There are so many reasons as to why we should invest or save money. It might be for our dream house, a well-coveted car, a newly released phone model, educational plans for our kids, a month-long European tour, and so much more. While some of us may have the capacity to instantly shell out an amount for a need, there is one thing all of us want to accomplish, wealth preservation.
Ah, Inflation. The inevitable reduction of the purchasing power of the money we have today. It is not the sudden price increase of a product, it captures a broader sense where price increase covers a sector or industry. This means that dormant money loses its value over time. Do you remember how many grocery items you can buy for 1,000 Php back then? In a technical sense, it is defined as "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services."
Image from Unsplash - Sara Kurfeß
In this blog, we will discuss:
THE PHILIPPINE INFLATION
Let's take a look at some of the prices of necessities and prime commodities as published by the Department of Trade and Industry (DTI). Kindly note that the rate of change shown in the table are for specific products, and not regarding inflation. They just represent how prices of goods change.
Table 1: Prices of products in 2014 vs 2019 September
The above shows that Argentina Corned Beef has the highest price increase at 14.29% from 28 Php to 32 Php as of September 2019. Different sectors have different rates, some even decreased after five years. Now, let's take a look at the Philippines' inflations rates throughout the years.
Figure 2: Inflation rates from 1995 to January 2021. Data from Philippine Statistics Authority
In two decades, the highest inflation rate the country had experienced was in September 1998 at 11.4%. The overall trendline decreases, but a 1% inflation rate still signifies a loss to the currency's purchasing power relative to the base date. Different administrations and different factors share their influence on inflation. To understand what causes inflation better, two concepts that encapsulate these: the 'Demand-pull' and the 'Cost-push'.
DEMAND-PULL
Demand-pull occurs when the demand for sectors of services or goods suddenly rises more than the economy's productive capacity. This is why printing more money will do more harm than good for an increase in the demand (due to the sudden surge of available circulating money) will cause inflation. Supply cannot keep up with the demand and thus, the prices increase.
COST-PUSH
Cost-push on the other hand is quite straightforward. Rises in prices of raw materials, wages, services, production necessities like electricity will cause the price of the final products within the affected sector to increase as well. Regardless of the reason whether by a newly legislated law, a natural disaster, etc. Other players that affect inflation are oil/petroleum prices, the weakening of the currency itself, political coups and insurgencies, etc.
MEASURING INFLATION
Inflation rates cannot be measured in terms of currency. The global performance of the peso is volatile and thus cannot accurately represent a change. Inflation is measured through the Consumer Price Index (CPI).
According to the Philippine Statistics Authority (PSA), CPI is an "indicator of the change in the average retail prices of a fixed basket of goods and services commonly purchased by households relative to a base year. It is computed using the weighted arithmetic mean of price relatives, a variant of Laspeyres formula with fixed base year period weights." Enough with the gobbledygook! It is just the average price change of goods or services in a category. Relative to the aforementioned, the inflation rate can be also be stated as the annual change of CPI in percent.
HOW DO WE COMBAT INFLATION?
Understanding all of these and taking a look back at the chart, we observe that the Philippine inflation rate ranges from 2 - 5 % since 2017. As individuals, we should be aware of our responsibility to preserve our wealth by choosing investment options that would combat the rising prices. There are so many investment vehicles out there that CAN perform at a 4% - 6% capital appreciation but that will be for another blog. I'll just introduce you to some of them.
1. Digital Wallets/ Banks (ING, Tonik, Diskartech, CIMB, etc.)
2. Money Market Funds
3. Mutual Funds/ UITFs / ETFs
4. Equity Funds
5. Dividend-earning Funds/ Stocks
6. Property Funds & Real Estate
7. Government Investment Schemes (Pag-ibig MP2)
and so much more!
HOW DOES THE COUNTRY COMBAT INFLATION?
Since inflation is a national concern, the government has ways to curb or slow it down especially at times when it is disastrous to the economy. One way is for the Bangko Sentral ng Pilipinas (BSP) to address the Demand-Pull side of inflation via increased Interest rates. The higher interest rates make borrowing and other financial transactions less appealing and thus lower consumer demands and spending.
Increased interest rates also affect our investments. In this case, bonds are the ones that are heavily affected and it will be wise to reallocate your bond funds to a more competitive market before it happens.
Image from Unsplash - Eduardo Soares
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