CREATING VALUE OUT OF INFLATION: THE REACTION

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28 Οκτ 2013 (πριν από 4 χρόνια και 12 μέρες)

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GILBERTO E.

ZAFRAN

Ateneo Graduate School of Business

MBA
-
REGIS 2012


CREATING VALUE OUT OF INFLATION: THE REACTION

When I was a child, my grandmother used to give me bronze colored one centavo

coin
. To my delight I could able to
buy “dinalonggan

-
a hardened cookie made from corn, every school recess.
Today, one centavo has no monetary
value and can’t be anymore be
used in the market
. When I was in Grade 6 I don’t understand why until I realized it
was the effect of devaluation a
nd

INFLATION.

As i
t was clearly defined, Inflation is a widely used measure of the underlying trend or movement in the average
consumer prices. It is often used as a complementary indicator to what is known as “headline” or Consumer Price
Index (CPI) inflation.

However, as
Dr. Mansibang’s book stated, there are factors driving inflation these are business
inefficiencies, political turmoil, graft and corruption not just in the private sector but rampant in the government
agencies and bureaus and some peace and order situation

that were greatly affecting the economy to inflation.

In many countries,

inflation is often influenced by factors beyond the control of economic policy and has tended to
be historically volatile. Shocks or disturbances in certain areas of the economy may

cause it to temporarily move
away from its long
-
term tr
end resulting to major impact of inflation in business.


In the
Philippines, the volatility of

inflation has been caused by

also other factors driving inflation
such as
disturbances in agricultural fo
od supply or movements in international oil prices. As a result, the headline inflation
rate may reach double
-
digit levels, even though the prices of other CPI components show only mild increases. Core
inflation is an indicator of the underlying movement i
n consumer prices since it takes out the effect

of temporary
disturbances and
shocks that cause prices to surge or decline, independent of economic and monetary policy.
Measuring core inflation helps policymakers determine whether current movements in con
sumer prices represent
short
-
lived disturbances or are part of a permanent trend. Such knowledge is important to the formulation of
economic policy
, particularly monetary policy to prevent if not lessen and cushioned the impact of inflation in
business
. S
uch impacts that should be cushioned are illusions of profits and shareholder’s value, address increased
cost of financing, diminished value of financial assets, higher tax implication, and changes in norms and behavior of
the company’s trading partners
.

D
r. Mansibang’s
book and his
interpretation of Inflation

sufficed the
intellectual cap
ability of a person reading the
book and actually add

thorough understanding
of the entire effect of inflation not just
to
the entire economy but in
the life of every Fili
pino. As I go through reading Dr. Mansibang’s book and looking through ot
her reading materials
that
help
ed

me find the exactness and in
-
depth analysis of inflation. I came to realized t
hat there are two

types of
inflation and one differ
s

from
the other.

T
hese are

Core I
nflation

and
Consumer Price Index

(CPI) Inflation
. I asked
myself, Core Inflation
different fro
m CPI or “headline” inflation? The answer is basically
Headline inflation refers to
the rate of change in the CPI, a measure of the average price
of a standard “basket” of goods and services consumed
by a typical family

not just in NCR but throughout the country
. This is actually in congruent in predicting inflation and
monitoring movement of macro
-
economic variables.


In the Philippines, the CPI b
asket is composed of various consumer items as determined by the nationwide Family
Income and Expenditure Survey (FIES), which is conducted every three years by the National Statistics Office (NSO).
Headline inflation thus captures the changes in the cost
of living based on the movements of the prices of items in
the basket of commodities and services consumed by the typical Filipino household. On the other hand, core
inflation measures the change in average consumer prices after excluding from the CPI cert
ain items with volatile
price movements. By stripping out the volatile components of the CPI, core inflation allows us to see the broad
underlying trend in consumer prices. Core inflation is often used as an indicator of the long
-
term inflation trend and
as an indicator of future inflation. It is usually affected by the amount of money in the economy relative to
production, or by monetary policy.

Studying and In
-
depth analysis of Consumer Price Index (CPI) and Core inflation is very helpful in coping with

the
inflation by way of reviewing price and cost structures, Reducing level of receivables and asset backed securities,
managing inventories, evaluate the effect of traditional performances and Individual or stakeholder action is
required in coping econom
ic inflation.

POINT OF REACTION:

Though there are certain aspects of inflation that ruins the economic soundness and activity in the Philippines but
there are also some aspects to be considered. I think inflation is not always bad but in my point of view,

and it seems
surprising in my readings and I was delighted to find out that inflations has enormous disadvantages but also has
some adva
ntages and good economic signs with high regards and combination of Dr. Mansibang’s
way of
coping
with inflation
as cle
arly stated in his book.

ADVANTAGES OF INFLATION

Yes it’s true that i
nflation is the sust
ained increase in price level.
It usually has negative aspects to inflation, but it
has some positive effects as well. Firstly, inflation is more desirable than deflat
ion in most situatio
ns. This does not
include hyper
-
inflation by the way.

Secondly, inflation shows economic growth, or at least it re
flects some economic activity.
The major positive aspect
is that it helps smal
ler firms grow to larger firms.
Assumi
ng
both firms A and B sell

similar goods. A is a large
cooperation with economies of scales and B a smaller firm without economies of scale. Therefore the prices of
goods A would be less than good B. Assuming that the inflation rate is 10%. The price of good
A is $9 and infl
ation
causes it to increase to P
9.90. And for good B, since the cost of produ
ction is higher, it costs P10, a
nd w
ith inflation
pushing it up to P
11. The proportion of increase is similar, but the real price

increase is different, firm A P
0.
90 and

firm B P1. Thus firm B having
0.10 incre
ased revenue more than firm A.
Resulting in a larger benefit, ceteris peribus
cost of production does not increase in proportion and other factors equalized.

Current Economic planners in the country may argue
that inflation is the not the main issue in this age of bail
out and
selling shares
-
for instance government shares of Large Companies like Petron, Meralco and Malampaya, and
stimulus packages. Inflation is always a threat to any economy, and depending
on ho
w the current economic
portfolio

packages work, could either become part of the changing economy, or part of an economics textbook.

Hence, inflation recorded economic benefits. In my researched and read
ings, I was able to detailed

Four (4)
Economic Benefit
s of Inflations.

Growth in Business
-
Controlled growth of Inflation, can become part of business growth, simply because savings are
often invested, because of the net l
oss if they are kept in a Bank.
During times of controlled Inflation, people in the
past tended to spend, as they feared prices could rise,
saving on buying now, rather tha
n paying more lately
.

Falling Debt Values
-

Higher Inflation eats away at the real value of a currency. This could m
ean that the actual value
of debts decrease, benefiting indebted businesses and private individuals.


Higher Stock Values
-
Stocks bought at an earlier value, could rise in price and sold off at a higher price bringing
higher profitability.

Rising asset Va
lues
-

Values of fixed assets could rise, making some Companies more financially secure. Traditionally
higher Inflation often leads to h
igher prices:

therefore fixed assets in theory should rise in value.

REAL SCENARIO: APPLICATION

AND PERSONAL VIEWS


I
n

order to less
en if not contain the impact of
inflation,
I believe that
economic analysts, consultants and
government resources should be at the forefront. Though, inflation can be forecasted, however, government

as the
economic implementer

and sanctionin
g body should tightens economic activity by overseeing unscrupulous
businesses who’s trying to sabotage
sound business dealings and activities. Based on previous data and forecast the
likely event will probably minimize the impact of inflation and maximize

the economic shields.

Though, in order to cope with inflation, I think all stakeholders
-
businesses,

investors, government and its
constituents, should also help each other because I beli
eve individual should play important role. P
eople believe
higher pri
ces reduce their standard of living and make them “poorer.” This is obviously true for people living on fixed
incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher
incomes as well as higher prices
, and it typically doesn’t have much of an effect either way o
n people’s standard of
living. After all, we have had
years of inflation

experienced even during the time of Spanish, Japanese, American
occupation and also during
postwar era, yet we’re much mo
re p
rosperous than we were in those years.

That’s not
how it feels, though,

myopia leads us to focus on how much more we have to pay, rather

than on how much more
we earn.


There’s also a moral dimension: we connect inflation to a lack of discipline and fa
ilure to live within our means.
This
intuitive prejudice against inflation may not be purely rational, but in normal times it’s beneficial: it encourages
sober habits and discourages quick fixes. But, in times of crisis, other policies may succeed where pu
re rectitude
c
an’t. After the Asian Crisis, when Asian Countries particularly Philippines and Thailand were

struggling beneath a
huge pile of debt, higher inflation helped shrink the real national debt to manageable proportions. And, in times
when people a
re reluctant to take risks, a little inflation can help grease the skids. In doing this, though, inflation
helps debtors and spenders at the expense of creditors and savers

It is generally accepted in economic circles that moderate rates of inflation in th
e 2
-
4% range are actually good for
the economy for the reasons mentioned above. But what happens when inflation rates increase significantly above
this “safe rate”. When inflation hits 7
-
12% as many are expecting, who benefits from high rates of inflation
?



The Government

-

The most obvious beneficiary of higher inflation, at least in the short term, is the
government. Since they control the printing presses, the government will always be able to pay its debt, at least
domestically since higher inflation

effectively reduces the long
-
term cost of borrowing money.



Borrowers

-

Anyone borrowing money for a long term for a fixed rate (such as a fixed rate mortgage) benefits
from inflation because, again, it effectively reduces the cost of future inte
rest pay
ments. Assumed that P
20
,000

per
month mortgage payment may seem like a lot today, but 20 years from now it will be worth a lot less. Your income
will have risen to keep up with the constantly
-
increasing cost of living while your fixed
-
rate debt will have

remained
constant.



Owners Of Real Assets

-

Owners of real physical assets s
uch as real estate, gold, farm land or estates,
mines,
etc tend to do very well during inflationary perio
ds since the price of these

tends to rise along with inflation.

On the
other hand, as inflation progressed, who would louse from high inflation rates? In my assumption m
ore
people lose from high inflation than win, including…



Consumers



Rapidly
-
escalating costs make things difficult for consumers. How do you put food on t
he table
when the cost of the table and the food is constantly increasing?



Businesses



By far the best risk
-
management tool businesses have is meticulous planning. But inflation
makes it nearly impossible to predict how much things like office space, r
aw material, and labor costs will be in the
future. Thus, inflation wi
ll tend to choke off investment, and



The Economy



As a result of the pain businesses and consumers feel during inflationary periods, the economy
as a whole is sure to take a hit. I
f consumers cut back on spending and businesses cut back on investment, GDP will
plummet and people will lose their jobs. The only cure in this scenario is to raise interest rates through the roof a la
Asian Crisis in the early 1997
′s. Yes, 15
-
17
%

intere
st rate per annum

mortgages would be painful but that is the best
sho
t at avoiding permanent damage.

Conventional Economic theory is based often on past experience; however Asian and current Euro economic crisis
has not really been experienced before. It a
lso resembles US credit Crunch, but all our economies are fundamentally
different, and the World is a different place to live with and doing business.

We may never be sure what higher inflation could do to our economies, one reason Gold has become the cho
ice of
many Savvy Investors. We are at the crossroads of great economical change, and this change could challenge more
conventional Economic thinking, especially about the effects of inflation on our economy.

References:

Financial Management: Reading Mater
ials (by: Dr. Cesar Mansibang, CPA,MBA,Ph.D)

Article Source:
http://EzineArticles.com/2102601

Management Dynamics:

Financial Management book