inflation and fiscal policy

Inflation

  • Definition of Inflation: The rate at which the overall level of prices for various goods and services in an economy rises over a period of time, leading to a decline in the purchasing power of the currency.

  • Purpose and Implications:

    • Causes money to lose value as it no longer buys as much as it did in previous times.

    • Individuals and families, particularly in the Philippines, may struggle as their money buys fewer goods and services.

The P100 Challenge

  • Activity Description:

    • Imagine having ₱100 to spend five years ago which could buy a full meal, dessert, and drink. Consider what you could buy with the same ₱100 today.

  • Reflection Questions:

    1. Why do you think ₱100 can buy less today?

    2. How does this affect individuals and families in the Philippines?

Consumer Price Index (CPI)

  • Overview of CPI:

    • CPI is a price index computed by the Philippine Statistics Authority that uses a “market basket for goods and services” to assess inflation.

  • CPI Market Basket Items and Weights:

    • Food and Non-Alcoholic Beverages: 38.98

    • Alcoholic Beverages and Tobacco: 1.99

    • Clothing and Footwear: 2.96

    • Housing, Water, Electricity, Gas and Other Fuels: 22.46

    • Furnishing, Household Equipment, and Routine Maintenance: 3.22

    • Health: 2.99

    • Transport: 7.81

    • Communication: 2.26

    • Recreation and Culture: 1.93

    • Education: 3.37

    • Restaurants and Miscellaneous Goods and Services: 12.03

Factors Affecting Cost of Living

  • Key Influential Factors:

    • Higher food costs.

    • Higher gasoline costs.

    • Higher utility costs.

    • Not receiving an increased wage.

    • Higher interest rates on home loans.

Hyperinflation

  • Definition: Rapid, excessive, and out-of-control general price increases in an economy.

Types of Inflation

  1. Demand Pull Inflation:

    • Occurs when the demand for goods and services exceeds total supply (Y = D > S).

  2. Cost Push Inflation:

    • Involves a rise in the cost of production which pushes the price level higher.

    • Commonly influenced by rising oil prices (oil-push inflation).

Inflation Formulas

  • Consumer Price Index Formulas:

    • Initial CPI: CPI{0} = rac{TWP P{0}}{TWP P_{0}}

    • Subsequent CPI: CPI{1} = rac{TWP P{1}}{TWP P_{0}} imes 100

    • Further Increments: CPI{2} = rac{TWP P{2}}{TWP P_{0}} imes 100

    • Latest CPI: CPI{3} = rac{TWP P{3}}{TWP P_{0}} imes 100

  • Inflation Rate Calculation:

    • ext{Inflation Rate} = rac{CPI{present} - CPI{previous}}{CPI_{previous}} imes 100

Example Calculation of CPI and Inflation

  • 2012 Base Year vs 2015 CPI:

    • Commodities weight and prices:

    • Food:

      • Quantity: 26.9

      • P0: 2800, P1: 2890

      • P0Q: 75320, P1Q: 77741

    • Health:

      • Quantity: 7.51

      • P0: 775, P1: 795

      • P0Q: 5820.25, P1Q: 5970.45

    • Transport:

      • Quantity: 7.8

      • P0: 750, P1: 765

      • P0Q: 5850, P1Q: 5967

    • Total Weighted Price (TWP) for 2015: 159,481.85

    • CPI: 103.14

    • Inflation Rate: 3.14

Impact of Inflation on Different Workers

  • Most Affected Groups:

    • Workers with strong wage bargaining power.

    • Producers if prices increase faster than production costs.

    • Retired individuals on a fixed income.

    • Workers in low-paid jobs.

    • Individuals with loans at high-interest rates.

Fiscal Policies

  • Definition: Fiscal policy actions taken by the government to influence the economy, either through spending or taxation.

  • Types of Fiscal Policies:

    1. Expansionary Fiscal Policy:

    • Involves increasing government spending, reducing taxes, and increasing transfer payments to stimulate economic growth.

    1. Contractionary Fiscal Policy:

    • Implemented when the economy grows unsustainably, leading to inflation. It includes decreased spending, higher taxes, and decreased transfer payments.

Importance of Government Spending

  • Rationale: Government spending is essential for managing the economy by supporting infrastructure, healthcare, and social services.

Synthesis Activities

  • Reflective Questions:

    • Which sector deserves the highest budget allocation and why?

    • How can citizens ensure effective and transparent government spending?

  • Motivational Role-Playing:

    • Imagine being the President with a limited budget to address various sectors: education, healthcare, infrastructure, etc. Decide on budget allocation to meet these needs effectively.

Note on Fiscal Policies: Historical examples including the mid-1980s Debt Crisis and the 1998 Asian Financial Crisis demonstrate the impact of contractionary fiscal policies on economic stability.