Economics Lesson 14: Inflation

• Inflation is covered in lesson 14
• Inflation is the rise in the price of products and services and is a key issue facing the economy.
• It can affect economic decisions by households, businesses, and even the government.
• The type and quantity of products and services are affected by increasing prices.
• Inflation refers to sustained increases in the general price level of a market.
• Inflation acts as an economic indicator for the condition of the economy.
• Price increases are continually happening around the world.
• During the Great Depression of the 1930s in Europe, hyperinflation arose, resulting in huge price increases.
• In Germany, prices of goods increased every hour, day and week.
• There was devaluation during the era of the Japanese, which meant a lot of money was able to buy very little.

Types of Inflation

• Demand-pull
• Cost-push
• Structural Inflation

Demand-Pull Inflation

• Demand-pull inflation happens when demand exceeds supply.
• Aggregate demand is formed when all sector demands are combined.
• Demand-pull inflation shows a situation where total demand exceeds the quantity of products that economic enterprises are willing to supply.
• Milton Friedman, Nobel Prize economist, held that inordinate money in circulation, known as the money supply, is the reason why sectors increase demand.
• Increased income drives excessive purchases, resulting in rising market prices.
• Aggregate demand is the total expenses of consumers, firms and the government.
• Aggregate supply is the total amount of products that will be produced and distributed by businesses and producers.

Cost-Push Inflation

• Production costs may factor into pricing goods.
• Higher production expenses lead to inflated goods.
• Payments to workers, rising raw material costs, machinery, and profit goals can cause goods to inflate

Supply and Demand

• Higher salaries for workers should be carefully considered as it may be necessary to charge customers more to cover costs

Price, Salary and Inflation factors

• Higher pay for the worker can increase the price of goods.
• Economist Joan Robinson stated there is a connection between how inflation drives prices.
• Middlemen can also influence price.
• Higher taxes will cause inflation.

Structural Inflation

• The government has implemented and adheres to policies regarding economic operations and adjustments.
• These can relate to pricing, taxation, dollar-peso exchange rate and more.
• Conflict between Filipino wage and profit earners, along with competition to increase wealth between public/private sectors can cause structural inflation.
• Price of commodities in the market may also affect salaries of staff, which businessmen oppose.

Causes of Inflation

• Monopoly
• Cartel
• Middlemen
• Excessive money in circulation
• Import-dependent and export-oriented policies
• Oil deregulation
• Production costs

Inflation Factors

• Inflation happens because of the urge to hoard products and create a monopoly for members of cartels, leading to deficient supply and inflated prices.
• Oil deregulation removes government price controls on products.
• The country's foreign dept to the World Bank and International Monetary Fund has been shown to also have a role in inflation, specifically in the national budget

Devaluation

• Devaluation is the reduction of pesos compared to foreign money, mostly dollars.

Inflation Effects

• Higher Prices
• More workers available
• More business
• Higher Taxes
• Higher Salary
• Inflation can have a good and bad impact on the economy
• People concentrate so much on the price increases that they cannot see the positive impact of inflation.

Who Benefits From Inflation?

• Those with non-fixed income
• Borrowers
• Speculators

Those With Unstable Income

• Entrepreneurs, workers and commission-based staff will adjust to price fluctuations.

Borrowers

• When loan interest is lower than inflation in a given time periods then debt holders benefit.

Speculators

• These are often business owners in real estate who buy and sell goods, but are often sold at a low cost and sold for more for profit

Those Affected by Inflation

• Savers
• Lenders
• Those with fixed income

Savers

• The government wants people to save money, but having higher levels of inflation than what the banks ask of the income may incur losses for the savers

Lenders

• The lending of interest affects what income is generated for lenders

Fixed Income

• A having regular income is not suitable during times or inflation because the money is already set and spent for a purpose.