Academics Research and Development
Ateneo Economics Association
The Philippines is seeing a significant increase in the price of petroleum products especially crude oil. The country faces a recurrent crisis, most notably a double digit inflation rate. The general inflation rate for the month of June to July of 2008 has climbed to an unbelievable 12.2%, from 2.6% of the same month last year. The inflation rate continues to gain momentum as shown by an increase from 12.2% in July to 12.5% last August.
Put simply, inflation is the increase in the overall price level of goods. When we say that prices have increased overall, we mean that the prices included in the basket of goods have risen. The items in baskets of goods are fixed and include food, beverages, tobacco, crude materials (excluding fuels), lubricants, chemicals, machinery and transport materials. It is determined by the research on the behavior of consumers in a specific market to ensure constancy in the computation of price indices.
Sustained Inflation is mostly attributed to the expansion of monetary supply, but in our case, it is different. In the present Philippine setting, the apparent surge of prices of basic commodities has fueled the inflation rate to peak at greater lengths.
There are two major factors that give way to inflation, both attributed to the supply of and the demand for a good or service. Demand-pull inflation is caused by an increase in Aggregate Demand for all goods and services available in the market. Aggregate demand increases, while keeping Aggregate Supply constant. What follows is an increase in the general prices of goods and services. On the other hand, rising costs in production which give way to rising prices of marketed goods is called Cost-Push Inflation.
One major factor of the sustained inflation being felt throughout the archipelago is Cost-Push in nature. Oil is more of a capital good than a consumer good, in the sense that we do not consume oil directly to satisfy our needs, but instead use to it power or produce the consumer goods that do. Since oil is a vital resource for the transport of all goods and services available in the market, producers increase their price as a response to an increase in one factor of production (shipment – in this case oil). This is not only apparent in the prices of goods, but also in the purchase of certain services. Transportation fees have risen along with basic goods. Transportation groups have requested for a price increase in the minimum fare matrix implemented by the LTRFB. Public Utility Vehicles (PUV) have increased their minimum fare by as much as 20%. Like producers, PUV operators do not have a choice but to increase prices to cope with rising utility costs.