Polytechnic University of the Philippines

Polytechnic University of the PhilippinesSta. Mesa, Manila

THE EFFECT OF INFLATION ON THE ECONOMIC GROWTH OF THE PHILIPPINES FOR YEAR 1984 UP TO 2013

A Research Paper Presented to Professor Maniego, Norie L.

In Partial Fulfillmentof the Requirements for the CourseECON 3043-Economics of Money and Banking 1st Semester SY. 2014-2015

ByGROUP 1Ahorro, Alyssa Dale Consuelo, Claudine Gonzales, DivinaMarpa, MarioPicardal, Eloise GraceVillarante, Mary JhoySeptember 2014

AbstractGeneral prices of commodities in the Philippines continued to rise more rapidly in the past years. It is therefore important to know whether inflation rate has an effect on countrys GDP growth rate. This study aimed to find out the significant relationship of inflation rate and GDP growth rate in the country from 1984 to 2013. Descriptive research method was used in analyzing the data obtained. The researches gathered relevant and reliable data from National Statistics Commission Board Office and the Bangko Sentral ng Pilipinas and even the non-government organizations like Trade Economics.Com and Worldbank.org. These data are then processed and evaluated through the use of efficient software called Econometric Views (EViews). It provided the researchers the precise results needed to validate their hypotheses. From the results generated, as can be observed, if the inflation reached 3.1, GDP growth rate is 9.97 on the 1st quarter of 2012 and 8.67 on the growth rate if the inflation is 2.43 on the 3rd quarter of 2013. Moreover, as of the Philippines in the year 1984, when inflation rate soared 53%, the GDP growth rate was -19.20% and when inflation rate was 1.9% in 2012, GDP growth rate turned 5.4%. This entails that an increase in the inflation rate have a spontaneous effect on the Gross Domestic Product growth rate in the long run. It turned out that inflation rate slightly affects the GDP growth rate positively in the short run but its effect is more visible in the long-run as inflation rate gives a negative effect on the growth rate.

CHAPTER 1THE PROBLEM AND ITS BACKGROUD

This chapter presents the Introduction, Background of the Study, Theoretical Framework, Conceptual Framework, Statement of the Problem, Hypotheses, Scope and Limitation, Significance of the study and the Definition of Terms.

IntroductionThe Philippines, once belonged to the poorest countries in Asia, has been making headway these years. It has been remarked as one of the fastest growing economy in its region, with the purpose of attaining high and sustained growth. Asian Development Bank has cited that private consumption and investment drove economic growth higher in 2013. It is expected to continue in the forecast period, though moderating from last year. However, economic growths do not ensure a stable inflation rate. It was reported by the National Statistics Office that despite the devastation brought by natural disasters and higher electricity prices, the countrys inflation rate in 2013 was the lowest in six years. Notwithstanding with the latter scenario, todays increase in the general price level of goods and services tend to pick up briskly:Mays headline inflation registered at 4.1 percent from 3.9 percent in March 2014 and 2.6 percent in the same period a year ago. Inflation in the first four months of 2014 also stood at 4.1 percent, according to the Philippine Statistics Authority (PSA).Todays condition, whereas the buoyancy of the price of commodities is likely to remain the status quo, it is engrossing to know the relationship between economic growth and inflation in the country. This paper is organized to provide a rational explanation regarding the effect of inflation in economic growth. Background of the StudyThe Philippines is a newly industrialized nation located in the South East Asia. The country experienced low economic development earning it the title the sick man of Asia due to its failure to attain the same level of development as what its neighbors has achieved. However,incontrasttothefateofmostofitsneighbors, the Philippines registered an average of 4.9 percent on its Real GDP growth rate on the year 2008 and 0.9 percent in 2009, a very upsetting situation due to some Asian countries such as India recording an 8 percent growth on 2008 and 6.5 percent on 2009, and Vietnam with 6.5 percent on 2008 and 4.4 percent on 2009 respectively.In some instances the efforts of the people and the administration has evaded vanity; the country did achieve a success from which the economic growth of the Philippines averaged 4.8 % in 2000-2012, grew by 7.8 % in the first quarter of 2013, faster than some countries. The quarterly growth rate was the highest since President Benigno Aquino III took office in 2010. Also, it ranked 16th out of 42 countries in the Asia-pacific region in the 2014 Index of Economic Freedom, reflecting notable improvements in investment freedom, business freedom, monetary freedom, and the control of government spending.. The country has also ascended 5 notches to 38th out of 60 countries worldwide on back of strong macroeconomic fundamentals and upbeat investor confidence. In the face of impressive growth figures, the Philippines is dealing with many challenges. Among these is the tangible rapid change of the price level of goods and services. Thus, the government introduced policies to help mitigate inflation rate. The BSPs approach to Monetary Policy has been introduced. The policys objective is to promote price stability, which is genuinely conducive in accomplishing balanced and sustainable growth of the economy. It is mainly focused to achieving a low and stable inflation, supportive of the economys development objective. The Philippine Development Plan 2011-2016 was also introduce to set an ambitious goal of stable economic growth in the country in six years. The condition of the progress of both the economic performance and inflation is too compelling for the researchers to resist evaluating. They want to know the effect of having an escalated economy to the cost of commodities, in which the citizens are directly affected as consumers. Theoretical FrameworkThe study regarding the effect of inflation to the economic growth of the Philippines from the year 1983 up to year 2013 is anchored to Endogenous Economic theory on Keynesian Mode discussing the relationship of inflation rate and economic growth specifically the Keynesian AD-AS Model. Keynesian model framework comprising of Aggregate Demand (AD) and Aggregate Supply (AS) curves, the AS curve is upward-sloping rather than vertical in the short-run; the implication is that changes in the demand side of the economy resulting from expectations , labor force and policy actions such as discretionary monetary or fiscal policies, affect both prices and output in the short run as predicted by the Phillips Curve (Blanchard and Kitoyaki, 1987 ; Dornbusch et al.,1996 ; Romer ,2001); therefore the Keynesian model advocates that there exists a positive relationship between inflation and output. However, in this Keynesian framework, it is not the case that inflation is itself a growth-enhancing force ; the point is rather that if rising aggregate demand is leading to increased growth , then some inflation pressures are likely to emerge as relatively benign byproduct. The positive relationship between inflation and growth exhibited in the short-run dynamics is unsustainable in longer term and turns negative with higher inflation rate.Moreover, inflation causes real appreciation of the domestic currency and reduces international competitiveness by making exports more expensive; in a country with fixed exchange rate, inflation would lead to the deterioration of the trade balance and capital outflows and impact negatively on the long-term economic growth (Dollar, 1992; Easterly, 1999).Concepts and principles of this model will lead the researcher to a deeper analysis of the study. This entail that inflation has a weak correlation to different variables that can affect the economic growth of a country and every institution involved plays a vital role to the economic sustainability of a nation. Conceptual FrameworkThe flow of the study is discussed through conceptual framework. The study used the system approach. The system of three frames is composed of input which went through the process or operations and emerged as the output.

* Economic Growth *Analysis of Data *Statistical AnalysisEconometric Views (EViews)* Philippine Economic Indicators Gross Domestic Product growth rate 2004-2013Gross Domestic Product growth ratd 1984-2013Inflation Rate INPUT PROCESS OUTPUT

FIGURE 1: CONCEPTUAL FRAMEWORK

Statement of the ProblemThis research paper titled The Effect of Inflation on The Economic Growth of The Philippines for the year 1983 up to 2013 aimed to answer the following question: What is the effect of inflation on the economic growth of the Philippines from the year 1983 up to 2013?Specifically the study endeavored to answer the following:1. What is the economic growth and inflation trend of the Philippines for the year 1984-2013?2. Does inflation rate affect economic growth of the Philippines for the year 1984-2013?a. Does inflation rate affect the economic growth on short run basis?b. Does inflation rate affect the economic growth on long run basis?Statement of the HypothesesThe null hypotheses tested are:1. Inflation has no significant effect on the economic growth of the Philippines on the 1st quarter of 2012 up to 4th quarter of 2013.2. Inflation has no significant effect on the economic growth of the Philippines on the year 1984 up to 2013.

Scope and Limitations of the StudyThis study was conducted to determine how inflation affects economic growth. Since inflation is a condition, when cost of services coupled with goods rise and the entire economy seems to go out of control. Whenever there is expected inflation, governments take appropriate steps to minimize the ill effects of inflation to a certain extent. Inflation often increases when economies experience booms in the economy.The study involved only the year 1984 up to year 2013 here in the Philippines. This given period provides an excellent backdrop given the presence of fluctuations in the trends of the inflation rate and economic growth for 30 years. For the short run basis, data from 2004 up to 2013 was collected. Data are gathered within this time frame which is subjected to specific process to yield pertinent results. The Real Gross Domestic Product growth rate is used by the researchers because among the indicators, this measures the growth of an economy either per quarter or annually. Also, inflation rate as measured by GDP deflator is used to show the fluctuations happening to inflation rate for the past 30 years.To make this possible, the study was anchored on the official government data released by the government agencies other independent organizations which are significant to the subject of this study.Significance of the StudyThis study will be beneficial and effective especially to the following people: To the society: As price takers, sellers, and consumers, they will really be the ones who are affected when inflation occurs. This study will help them know the changes in prices especially of prime commodities and so that they will be well equipped in case of spikes in inflation. To the Philippine Government: Government agencies especially the executive body is tasked in crafting economic policies to rein in inflation and encourage economic growth to lead the country to progress. This research paper shall help them make decisions that will prevent or the minimize effect of inflation on the economy and formulate effective solutions to the problem. To the students (especially Economics students): This study will help them understand the important issues and its implication to the economy. Through their awareness with the inflations effect to the economic growth, they will be able to make educated consumption decision to somehow lessen its impact to their personal budget and eventually contribute to small yet gradual improvement to our economy. This will also ensure that they are equipped with the right knowledge that they can use for the future. To the researchers: This study served in great part for the completion of the researchers course requirement. And also led them to discover new knowledge and widen their understanding on the relevant economic issues. To other researchers: This paper shall be effective and helpful reference for the researchers who would intend to make any further relevant study about the effect of inflation on the economic growth.

DEFINITION OF TERMSCommodityis a marketable item produced to satisfywantsorneeds. Economic commodities comprise goodsandservices.Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or service. Demand refers to how much (quantity) of a product or service is desired by buyers at various prices.Economic growthis the increase in themarket valueof the goods and services produced by aneconomyover time. It is conventionally measured as the percent rate of increase inreal gross orreal GDP.Economyoreconomic systemconsists of theproduction,distributionor trade, andconsumptionof limitedgoodsandservicesby different agents in a given geographical location.Governmentis a group of people that has thepowerto rule in aterritory, according to thelaw. This territory may be country, astateorprovincewithin a country, or a region.

Gross domestic product(GDP) is themarket valueof all officially recognized final goods and services produced within a country in a year, or over a given period of time.Inflationis a sustained increase in the generalprice levelof goods and services in aneconomyover a period of time.Marketis one of the many varieties ofsystems,institutions,procedures, socialandinfrastructureswhereby parties engage in exchange.Price takeris a person or company that has no control to dictate prices for a good or service. In the trading world, a price taker is a trader who does not affect the price of thestockif he or she buys or sellsshares.Priceis thequantityofpaymentorcompensationgiven by onepartyto another in return forgoodsor services. In moderneconomies, prices are generally expressed in units of some form ofcurrency. (Forcommodities, they are expressed as currency per unit weight of the commodity, e.g. euros per kilogram.)Societyis agroupof people involved in persistentinterpersonal relationships, or a large social grouping sharing the same geographical or social territory, typically subject to the same political authority and dominant cultural expectations.Supplyis the amount of aproductthat producers and firms are willing to sell at a givenpriceall other factors being held constant.

CHAPTER 2REVIEW OF RELATED LITERATURE AND STUDIES

This chapter presents the significant areas of the major components of the study. Each section is organized under related literature, foreign and local and related studies. Insistent to identify the effect of inflation on the economic growth, there is seemed a need to conduct a research on the subject for a wider view of some relevant circumstances. In view of above considerations, studies are presented as they lead justification to the study.

REVIEW OF THE RELATED LITERATUREThis portion presents a review of several literatures that would be beneficial to the study summarized from previous writings, showing detailed facts asserted by few people on the effect of inflation in economic growth. On this element of study some reviews of the proponents and authors passage in order to help the proponents to find ways in contact with theproblemthat have been encountered.

LOCAL LITERATUREJosef T. Yap has cited the stand of economic growth of the Philippines at various inflation rate, at different periods of times on his discussion paper, Inflation and Economic Growth in the Philippines (September 1996).

At the macroeconomic level, studies have been more quantitative in nature. There has been recent cross-country evidence supporting the view that long-run growth is adversely affected by inflation. An oft-cited reference is that of Fischer (1993). The framework that is used is derived from endogenous growth theory which tries to determine the causes of difference in growth rates in different countries. The negative effect of inflation on output stems from the resulting macroeconomic instability which makes it more difficult for economic agents to plan efficiently thus reducing investment. In the Philippine the direct costs of inflation have been measured by estimating its impact on output and its components. The welfare costs and distributional effects of the inflation tax have been largely ignored. In the PIDS Annual Macroeconometric Model (Reyes and Yap, 1993a), for example, a rise in sectoral prices and the general price level results in a decline in demand for the relevant sectoral output. This explains why the impact of a peso depreciation on total output is contractionary, particularly in the industry and service sectors.Inflation as a proxy for macroeconomic stability also has a negative impact on real fixed investment in the PIDS model. Thus, controlling inflation will result in higher capital formation and expand the future productive capacity of the economy.

FOREIGN LITERATURE

REVIEW OF RELATED STUDIESThis portion presents a review of few studies that would be beneficial to the study, showing thesis abstracts asserted by few people on the effect of inflation in economic growth.

LOCAL STUDIES

Cesar B. Quicoy, Amelia M. L. Bello and Tirso B. Paris, Jr. on their paper, Price Stabilization Measures and its effects on the Philippine Export Sector (1999), have supposed the result of inflation to growth:

Using a general equilibrium model, it is showed that there was a structural relationship between inflation and growth - higher inflation reduced growth. They suggested, however, that future empirical studies should take more care to control for the factors that influence both inflation and growth since these are jointly affected by a number of other factors. The short-run relationship runs from output to inflation, with higher levels of economic activity tending to push inflation up when aggregate spending in the economy runs ahead of the level of output that the economy can supply on a sustainable basis.

FOREIGN STUDIES

Min Li of the University of Alberta, Canada, has proven that theres a negative relationship between inflation and economic growth in the long-run in his paper, Inflation and Economic Growth: Threshold Effects and Transmission Mechanism.

Findings provide some strong policy implications. For developing counties, first, the marginal negative effect of moderate inflation in the range of 14 to 38 percent is pronounced. An increase in inflation by 10 percentage points per year will reduce economic growth by about 0.2-0.4 percentage points. This adverse influence of moderate inflation on growth will lead to a substantial negative effect on economies in the long term. Second, policymakers should not exert efforts to keep the inflation rate at zero percent since single-digit inflation (below the first threshold of 14%) does not impede and can even stimulate economic performance. Third, hyperinflation does not have hyper-negative effects on economic growth because the marginal impact of hyperinflation is much lower than that of moderate inflation. Empirically, we can observe that reductions in the hyperinflation rate have never had significant effects on economic growth. Therefore, controlling moderate inflation should be the main goal for policymakers in developing countries.

Robert J. Barro on his paper, Inflation and Economic Growth (2013) that was supported by the National Science Foundation, England assessed the effects of inflation on economic performance.

A major finding from the empirical analysis is that the estimated effects of inflation on growth and investment are significantly negative when some plausible instruments are used in the statistical procedures. Thus, there is some reason to believe that the relations reflect causation from higher long-term inflation to reduced growth and investment. It should be stressed that the clear evidence for adverse effects of inflation comes from the experiences of high inflation. The magnitudes of effects are also not that large; for example, an increase in the average inflation rate by10 percentage points per year is estimated to lower the growth rate of real per capita GDP (on impact) by 0.2-0.3 percentage points per year. Over long periods, these changes in growth rates have dramatic effects on standards of living. For example, a reduction in the growth rate by 0.2-0.3 percentage points per year (produced on impact by10 percentage points more of average inflation) means that the level of real gross domestic product would be lowered after 30 years by 4-7%.14 In mid 1995, the U.S. gross domestic product was over $7 trillion; 4-7% of This amount is $300-500 billion, more than enough to justify a keen interest in price stability.

Literature reviews from Vikesh Gokal and Subrina Hanifs working paper, Relationship Between Inflation and Economic Growth (2004) stated that inflation may have slightly positive effect on growth:

Non-linear effects of inflation on economic growth by Michael Sarely: There is evidence of a structural break that is significant. The break is estimated to occur when the inflation rate is 8 percent. Below that rate, inflation does not have any effect on growth or it may even have a slightly positive effect. When the inflation rate is above 8 percent, however, the estimated effect of inflation on growth rates is negative, significant, robust and extremely powerful. This study also demonstrated that when the structural break is taken into account, the estimated effect of inflation on economic growth increases by a factor of three. The results suggest that the existence of a structural break also suggests a specific numerical target for policy: keep inflation below the structural break.Role of Macroeconomic Factors in Growth by Stanley Fischer: Inflation is significantly correlated with the growth rate. The simple panel regressions confirm the relationships between inflation, inflation variability and growth. The growth accounting framework made it possible to identify the main channels through which inflation reduces growth. The author pointed out that, in line with past theory and studies, the results of the paper implied that inflation impacted on growth by reducing investment, and by reducing the rate of productivity growth. Examination of exceptional cases also showed that while low inflation and small deficits were not necessary for high growth even over long periods, high inflation was not consistent with sustained growth.

CHAPTER 3RESEARCH METHODOLOGY This chapter discussed the designs and procedures undertaken during the conduct of the study. It presented the research method used, instrument used, and validation of instrument, data gathering procedures and statistical treatment of data. RESEARCH METHOD USED Descriptive research is a method used in the process of finding adequate and precise interpretation of the facts presented. The researches employed this research method to emphasize the problems revolving around the situation rather than simply identifying them. To define the descriptive type of research, Creswell (1994) stated that the descriptive method of research is the gathering of information about the present existing condition. The aim of descriptive research is to verify formulated hypotheses that refer to the present situation in order to elucidate it. Moreover, this method uses a flexible approach, thus, when important new issues and questions arise during the duration of the study, further investigation can be conducted.The descriptive research is one in which information is collected without changing the environment Sometimes these are referred to as correlational or observational studies. The Office of Human Research Protections (OHRP) defines a descriptive research as Any research that is not truly experimental. Moreover, it is also conducted to demonstrate associations or relationships between things in the world around.A case study on the other hand, is an in-depth study of a particular research problem rather than a sweeping statistical survey. It is often used to narrow down a very broad field of research into one or a few easily research examples. The case study research design is also useful for testing whether a specific theory and model actually applies to phenomena in the real world. It is a useful design when not much is known about a phenomenon. Since this study regarding the relationship between the economic growth and the inflation rate is a time series research, this type of study is the best suit.

INSTRUMENT USEDTo gather data that will be subject to different processes to yield meaningful information that may support or reject the presented hypotheses, the researchers used library method in researching pertinent data. Through surfing in the internet in various websites of the government and other reliable non-government organizations, the researchers were able to get secondary data to be subject for cross-validation. VALIDATION OF THE INSTRUMENTThe secondary data garnered by the researchers are considered more reliable given the fact that the sources of these records have already been processed to alleviate fallacies and to accomplish authenticity. DATA GATHERING PROCEDUREThe researchers endeavored to look for sufficient data from various websites of the government such as the National Statistics Commission Board Office and the Bangko Sentral ng Pilipinas and even the non-government organizations like Trade Economics. Com and Worldbank.org. The researchers gathered the required data from June up to July of 2014 and this duration gave them enough time to gather sufficient data. STATISTICAL TREATMENT OF DATA To yield meaningful information from the data gathered from various sources that can lead to the deeper analysis of the processed data, the researchers used the Econometric Views (EViews). After the data are collected, the researches face the task of converting numbers into assertions; they must find a way to choose among the hypotheses the one closest to the truth. Statistical tests are the preferred way to do this, and software programs like EViews make performing these tests much easier. EViews organizes data, graphs, output, and so forth, as objects. Each of these objects used for further analysis. EViews is a powerful program which provides many ways to rapidly examine data and test scientific hunches. It can produce basic descriptive statistics, such as averages and frequencies, as well as advanced tests such as time-series analysis and multivariate analysis. The program also is capable of producing high-quality graphs and tables. Knowing how to make the program work for you now will make future work in independent research projects and beyond much easier and more sophisticated.

CHAPTER 4PRESENTATION, ANALYSIS, AND INTERPPRETATION OF DATAThis chapter presents the findings obtained from the primary instrument used in the study. It shall discuss the results obtain from the data processed through Eviews to come up with precise conclusion regarding the problem. In order to simplify the discussions, the researcher provided tables and graphs.Presented below is the result from Eviews to answer the question, if there is a significant relationship between the inflation rate and Gross Domestic Product growth rate in the short run basis.

The table above shows that R-squared obtain from the short run data is 0.100847 which means the variance of Gross Domestic Product growth rate can be explain by inflation rate by 10%. This entails that the model has a very small capability to fit and explain the relationship between the independent variable which is the inflation rate and the dependent variable which is the Gross Domestic Product growth rate. Inflations coefficient is 0.623 connotes that there is a positive relationship between the two variables but since the r-squared is low, its positive relationship is less significant. T- statistics probability is 0.44 and is less than 5% which indicate that the first null hypothesis is rejected, GDP growth rate and inflation rate has significant relationship and the 0.82 of the T-statistics means that the even theres a positive relationship among the two variable, but still it has a minor effect. Moreover, the F-statistics probability, 0.443, which is less than 5%, denotes that the independent variable influence the dependent variable and since the value of F-statistics is 0.64, inflation rate can influence GDP growth rate by 64%. Given that the result is significant, the null hypothesis is rejected.Short Run Model

The table above containing the results obtain shows the model to be used to prove if theres a relationship between the inflation rate and Gross Domestic Product growth rate.

After substituting the inflation rate to the model, the result obtain in which was presented on the previous page show that if there is direct relationship between the independent and dependent variable it is very little that it is neglected and assume to be less significant, which proves that there is significant relationship between inflation rate and GDP growth rate.Following is the presentation of the table of the long run result processed from data dated from 1984-2013 through Eviews.

The table shows that the R-squared is .566 which denotes that the model fitted good to explain the relationship of the independent variable and dependent variable since the result obtain is near 60% that set as the benchmark of being the best model. T-statistics probability is zero and is less than 5% percent thus; the second null hypothesis is rejected. The -6.0448 value of T-statistics tells that the inflation rate negatively explains the GDP growth rate. The coefficient -.0284 means there is a negative relationship between the inflation rate and GDP growth rate. On the other hand, the P-value of F-statistics is 0.00002, less than 5%, indicates that there is a significant relationship between the inflation rate and GDP growth rate and IR can influence GDP growth rate by 36.54 as stated in F-statistics.Long run Model

The table shows the model to be used to prove the negative relationship between the inflation rate and GDP growth rate in the long run.IRGDP

53.3-9.198550145

17.65.950656513

35.097980716

7.53.818967021

9.63.222093963

93.392629122

132.25572806

16.51.26093963

7.93.705276915

6.84.017924707

103.108403857

7.63.790544494

7.73.762121968

6.24.188459866

22.4-0.415989437

6.64.07476976

5.74.330572499

5.54.387417552

4.24.756910397

3.25.041135663

5.54.387417552

5.84.302149972

4.94.557952711

3.15.06955819

7.53.818967021

2.85.154825769

4.24.756910397

44.813755451

1.95.410628508

25.382205982

The result obtain by substituting the value of inflation rate indicates that there is a negative relationship between the inflation rate and GDP growth rate. For instance, if the inflation rate is 53.33% its equivalent GDP growth rate is -19.20 and if the IR is 1.9% the GDP is 5.41. This result entails that a large increase in the inflation rate gives a large decrease on the growth rate in the economy. This proves that there is a significant relationship between inflation rate and Gross Domestic Product growth rate in the long run.

CHAPTER 5SUMMARY OF FINDINGS AND CONCLUSION

The very purpose of this study is to determine the effect of inflation on economic growth. The results were accumulated by conducting least-square estimation of inflation and Gross Domestic Product growth rate through Eviews 7. The main objective has been to indicate whether the general increase in prices of commodities could or could not hamper the growth of the economy in the short-run and long-run period. This chapter will report the conclusion reached from the conduct of this undertaking. The results suggested that in the long-run, inflation imposes a significant negative effect on GDP growth rate. When inflation soars, GDP growth rate will be at its bottom. In converse, when inflation resorts in low level, GDP growth rate will ascend. As it were, Aggregate Demand falls as inflation rises since it lowers the level of consumer spending, investment and exports. This assertion was corroborated by reasonably high result of R-Squared, which is 57%, and the calculation of probability, with 0%, presenting a significant relationship between the variables used, Inflation and GDP growth rate.A sustained rise in the general price level can do economic damage by distorting consumption decisions. Distortions result from households and businesses uncertainty about inflations future course. Inflation makes goods produced in the Philippines more expensive, towing exports to decrease. Yet it causes imports to increase by making goods made abroad less expensive. Also, this occurrence poses a stealth threat to investors because it chips away at real savings and investment returns. Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power.On the other hand, the obtained outcome of the estimation has shown that inflation prompts substantial growth in the short-run. Having an R-Squared of 10%, it is understood that growth could be explained by the hike in prices of commodities.The rationale of this finding could be explained by building up of output, with the producers having the myopia that they will be gaining more, believing that prices of products would be high. In conclusion, the researchers were able to recognize the weight of inflation rate to both short-run and long-run period in the Philippine context. Though the said phenomenon was proven not to be on the way of attaining growth in the short-run, inflation should still be controlled for it deteriorates progress in the long-run.