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Inflation
Pascua, John Adrian A.
Bachelor of Science in Chemistry 4-1
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Sustained/ continuous
rise in the general
price level
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Inflation
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Sustained/ continuous
decrease in the
general price level
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Deflation
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Causes of Inflation
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Demand-pull inflation

 ‘Too much money chasing too few goods.’

 Level of spending > amount of firms capable of producing
 This excess demand pulls the general price level upward
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Cost-push Inflation

 Inflation due to increase in cost of production, specially

energy, gasoline and wages.
 Inflation from supply side.
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Effects of Inflation on the

National Economy
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Hyperinflation

 Period of extremely high

inflation reaching up to
100,000% and above.
 Leads to abandonment
of the country’s currency,
inefficiencies in barter.
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Hyperinflation
in Zimbabwe

 Recorded peak
month of
hyperinflation
occurred in mid-
November 2008 with
a rate estimated at
79,600,000,000%

 $1=
Z$2,621,984,228,67
5,650,147,435,579,3
09,984,228.
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2,600,000 Bolivars for a Tissue Roll

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14,600,000 Bolivars for a 2.4 kg Chicken

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5,000,000 Bolivars for a kg of Tomatoes

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3,500,000 Bolivars for a bar of soap

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2,500,000 Bolivars for a kilo of rice

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 Reduces the
standard of living;
specially for wage
earners despite
COLA. Expenses for
education, food,
health and
recreation cannot
be covered.
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 Creditors lose,
debtors gain.
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Protection Against Inflation

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 Banks protect
themselves by
raising nominal
interest rate to
reflect anticipated
inflation.
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 Workers are protected through COLA (cost of

living adjustment/allowance); automatic wage
increases to offset price increases.
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Measurement of inflation

𝐶𝑃𝐼2 − 𝐶𝑃𝐼1
𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 𝑥100
𝐶𝑃𝐼1

• CPI- Consumer’s Price Index; Compares present prices of

commonly purchased goods and services (defined by Family
Income Expenditures Survey by NSO) to prices of similar goods and
services in a base period.

• Also used as a deflator for Nominal/Current GDP, and for nominal

income to obtain real income.
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Nominal Income vs Real Income

 Nominal income- money income from wages, rent, interest

or normal profit.
 Real income- purchasing power of nominal income.
Income adjusted for inflation/deflation.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑥100
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
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1
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑖𝑛𝑔 𝑃𝑜𝑤𝑒𝑟 𝑜𝑓 𝑃𝑒𝑠𝑜 = x100
𝐶𝑃𝐼
z Consumer Price Index, Inflation rate and
Purchasing Power of Peso in the Philippines
from 2000-2010
Year Consumer Price Inflation Rate Purchasing
Index (%) Power of Peso
2000 100 4.0 1
2001 106.8 6.8 0.94
2002 110.0 3.0 0.91
2003 113.9 3.5 0.88
2004 120.7 6.0 0.83
2005 129.8 7.6 0.77
2006 137.9 6.2 0.73
2007 141.8 2.8 0.71
2008 155.0 9.3 0.65
2009 160.0 3.2 0.63
2010 166.1 3.8 0.60
 z Consumer Price Index Year 2000-2010
180

160

140

120

100

80

60

40

20

0
1998 2000 2002 2004 2006 2008 2010 2012
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Purchasing Power of Peso Year 2000-2010
1.2

0.8

0.6

0.4

0.2

0
1998 2000 2002 2004 2006 2008 2010 2012