Inflation soared to its highest level in three and a half years in May, and authorities say it could reach new peaks as the world economy reopens from the pandemic and as Russia's invasion of Ukraine pushes prices of oil and food ingredients such as wheat.
Inflation is one figure that indicates the over-all health of the economy and determines how far your money will go. Here's what you need to know about inflation and why it's important.
Inflation is the rate of increase in the prices of basic goods over a period of time. It is usually measured monthly and compared to the same month in the previous year. So when the Philippine Statistics Authority reported May 2022 inflation at 5.4%, that's how much prices increased from May 2021.
Inflation is calculated based on a basket of goods. The basket for the CPI or consumer price index includes the most common expenses on food, home improvement and transportation. That's why when a typhoon devastates rice fields during the monsoon season, rice prices drive inflation higher in the months that follow.
During the May 2022 inflation report, the Philippine Statistics Authority cited the impact of the Russia-Ukraine war on fuel prices, which most recently pushed prices per liter near the P100-mark.
Inflation determines interest rates on debt. When inflation is rising faster than expected, the Bangko Sentral ng Pilipinas may signal banks to increase interest rates by raising the benchmark or overnight borrowing rate. When inflation is low, the central bank may opt to keep borrowing costs steady, or reduce it.
High inflation means the economy could overheat, thus the BSP increases interest rates to discourage people from borrowing, thereby limiting the amount of money that's circulating in the system. It's the reverse when people are not spending enough to keep the economy afloat, as during the start of the pandemic, when interest rates were cut to record lows and stayed that way for nearly two years.
Inflation slashes the power of your money. It's simple math, inflation reduces what you can buy with your money. If your salary increased by 4% in 2022 and inflation in May was at 5.2%, then you are able to buy less even if you have more money.
It's the same for savings, when the amount of interest you earn is not enough to cover for inflation. Worse, if you keep your cash in the drawer, you earn nothing.
There's also the prospect of "shrinkflation", when businessmen reduce the serving sizes to keep prices steady. Try eating in your favorite carinderia. If your suki keeps prices unchanged, chances are, you're getting one less sliver of meat in your saucer of adobo, or there are more vegetables than meat in your menudo, or your turon is suspiciously less caramelly than before.