Infrastructures to Mitigate Inflation Rate: Yay or Nay?

By: Glannerry Kate Salarza and Reyban Sabordo

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According to the tweet of Senator JV Ejercito, it is but visible that he is making a huge effort in pushing through the idea of improving infrastructures, for he affirms to the thought that it would be of great solution to mitigate inflation.

But how will spending in infrastructure impact inflation?

In a short span of time, it will increase inflation, however, in the long run, it will cause deflation, ceteris paribus.

For a short while, when government spends heavily on infrastructure they will engage many private institutions and state-owned companies to do the projects. Through multiplier effects, the income they receive as a result of doing the projects, when they spend it will be larger than the actual amount. Multiplier effects says that, for example the infrastructure projects cause 1 Billion and 10 companies receive 100 million each as a result of completing the projects. When they spend 100 million, amount spend could be higher, says 200 million instead of 100 million. Thus, multiplier coefficient is 2.

On the flip side, observing the long run process, it will cause price level to fall or deflation. Spending on infrastructure would make the economy more efficient (e.i.: higher private investments, faster and cheaper transportation etc.) and thus, it will push the Aggregate Supply curve to the right. Hence, overall price level would fall while national output increases.

With that being said, we believe that every decision is always a matter of weighing two things carefully. Look even into the smallest details and consider possibilities, then, it’s for you to choose.

Again, the question is, yay or nay?

 

References:

Tweet photo taken at https://twitter.com/jvejercito/status/1045214946101932032

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