Inflation is high, but how does it affect our economy?

how inflation affects the economy

The Philippine economy has been expanding steadily for several years. However, some signs indicate that inflationary pressures may be building up in the economy. Inflation affects everyone, from consumers to businesses and investors alike, because it makes borrowing more expensive. Thus, inflation can slow down growth if not addressed properly. It means keeping prices stable over time without causing too much or too little economic activity (jobs created or lost).

What is inflation?

Inflation is the rate at which prices for goods and services rise. It’s a sustained increase in the general cost of goods and services in an economy over time.

Inflation occurs when there is too much money circulating within an economy. For example, if consumers spend more than they earn or businesses don’t have enough money to pay employees. It is due to insufficient reserves, i.e., cash reserves).

How does the inflation rate affect the economy?

The Philippines’ inflation rate is at 6.9% for September 2022. This number can be measured by looking at the Consumer Price Index (CPI). It is a measure of the average change over time in retail prices of consumer goods and services. The CPI measures changes in price levels from one period to another, including increases and decreases.

The Philippine Statistics Authority (PSA) surveys the changing prices of staple food commodities usually consumed by a typical Filipino family. The survey basket contains more than 400 items of mostly food, some clothing and footwear, housing, and transportation. It compiles into an average monthly index number with an overall accuracy level of +/-2%.

How to prepare for rising inflation?

One of the best ways to prepare for rising inflation is to pay down your debt. It’s crucial to stay on top of your finances, and paying off credit cards and other forms of debt can help you do that.

You also shouldn’t take on new debt if you can avoid it. You don’t want interest costs weighing down on your budget when there are already so many other things competing for your attention.

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Federal Reserve hiked up the interest for the 5th time

As a result of the inflationary pressures on the economy, the Federal Reserve raised its interest rate by 75 basis points (bps).

Now, the fund rate is 3.00% to 3.25%. It is the fifth hile this year done in September 2022.

The Fed’s target rate is “the average value above which inflation must fall for the economy not to experience deflationary pressures.” In other words, if the Fed keeps its target at 3.25%, then inflation will stay below 3.25%.

However, if we were going beyond that, it would mean that prices are rising faster than expected, which could lead to deflationary pressures within our economy.

Interest rate hikes slow down the economy

Higher interest rates make it more expensive to borrow money. It can slow down the economy, especially if companies and consumers are not spending money.

The higher interest rate will also affect stock markets. Because investors want to hold onto their investments instead of spending them on something else. If they don’t buy stocks or other investment opportunities, then there won’t be enough demand for those products created by businesses or consumers (like houses).

It means fewer jobs for workers in these industries and less revenue going into government coffers each year. It is due to lower tax revenue from sales taxes at stores like Walmart, Target stores, etc.

Fed rate hikes have negative effects on the Philippine economy

Higher interest rates are bad news for the Philippine economy since they will increase our debt payments and make borrowing more expensive.

Higher interest rates mean you have to pay more when you borrow money. For example, if the government had to refinance its existing loans at an 8% interest rate and inflation was at 4%, then the effective annual interest rate would be 12%.

It means that if we were to borrow $1 million (purchasing power parity), we would have to pay out $12,000 per year in principal payments just because of inflation alone!

We should always make sure our debts do not exceed what they can bear. It will only cause trouble later down the line when there isn’t enough money available due to inflationary pressures taking place globally and locally within specific sectors such as housing or transportation services, which rely heavily on borrowed funds from banks.

Even if these people don’t realize it, something needs fixing before everything collapses around them.

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Inflation is a factor that affects the economy. It can help create new jobs and make it easier for companies to pay their employees. However, when inflation is too high, this can lead to problems such as rising prices at the grocery store or higher hospital bills due to medical insurance costs increasing faster than wages.


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