Relationship between inflation deflation and price stability in the philippines

Inflation in Philippines a faultline for Duterte's 'Build, Build, Build' ambition | Reuters

relationship between inflation deflation and price stability in the philippines

staff of Philippine Institute for Development Studies during my field work. over , there is a negative relationship between inflation and output variability. institutional commitment to price stability as the primary goal of monetary policy. (or deflationary) and assuming that exchange rate movements reflect changed. When taken to their extremes, both are bad for economic growth, but for different How to Tell the Difference Between Inflation and Deflation. On the costs of deflation: a consumption-based approach .. In the Philippines, the correlation between expected and actual inflation has gone up since the .. targeting the PPI or the GDP deflator might help preserve price stability, as.

If the amount of money in a country - the money supply - grows faster than production in that country, the average price will rise as a result of the increased demand for goods and services. Inflation can also be caused by higher costs being charged on to the end-user. These might be raw material costs or production costs which have risen, but could also be higher tax rates. These price rises cause the value of money to fall. You can therefore buy less with the same amount of money.

But this does not need to have an immediate effect on purchasing power.

relationship between inflation deflation and price stability in the philippines

Purchasing power only declines if wages rises less rapidly than prices. Consequences of limited inflation Governments often strive for an inflation rate of around 2 to 3 percent per year. Such low inflation is beneficial for the economy.

Low inflation encourages consumers to buy goods and services. Delaying will mean that they would have to pay more for the same product.

Inflation: advantages and disadvantages | Economics Help

Low inflation also makes it more appealing to borrow money, since interest rates are usually also low during periods of low inflation. Maintaining low inflation is therefore an important goal for governments and central banks because of the economic benefits. Consequences of high inflation As indicated above, limited inflation is good for the economy. But high inflation is less beneficial. High inflation therefore often has a harmful effect on economic growth. Consequences of deflation The opposite of inflation is deflation.

Rather than dealing with these uncertainties, many decision makers will simply forgo capital investments and other transactions involving long-term commitments. Some will even move their business and investment activities to countries with a more stable environment. As a result, potential gains from trade, business activities, and capital formation will be lost.

Because failure to accurately anticipate the rate of inflation can devastate one's wealth, individuals will shift scarce resources away from the production of goods and services and toward actions designed to hedge against inflation.

The ability of business decision makers to forecast changes in prices becomes more valuable than their ability to manage and organize production. When the inflation rate is uncertain, businesses will shy away from entering into long-term contracts, place many investment projects on hold, and divert resources and time into less productive activities.

Funds will flow into the purchase of gold, silver, art, and objects of passion, in the hope that their prices will rise with inflation, rather than into more productive investments such as buildings, machines, and technological research.

As resources move from more productive to less productive activities, economic progress slows. Inflation also undermines the credibility of government. At the most basic level, people expect government to protect their persons and property from intruders who would take what does not belong to them. But the government becomes an intruder when it cheats citizens in the same way that counterfeiters do by creating money, spending it, and watering down its value.

How can people have any confidence that the government will protect their property against other intrusions, enforce contracts, or punish unethical and criminal behavior?

Inflation in Philippines a faultline for Duterte's 'Build, Build, Build' ambition

When the government degrades its own currency, it is in a weak position to punish, for example, a coconut juice producer who dilutes juice sold to customers or a business that waters down its stock issuing additional stock without the permission of current stockholders. Economic progress will also be undermined when monetary policy makers are constantly shifting between monetary expansion and contraction.

When the monetary authority expands the monetary supply rapidly, initially the more expansionary monetary policy will generally push interest rates to a low level, which will stimulate current investment and generate an artificial economic boom. The low interest rates will attract investment into projects that appear to be profitable, but will not be sustainable for very long.

When the expansionary monetary policy continues, it will generate inflation, which will cause monetary policy makers to shift toward a more restrictive policy. However, as they do so, interest rates will rise, which will retard private investment and throw the economy into a recession.

relationship between inflation deflation and price stability in the philippines

Thus, monetary shifts from expansion to restriction will generate economic instability.