk box or each type of toothpaste, … you have to bring a lot of money to pay.
The most basic example is Venezuela in recent years, which is facing a great crisis with hyperinflation of up to 1,000,000%. This proves that inflation is really the key to be concerned about in each country.
Table of Contents
What is inflation?
Inflation is one of the economic phenomena reflecting a decline in the purchasing power of a currency. When inflation occurs, the goods or services purchased and sold will show signs of increasing the overall price. This causes the monetary value to lose its value, the same amount of money, but it is impossible to buy as much goods as before.
Not only a domestic problem, compared to foreign countries, inflation also makes the valuation of money a big difference between the two countries.
For all countries that use cash as a payment intermediary, the inflation factor is a natural economic phenomenon, calculated in% and divided into three levels:
- Natural: 0 – less than 10% (inflation below 5% is the desired inflation rate of most countries)
- Galloping: 10% to less than 1000%
- Hyperinflation: over 1000%
Type of inflation
In fact, inflation can be caused by many different reasons, but the two most prominent ones are demand-pull inflation and cost-push inflation.
Literally, when the market demand for a certain commodity increases, it will lead to an increase in prices. At the same time, leading to the price of a series of other goods also “escalated”. As the value of money becomes devalued, you have to spend more money buying goods.
For example, when the price of gasoline increases, almost all goods and services will increase such as taxis, grabs, necessities …
The pushing costs listed are: the cost of raw materials purchased, taxes, workers’ wages, insurance payments, machinery costs … of a business.
Once these costs increase, businesses will increase the price of products sold to the market to ensure profits. This causes the overall price level of the whole economy to increase accordingly.
This is an issue of inflation stemming from businesses. From an efficient business that wants to raise salaries for its employees, it will lead other businesses to increase even if it does not know whether the business will generate revenue or not. Because, they use the way to increase product prices in the market to ensure profit.
Inflation due to change in demand
When the market reduces the demand for a certain item, but is an exclusively supplied item (such as electricity prices in Philippines), they still cannot lower their prices. At the same time, it leads to an increase in the quantity demanded for another good and also for the price.
It is an inflation phenomenon due to an imbalance in aggregate supply and demand. Aggregate demand from both domestic and foreign makes aggregate supply insufficient to supply. Meanwhile, these deficient products will push up prices.
When imported goods increase due to taxes or world prices, so will the domestic selling price. And if the general price is raised by the prices of imports, inflation will result.
This is the cause from the banks that caused the domestic money to increase, causing inflation. When a bank purchases foreign currency to keep the domestic currency from devaluing. Or, it is possible that banks buy bonds according to state requirements, causing the amount of money in circulation to increase much.
Levels of inflation
Inflation consists of 3 main levels, from simple to complex, which are evaluated based on a percentage of inflation. Specifically:
- Natural inflation: There is an inflation rate of 0 – <10%. The economy is now operating normally with less risks and stable life.
- Galloping inflation: is the level of inflation that occurs with rapidly increasing prices, the rate is from 10 – <1,000%. This type is likely to cause fluctuations in the economy.
- Hyperinflation: occurs when inflation increases at a dizzying rate, over 1,000%. Hyperinflation leaves great consequences and is difficult to overcome. However, hyperinflation is very rare.
Reference: What is working capital turnover?
How to calculate inflation
State organizations will collect data and then track the price volatility of goods and services to measure inflation.
The inflation rate is calculated as a% of the average price index, which is the average price of a set of products and services put together.
There does not exist an exact measure of inflation. The consumer price index (CPI) is the most popular measure when measuring inflation. Most goods and services use CPI to measure the price index.
Effects of inflation on economy
What is inflation? Does it affect the country’s economy? The answer is yes.
As noted above, inflation reduces the value of money in circulation, and when compared to other countries with money, there are major limitations. Since then, the economy needs more money to develop. When there is not enough money, economic difficulties are inevitable.
In addition, inflation at a certain level may still create a more positive factor. Such as:
Inflation has a positive effect
Inflation at a natural level with a ratio of 2 – <10% will not harm the economy.
Not only that, they also bring about certain significant benefits such as: mild inflation can stimulate consumption, debt, investment and reduce unemployment in society thanks to steady and rising prices.
Inflation mostly causes negative effects
Inflation creates an increase in the prices of commodities in the market, causing the currency to devalue, which in turn leads to many difficulties for economic life, social security and welfare.
With the inflation rising rapidly and uncontrollably, borrowing money and investing can cause many consequences.
The most typical example is that rising interest rates lead to recession and rising unemployment in that country. From there, they lead to external borrowing, spawning the nation’s debt.
High level of inflation can be dangerous for an economy to decline
Besides, the high inflation will make the national currency devalue in comparison with foreign currencies, from which the public debt of the state will increase greatly. Negative impact on the national economy.
How to control inflation
At present, inflation has gradually taken measures and policies to control effectively. So what is the direction to control inflation? Based on the actual situation, there are 2 main directions for individuals and businesses as follows:
Reduce the amount of money in circulation
- Stop issuing money into circulation to reduce the amount of money in society.
- Increasing interest rates on bank deposits to stimulate money reduction in circulation, bringing in banks, increasing monetary value.
- Reduce pressure on prices of services and goods.
- Release Stock
- Cut public spending and investment, and postpone unnecessary payments.
Rebalancing the state budget.
- Increase consumption tax money to reduce spending needs of individuals in society.
- Reduce pressure on prices and goods
Increase the supply of goods in the market to balance the amount in circulation
Control inflation by increasing labor productivity through reducing production costs. Applicable to cases operating in the field of production and business. The best solution is to offer many preferential credit policies, preferential loan interest rates.
The State should direct the reduction of taxes such as investment taxes, import taxes on raw materials, machinery and equipment, … thereby helping to reduce pushing costs, increase labor productivity, and limit product prices to the market.
Inflation rate 2019 Philippines
Philippines inflation rate for 2019 was 2.48%, a 2.73% decline from 2018.
Philippines society is also entering a period of increasing inflation, making people’s lives not easy to breathe. Good implementation of the policies mentioned above can help you control inflation effectively.
If you are a producer, the most active thing to avoid inflation happening is to borrow money at low interest rates. Do you know which banks offer high preferential loans?
The above article provides information to answer the question of what is inflation? Hope the article gives you many benefits.
Reference: Philippines inflation rate 1984 – 2020