Before I go on about this topic on inflation, allow me to make a disclaimer first and foremost. I am not old, exclamation point. As the wizened folks in my hometown would often say, “Only carabaos grow old.”
I agree, and still with an exclamation point.
Okay. I feel better now. And now that we got that out of the way, let’s proceed. When I was a kid, puto seko at the sari-sari store cost merely five centavos. The five-centavo coin then didn’t have a doughnut hole. Instead, it was shaped like a dainty flower, in bronze.
And no, I’m not a Martial Law baby!
Once upon a lifetime …
And then when I was old enough for preschool, my daily allowance was a hefty twenty-five centavos. That meant a generous serving of ice scramble at the school canteen during recess.
And when I was good or my parents were feeling a little too generous for their own good, they would double my allowance and I would stuff up on goodies a kid my age at that time enjoyed.
During Christmas, when a ninong, ninang, uncle or auntie gave me a one-peso coin as aginaldo, just imagining the amount of goodies I would be able to buy would be enough to make me grin from ear to ear until New Year’s Eve.
Of course, there’s a bit of an exaggeration in the Christmas-to-New-Year grinning piece. But really, what I’m trying to illustrate here is the purchasing power of the peso then. Yes, power with a ka-pow.
Fast forward to 2011. All my one-peso coin can buy is a bar of Chocnut from the sari-sari store. And some of you probably experienced getting frowned at if all you gave to a kid on Christmas was a one-peso coin.
Some Christmas carolers might even have punctuated their sojourn by your front porch with a sarcasm-filled “Thank you, thank you. Ang babarat ninyo. [You all are so stingy.] Thank you.”
Clearly, over the years, the average Filipino has experienced a significant amount of inflation.
What is inflation
Investopedia.com defines inflation as the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. As inflation rises, every peso will buy a smaller percentage of a good. For example, if the inflation rate is 5%, a bar of Chocnut that costs 1 peso today will cost 1.05 pesos in a year.
Before you cling to the notion that inflation is bad, let me just clarify that inflation is not all bad. Deflation, the opposite of inflation, can be bad for the economy as well, and so can hyperinflation – inflation in overdrive – and stagflation – combination of unemployment, economic stagnation and inflation. But these other topics we will have to park for now.
What causes inflation
Once upon a time ago, you probably dreamed of having a money tree, a tree that literally grows money instead of fruits. If that dream ever became a reality and a lot of us dreamed the same dream, there would be a thousand times, or perhaps million times, more money than there is today.
Now junior high school economics taught us about the law of supply and demand. When there is too much money chasing too few goods, inflation happens. This is called demand-pull inflation. To illustrate, if there are 10 pieces of cellphone for sale in a store, and 15 people are lining up to have them, business sense would dictate that the store owner raise the prices of the cellphones.
Cost-push inflation, on the other hand, is when companies raise prices to offset increased costs and maintain their profit margins. Increased costs include increase in wages, rising raw material costs, taxes, overheads, et cetera.
So how does this affect the average consumer? When prices of goods rise, the average consumer would have to tighten his belt even more because even if inflation ultimately results in a wage hike, the rise in prices have already been felt.
Inflation and the economy
Like it or not, inflation is a sign that an economy is growing. The average rate of inflation in developed countries is at 2% to 3%. In the Philippines, inflation rate at March 2011 was at 4.3%. So when thinking long term, consider inflation.
Think about it. Your 10,000 pesos today will not buy as much 20 years from now.
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