Basic principles of inflation explained for dummies

So-called “investigative” journalist Raissa Robles had a laugh at my Twitter post the other day about Philippine inflation. She wasn’t specific about why she thought I didn’t know what I was talking about though and I never got the chance to ask since she blocked me. What’s up with people like that? They block others they don’t agree with, but they take the trouble to go to the profile of the person they blocked just to read the posts. They seem to be showing signs of insecurity and feel the need to monitor if others are talking about them. But I digress…

Anyway, so I made a comment saying that from what I understand, inflation is when an economy grows and there is increased spending that consequently exerts upward pressure on prices. Therefore, one way to control inflation is to curb the spending power of consumers by increasing interest rates. The public can help by putting a hold on spending and save money instead.

Strong demand from the Filipino middle and affluent classes enable suppliers and retailers to price their goods beyond the reach of the poor.

Of course there are other causes of inflation, I was merely citing one. But the main problem people like Robles have with my statement is they think I was trying to absolve President Rodrigo Duterte from the rising prices of goods in the country. They think anyone who tries to analyse an issue using neutrality is simply trying to make excuses for the people they are against, which, in this case, is the Duterte government. They also assume that anyone who criticises the Aquinos and the Liberal Party are Marcos loyalists. They suffer from an acute tunnel vision syndrome and think every policy or initiative by anyone not allied with the Aquinos is geared towards Marcosian doctrine. It is worth pointing out that these people are a big part of why the Philippines cannot progress. They are stuck in the past. But I digress once again…

Anyway, understanding inflation starts with the basic law of supply and demand. A lot of factors affect the prices of goods and if we look at the prices of rice and other food products for example, it’s easy to conclude that the prices have skyrocketed because demand for them is high and supply is low. Filipinos love their rice so much but, unfortunately, have had to import rice due to their inability to produce enough rice for their own consumption. There are also reports that rice importers and traders have been hoarding and holding on to the supply to create a “crisis” so they can manipulate the prices to their favour.

It is the role of the Central Bank of the Philippines to maintain price stability and to balance and sustain economic growth. The Central Bank can set interest rates to reduce demand and lower inflation. They can also control the money supply. When there is too much money floating around, the value of the currency can go down. Just to give an example, the Spanish economy collapsed when gold and silver flowed into the Spanish and other European economies after the Spanish conquest of the Aztec and Inca empires. Since the money supply had increased, prices spiked and the value of money fell.

Increasing competitiveness and efficiency of the economy can also put downward pressure on prices as efficiency gains allow progressively larger amount of goods to be produced, moved, and traded for less cost per unit. The good news is, the latest Global Competitiveness Report 2018, showed the Philippines rising 12 rungs from last year to 56th of a total of 140 countries and regions citing improvement in infrastructure particularly the country’s airport and shipping connectivity:

Economic growth in the Philippines exceeded 6%, along with China, Cambodia and two other countries in Southeast Asia. The WEF also noted that the country’s safety improved over the year, with scores in indicators including organized crime, homicide rate and incidence of corruption rising. It ranked 21st in social capital.

The country’s infrastructure such as airport and shipping connectivity improved as well. On the other hand, the Philippines still needs to enhance education, its product market as well as its workforce, the report shows.

Outdated and inefficient methods of handling and storing commodities like rice add costs throughout the supply chain.

Speaking of Philippine infrastructure, the country consists of group of islands and you don’t have to be a genius to realize that transporting goods contribute significant costs that eventually get passed to consumers. So if a clove of garlic has to be transported from Nueva Ecija, the infrastructure involved in transporting it and the fuel costs have to be taken into consideration. It doesn’t help that global oil prices have gone up. This is something the Central Bank cannot control. But, of course, the members of the Opposition ignore this part of the equation and blame even the rise in fuel cost on the Duterte government.

Duterte’s economic managers have decided to suspend the fuel excise tax until next year in response to the inflation rate hitting 6.4 percent. Calls by the Opposition to suspend the new Tax Reform for Acceleration and Inclusion (TRAIN) law fell on deaf ears. As former President and now Speaker of the House of Representatives Gloria Arroyo said, the new tax law only played a small portion in the country’s rising inflation:

Arroyo explained that the five main drivers which have direct effects on inflation are the peso-dollar exchange rate; and the market prices of rice, fish, meat, and oil.

Arroyo said that the Duterte administration’s economic managers should focus on ensuring that there is enough supply of rice, fish, and meat so that market prices will remain stable.

The country’s infrastructure is something that needs to be prioritized if the government is serious about sustainable growth and keeping inflation at bay. It’s bad enough that the country’s production of crops gets battered by typhoons and the country’s roads and transport system are still stuck in the Martial Law years. Train lines connecting the provinces should be built to provide alternatives to the use of trucks that compete for space in the country’s limited roads and highways. Trains could also cut travel times and there wouldn’t be wastage due to goods going bad while in transit.

Unfortunately, the previous government did not think long-term and did not do enough to upgrade the country’s infrastructure. They were more preoccupied with campaigning for the next election, which they lost. Former President Benigno Simeon Aquino  III even has the audacity to say that the people probably miss him now with the country’s inflation rate. If he was really that good, then the problems Duterte is facing now would not even exist. If he was that good, Aquino would have initiated policies that could have prevented the rice crisis from happening again for instance. He would have fixed the transport system including the trains and eliminated the horrendous traffic that contributes to the loss in business revenue every year and attracted more investments from overseas that would create more jobs for Filipinos.

Yes, Aquino and supporters should quit deluding themselves into thinking the people miss their “greatness”. Some of them can’t even understand what the real cause of inflation is. If they did, they wouldn’t be laughing because they would realize they were part of the cause.

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24 Comments on “Basic principles of inflation explained for dummies”

  1. We can all forget about that improvement of infrastructures when Mar makes it to the senate, he wants to repeal it, the damned idiot. It is now his battlecry, and I know, with the pinoy narrow mindedness, many will support him.

    1. AFTER MAR ROXAS WAS DEFEATED … Mar Roxas said he is going to VLog in YouTube …. but never heard of him … LIAR ! LIAR! LIAR!

  2. I think you’re missing the wood for the trees here.

    How do you suppose a country that cannot even feed itself is going to be capable of investing in expensive and complex infrastructure? As a rough rule of thumb, a road costs US$1m per lane-kilometer. If you assumed 40% of GNI appropriated as tax (which is about average for rich countries) that’s 4000 Pinoy-years per kilometer for a 4-lane highway – or if you prefer, one Pinoy can finance 25cm of highway per year if his entire tax contribution is spent on nothing else. Making the generous assumption that 30% of the population are in gainful employment (that’s 60% of all adults) and 5% of taxation is spent on infrastructure upgrades, 30M x 0.25m x 0.1 = 375km of road per year.

    So, basically, the country has the economic capacity to build one north-to-south highway on each of its major islands. Once a year.

    Time for a bit of a fundamental rethink, wouldn’t you say? To paraphrase that memorable line from Back To The Future – because, of course, Filipinos are going Back to the Stone Age – “Roads? Where we’re going, we can’t afford … roads”.

    Oh, and as for that business about the government providing rice and fish for everyone, who the fcuk do they think they are? Talk about a messiah complex.

    1. I should add that I’m aware the country’s official GNI is actually higher than my calculation suggests. However a lot of this is smoke-and-mirrors income, such as remittances from abroad or money that flows right back out again into the bank accounts of foreign corporations.

      I was attempting to illustrate that the man in the street simply isn’t productive enough to fund all the stuff he wants. Which basically sums up the Pinoy condition.

    2. The seeming aversion of Filipinos to large-scale infrastructure projects — the sorts needed to achieve the vast economies of scale needed to compete in the global market likely stems from the Filipinos’ heritage of smallness. This prescient snippet quoted from Nick Joaquin’s seminal piece describes the underlying character of Philippine culture that is at the root of this national affliction…

      The depressing fact in Philippine history is what seems to be our native aversion to the large venture, the big risk, the bold extensive enterprise. The pattern may have been set by the migration. We try to equate the odyssey of the migrating barangays with that of the Pilgrim, Father of America, but a glance of the map suffices to show the differences between the two ventures. One was a voyage across an ocean into an unknown world; the other was a going to and from among neighboring islands. One was a blind leap into space; the other seems, in comparison, a mere crossing of rivers. The nature of the one required organization, a sustained effort, special skills, special tools, the building of large ships. The nature of the other is revealed by its vehicle, the barangay, which is a small rowboat, not a seafaring vessel designed for long distances on the avenues of the ocean.

      Filipinos, quite simply, cannot be bothered to think that far ahead and are entirely focused on the short-term need of scratching in the next morsel of grub to get by his sub-productive day.

      “Economists” screech about a “lack of money” to build stuff. They fail, however, to look deeper into why Filipinos lack money — or, in more precise terms, capital. They fail to realise that societies that enjoy a surplus of capital did not achieve that wealth overnight. It is an accumulation of centuries of building upon the rewards of innovation, bold exploration, and the audacity to dream big that motivates the funding of big projects and grand designs.

      1. This isn’t a concrete solution benign0.
        It’s just “philosophical” circle jerking once again. You’ve taken too many philosophy/theology classes in whatever chi-chi college you went to.

        Many Philippine companies have built great infrastructure…. in other countries. Ayala is building out vietnams water infra. EEI routinely builds skyscrapers in the middle east. MPI is building giant toll roads in Indonesia.

        This is the economic equivalent of the SECRET. A bad self help book.

        “DREAM. BELIEVE. ACHIEVE!”

        I BELIEVE benigno. I BELIEVE!!!

      2. @benigno: there’s nothing actually wrong with thinking small. Ever read B F Schumacher? As you said, that’s not exactly the problem here: Filipinos just don’t think AHEAD. They have no clue how to frame goals or purpose and act towards them.

        There are any number of ways to get stuff from A to B without traditional roads and cars – in fact they offer incredibly poor value for money. Most Western countries are wishing they weren’t stuck with them. And here’s Filipinos, desperately wishing for more of something they don’t understand and can’t have, instead of sitting down and figuring out what they CAN have that will get the job done.

        1. True indeed. Tribal units in their original habitats maintained populations that put their communities in sustained equilibrium with their environments using inherent capability. So they managed to lead simple lives without much technological advancement (or at least through advancements originating internally).

          The trouble with modern Philippines is that its population — and commitments — grew to its enormous size on the back of foreign capital and input. Thus its very existence is premised on a sustained dependence on external input rather than self-sufficiency.

  3. For us ordinary Filipino, who cannot understand much about Economics, Ms. Ilda’s explanation is clear enough for us to understand.

    We should not politicize the growing economy of our country. The Aquino Cojuangco political axis, and various opposition groups, are engaged in the , “Politics of Destruction” and “Politics of Obstruction” against the Duterte administration. All these people want is power !

    They have more than thirty years of Aquino era, to prove themselves to us. What have they accomplished ?

    Did they solve the rice production problem ?

    Did they improve the country’s infrastructures and transport system ?

    Did they ever improve the quality of our lives, and the country as a whole ?

    They should look at their performance during their years in power.

    Killings and massacres; DAP; PDAF; 2016 HOCUS PCOS, SMART SWITIK election frauds; Dengvaxia vaccine fraud; Typhoon Yolanda Fund disappearance; and so on and so forth.

    So whatever they are telling us now…they should take a good look at themselves and their performances…it is poor and dismal performance during their terms of office.

    Remember, we have Eyes to see, and Brains to think, We are not as stupid, as you think you are !

    1. Maybe…….. learn about economics? Carabao sense doesn’t cut it son. And stop believing everything you read on facebook

  4. Lol GRP’s hypocrisy at it’s finest. Claim to be neutral yet give a hyper-partisan explanation. Claim to be pro science and technology yet give NO DATA to back it up. NO DATA at all. It’s like you pulled your opinions out of your asses.

    You should stop writing about economics IIda. It’s too complicated for you. Maybe if you studied a bit more or defer to expert opinion (like a certain someone with a PhD in FREAKIN economics) this article would be better. As of now, your carabao sense isn’t cutting it.

    It’s NOT external factors causing inflation.
    Thailand inflation – 1.3%
    Indonesia inflation – 2.88%
    Vietnam inflation – 3.4%

    If it were external factors, all of SEA would exhibit signs. Think Asian financial crisis.

    It’s the TRAIN law. Very very bad policy. Done so that this administration can get a discount on their LUXURY CARS!

    SAD!

    1. FILIPINOS HAVE NO BRAIN … therefore no Data … Their Data Bank, up here, is blank. Empty. Zilch.

      Philippine Data is made-up. If I wanted to know about Philippines I have to check foreign sources NOT PHILIPPINE SOURCES …

      EVEN RAPPLER USE FOREIGN DATA AND STATISTICS because Filipinos just do not have data. E-M-P-T-Y !!!

      If ever they have DATA it is useless !!!

  5. Anyway, understanding inflation starts with the basic law of supply and demand. A lot of factors affect the prices of goods and if we look at the prices of rice and other food products for example, it’s easy to conclude that the prices have skyrocketed because demand for them is high and supply is low.

    Price increase and price decrease based on the law of supply and demand. Inflation is different. There can be inflation without price increase, although extremely rare.

    The problem now is that inflation is being defined as price increase, which exacerbates the problem.

    It is the role of the Central Bank of the Philippines to maintain price stability and to balance and sustain economic growth.

    No, it isn’t. Economic growth is maintained by economic activities. The central banks are only the result of the governments’ desire to meddle on things that they should not meddle with like, like economics and markets.

    1. @Tobias Your comment shows you have the economics knowledge of a toddler . Maybe gain a little more knowledge? Study.

      Stop watching conspiracy videos on youtube.

      1. @DM,

        You only say that because you are nothing but a parrot. Incapable of critical thought, just repeats what it heard.

        You are just like all economically illiterates here: thinks inflation is price increase.

        That is like calling symptoms of cancer as cancer.

  6. BSP can control money supply to some extent if they had police raid the hideouts, operations centers and dens and take all the cash of “known” drug lords, and garnished their bank accounts and took that pile of cash and burned it in the public plaza for all to see.

    1. @Dick S. O’Rosary
      You mean like the joker in the dark knight?
      We can burn the money in the bank accounts of everyone on the “list”

      Where did YOU get your money Dick? Can you prove your not a drug pusher???!?!
      Maybe we should BURN your money too!

  7. The only people that can’t handle the truth are those that suffer so much anxiety that they will live in denial, in order to prevent their illusion from being destroyed and feeling more anxiety.

  8. Protip to everyone here, especially those always appealing to Econ 101: Supply and Demand:

    MASTER THAT. Master Supply and Demand. And only then you will realize how incorrect the current mainstream definition of inflation is.

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