According to the National Statistics Office (NSO), the average year-on-year inflation rates on all prices in the Philippines from January 2007 to August 2011 are as follows:
| 2007 | 2008 | 2009 | 2010 | 2011 |
|---|---|---|---|---|
| 2.9% | 8.3% | 4.1% | 3.8% | 4.8%* |
Analyzing the above data, inflation in the Philippines has been around 4.78% for the past five years with a peak of 8.3% in 2008.
How Inflation Affects You
So, how does inflation affect you? Inflation erodes your purchasing power. Your P1,000 will be able to buy fewer goods next year, and yet fewer goods every year after that.
Inflation also affects your savings. If you save P1,000,000 in a BPI Maxi Saver account today (9/10/2011), your deposit will earn at a rate of 1.75%. That’s the biggest interest rate the BPI offers for a savings account. Note that this is much lower than the inflation rate! With inflation higher than your savings account interest rate, your purchasing power will be eroded from year to year.
If you leave your money in the savings account in the bank for 20 years earning 1.75% interest while inflation is at 4.78%, this is what will happen:
| Year | Your Savings | Purchasing Power |
|---|---|---|
| 1 | 1,017,500.00 | 971,082.27 |
| 2 | 1,035,306.25 | 943,000.77 |
| 3 | 1,053,424.11 | 915,731.33 |
| 4 | 1,071,859.03 | 889,250.45 |
| 5 | 1,090,616.56 | 863,535.35 |
| 6 | 1,109,702.35 | 838,563.86 |
| 7 | 1,129,122.15 | 814,314.50 |
| 8 | 1,148,881.78 | 790,766.37 |
| 9 | 1,168,987.21 | 767,899.20 |
| 10 | 1,189,444.49 | 745,693.29 |
| 11 | 1,210,259.77 | 724,129.54 |
| 12 | 1,231,439.31 | 703,189.35 |
| 13 | 1,252,989.50 | 682,854.71 |
| 14 | 1,274,916.82 | 663,108.10 |
| 15 | 1,297,227.86 | 643,932.52 |
| 16 | 1,319,929.35 | 625,311.45 |
| 17 | 1,343,028.11 | 607,228.86 |
| 18 | 1,366,531.11 | 589,669.18 |
| 19 | 1,390,445.40 | 572,617.28 |
| 20 | 1,414,778.20 | 556,058.49 |
In effect, at the end of 20 years, you will have P1.414 million in your bank account, but you will only be able to buy the equivalent of P556,000 worth of goods in today’s prices. If you can buy a lot of 100 sqm with your P1M today, you can only buy a lot of 56 sqm with your P1.414M in 20 years. Your purchasing power has been eroded by almost half!
Imagine what happens to your money if inflation becomes 6%, 8%, or even 11%. Too far fetched? Not quite. The average inflation rate on consumer prices in a 10-year span from 1990 to 1999, was 9.94%. In the first five years of that same decade the average inflation rate was 11.46%. Thankfully, it is now at 4.8%. But who knows what the inflation rate will be tomorrow?
So what do you do to protect your money from inflation? You look for a savings plan or an investment plan that could potentially offer you better returns than the inflation rate over the long term. Such plans could invest your money in stocks and bonds which carry more risk but have the potential to generate much higher returns.
If you need help setting up such a savings or investment plan, contact us, and we will be glad to be of service to you.
How is the yearly purchasing power computed with 4.78% inflation rate?
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.
This has changed in recent months. Again, bank rates haven’t suddenly been resurrected, but inflation has slipped back noticeably. After flaring up in the first quarter of this year, inflation has been negative since, meaning that overall prices have actually declined. This has given savings account rates and other deposit rates a rare opportunity to get ahead of inflation.