The Other Side of Inflation


other side

In Personal Finance, one of the bogeymen we all have to deal with is inflation. It is actually one of the biggest reasons we HAVE to invest as inflation will eat up the value of our savings if left unchecked. Hence, many books and articles have been written (including some by yours truly) about how inflation is some malevolent phenomena that’s just waiting to gobble up all your hard-earned money. And for the most part, those books and articles are correct.

However, if you look at inflation closely, you will begin to understand that as “evil” as inflation may be, it is also quite necessary for an economy to grow.

Siopao

Yup, that’s right, inflation is a necessary evil for economies to expand and grow.

Why? Consider the following points:

First, for the purposes of this article, we will be viewing inflation as being DEMAND-DRIVEN. (meron din kasing SUPPLY-DRIVEN inflation). This means that prices are being driven up because more people are competing for a finite amount of goods and services. Put another way: Dahil dumarami ang tao sa mundo, at hindi lumalaki ang mundo, nag-uunahan tayong lahat makabili ng mga bagay-bagay.

Halimbawa: Pareho tayong gutom at may isang siopao sa harap natin. Ang presyo nito ay 10 piso. Dahil pareho natin itong gusto, at iisa lang ito (walang hatian), sasabihin kong willing ako magbayad ng 11 piso para makuha ito. Ikaw naman, sasabihin mong 12 piso at aakyat ang presyo niyan hanggang sa isa sa atin ay hindi na ito mabibili. Yan ang quick example ng demand-driven inflation.

Syempre, ang sasabihin ngayon eh,ba’t hindi na lang magdagdag ng isa pang siopao para everybody happy?

Well, magdadagdag lang nga ng siopao kung sa tingin ng negosyante eh may bibili pa nito. Kung sa tingin niya eh wala at mabubulok lang ito, bakit siya gagawa pa ng isa? Syempre ayaw niya masayang ang produkto at malugi siya.

Hence, if inflation in a country is demand-driven, it can be used as an indicator by businesses that there is potential demand for their goods and services – lalo kung ang mga iyun ay necessities like food and utilities. Then, they can expand their business and try to meet those demands – and that is how entire economies begin to grow.

The big question therefore is how much inflation is “healthy” for an economy? Kasi nga naman, too much and people can’t buy stuff while too little and businesses will not expand. So to answer the question, the terrifying fact is that no one knows. Governments just estimate what they believe will be good for their economy, use interest rates and other tools to keep it near that desired level and hope for the best. (And with our government, dasal talaga kailangan.)

READ MORE ABOUT INFLATION HERE: Ang Pera Mo At Ang Halaga Nito

Aya Laraya, Investment Advocate

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