Inflation and Unemployment Rate

Inflation,Unemployment, and the Business Cycle

I N F L A T I O N R A T E

Inflation Rate Defined

Inflation Rate is the rate of increase in the weighted average prices of goods and services typically purchased by consumers.

π2015= CPI2015 − CPI20014

CPI2014

x 100

e.g. CPI 1Q 2014 = 147.60CPI 1Q 2015 = 157.80

π1Q,2015 = 6.90%

Causes of Inflation

1. Demand-Pull Inflation

Spending increases faster than production.

Causes of Inflation

2. Cost-Push InflationPrices rise because of a rise in per-unit production costs (Unit cost = total input cost/units of output).

3. Profit-Push InflationPrices rise due to higher mark-ups.

Effects of Inflation

1. Redistributive Effectsa.Losers during Inflationary Times

i.Fixed income earnersii.Saversiii.Creditors

b.Gainer during Inflationary Timesi.Debtors

2. Menu Costs

3. Shoe leather Costs

4. Confusion and Inconvenience

Headline Inflation vs. Core Inflation

• 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. In the Philippines, the CPI basket 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.

Headline Inflation vs. Core Inflation

• core inflation measures the change in average consumer prices after excluding from the CPI certain 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.

Why Do we Need to Measure Core Inflation?

Excluded Items in Core InflationThe items in the CPI that were excluded in the definition of core

inflation components and their corresponding CPI weights (2006=100) are as follows:

• Rice (8.9 percent) • Corn (0.7 percent) • Meat, fresh, chilled or frozen (4.9 percent) • Fruit, fresh (1.5 percent) • Vegetables, cultivated for their roots, fresh or dried (0.6 percent) • Vegetables, cultivated for their fruit, fresh or dried (1.2 percent) • Natural gas, liquefied or in a gaseous state (1.5 percent) • Gas oils for motor vehicles (0.7 percent)

Third Quarter Report on Inflation

Time Series Monthly Data on Headline and Core Inflation

Inflation for Selected Food Items

Inflation for Selected Non-Food Items

DEFLATION vs. HYPERINFLATION

• Deflation is the rate of decrease in the weighted average prices of goods and services typically purchased by consumers.

• Hyperinflation is defined as period of extremely high inflation rate.

Ex. Bolivia in 1985 experienced an inflation rate of 116,000%

U N E M P L O Y M E N T R A T E (u)

Unemployment Rate Defined

Unemployment Rate is the proportion of the labor force who are unemployed, currently available for work and seeking for work.

u = UnemployedLabor Force

e.g. LF = 37,113U= 2,855 u= 7.70%

NSCB Resolution No.15Series of 2004

The unemployed include all persons who are 15 years old and over as of their last birthday and are reported as:

1. Without work , i.e., had no job or business during the basic survey reference period; AND

2. Currently available for work , i.e., were available and willing to take up work in paid employment or self employment during the basic survey reference period, and/or would be available and willing to take up work in paid employment or self employment within two weeks after the interview date; AND

3. Seeking work, i.e., had taken specific steps to look for a job or establish a business during the basic survey reference period; OR not seeking work due to the following reasons: (a) tired/believe no work available, i.e., the discouraged workers who looked for work within the last six months prior to the interview date; (b) awaiting results of previous job application; (c) temporary illness/disability; (d) bad weather; and (e) waiting for rehire/job recall.

Labor Force Defined

Labor Force includes all persons 15 years old and over as of their last birthday who contribute to the production of goods and services in the country either employed or unemployed.

Two Types of Unemployment

UNAVOIDABLE UNEMPLOYMENT

1. FRICTIONAL UNEMPLOYMENT2. STRUCTURAL UNEMPLOYMENT3. CYCLICAL UNEMPLOYMENT

AVOIDABLE UNEMPLOYMENT

Types of Unavoidable Unemployment

1. Frictional UnemploymentIt consists of those searching for jobs or waiting

to take jobs soon.2. Structural Unemployment

3. Cyclical Unemployment

It is due to changes in the structure of demand for labor.

It is caused by the recession phase of the business cycle.

Avoidable Unemployment

Unemployment usually associated withinsufficient demand for workers caused bymany factors such as poor performance ofthe economy.

Underemployment

• A person is underemployed if he or she is current working but seeking additional hours of work: In his current work/or in another work/ or longer working hours in a different work.

Two types of Underemployment

1. Visibly Underemployed – working less than 40 hours per week.

2. Invisibly Underemployed – working at least 40 hours a week.

Labor Market Remains Stable

Total Underemployed

Household Population 15 Years Old and Over by Employed by Major Industry Group

Okun’s Law

• This concept was developed by Arthur Okun

• His concept explains that there is an existing negative relationship between GDP and unemployment.

• For every 2-3% changes in GDP, unemployment changes by 1%.

PHILLIP’S CURVE AND STAGFLATION

• This theory explains that in the short-run (SR) there is a trade-off between inflation and unemployment.

• Stagflation comes from two different words, stagnant and inflation. The word stagnant depicts the dormancy of the economy with the simultaneous occurrence of inflation.

• This means that the economy is experiencing high inflation and unemployment at the same time.

Business Cycles

Business Cycle is defined as follows:• Co-movement in different macroeconomic

variables.• Diffusion of fluctuations in different economic

activities and not just in a single industry.

Selected Classical Theories Explaining Business Cycles

1. Endogenous - These theories explain the causes of business cycles within rather than outside of the economy

2. Exogenous - These theories explain the causes of business cycles as disturbances outside the economy.

Selected Classical Theories Explaining Business Cycles

1. Endogenousa. Real Structural Hypothesis b. Innovation Theoryc. Under – consumption theoryd. Monetary Theory

Selected Classical Theories Explaining Business Cycles

2. Exogenous Theories. These theories explain the causes of business cycles as disturbances outside the economy.

It has been said that when the economy of United States catches cold, the Philippine economy contracts pneumonia. The reason behind this is that the country’s economy is so dependent on the demand of the United States for our products. In fact, the United States remains as our top trading partner, so any decline in their economic activities will definitely generate fluctuations in the economy.

Another exogenous factor that will create fluctuations in the economy would be conflicts in other nations or regions such as the Middle East. Since the Philippines relies heavily in this region for our oil supply, any political unrest will create higher prices of crude oil in the world market which eventually lead to higher prices of gasoline and diesel in the local market. These higher prices will generate economic woes for the household and industries.

Phases of the Business Cycles

1.Peak/Prosperity2.Recession3.Trough/Depression4.Recovery

Business Cycles in the Philippines

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

90 92 94 96 98 00 02 04 06 08 10 12

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