Inflation
Learn what inflation is, how it's measured in the Philippines, and simple ways to protect your small business.
February 2024 | Published by Xero
Published Monday 31 August 2026
Table of contents
Key takeaways
- Inflation is the rate at which prices rise over time, which means each peso buys a little less than it did before.
- It comes from the interplay of supply, demand and the money supply, so prices can rise unevenly across different goods and services.
- Some inflation is normal in a healthy economy, but rapid inflation squeezes small business margins, cash flow and customer spending.
- Reviewing your pricing, watching your margins and managing cash flow help your business stay steady when costs climb.
What is inflation?
Inflation is the rate at which the prices of goods and services rise over time, measured from the average price change of a selected basket of items. As prices go up, each peso buys a little less than it did before.
Inflation comes from the interplay of supply, demand, the money supply and market-specific factors like how much competition there is for certain goods and services. Picture your regular grocery run: if a basket that cost 1,000 pesos last year now costs 1,050 pesos for the same items, that 5% rise is inflation at work. A low, steady rate is a normal sign of a growing economy, while a sharp jump is hard for small businesses to absorb.
What is the inflation rate?
The inflation rate is the percentage by which prices rise over a set period, usually a year. It is normally reported as a single headline figure for the whole economy, but prices do not move evenly, so energy prices can climb faster than food prices, for example.
How to calculate the inflation rate
To work out the inflation rate for a single good or service, subtract the old price from the new price, divide the result by the old price, then multiply by 100. A country's central bank monitors and manages inflation and publishes the official rate, so that is where you can usually find the current figure.
What causes inflation?
Prices climb for different reasons, and often several act at once. The main drivers are:
- Demand-pull inflation, when buyers want more than businesses can supply and prices rise to catch up
- Cost-push inflation, when production or import costs increase and sellers pass the rise on to customers
- Growth in the money supply, which lowers the value of each peso when money grows faster than the economy
- Supply shocks, such as higher global oil prices or a weaker peso that makes imported fuel and materials dearer
How is inflation measured?
Inflation is measured with a consumer price index (CPI), which tracks the average change in prices for a basket of goods and services a typical household buys. The headline inflation rate is the year-on-year change in that basket.
In the Philippines, the Philippine Statistics Authority (PSA) compiles and publishes the CPI, while the Bangko Sentral ng Pilipinas (BSP) monitors inflation and adjusts interest rates to keep prices stable. Watching your own numbers matters too: Xero's business analytics tools help you see how rising prices flow through to your cash flow and results.
Why inflation matters to small businesses
In some cases inflation can work in a business's favour, because it raises the cash value of assets like property or inventory, and it erodes the real value of existing debts as money loses buying power. Inflation is also a live concern in the Philippines: according to the Philippine Statistics Authority, headline inflation ran above the 2% to 4% target through much of 2026, reaching 6.2% in July 2026 as fuel and food prices climbed.
More often, though, inflation creates challenges for small businesses:
- It can be hard to pass rising costs on to customers
- Businesses that sell nonessential goods may struggle as customers prioritise essentials over discretionary purchases
- Businesses that borrow may face higher interest bills, because central banks often raise interest rates to cool inflation
How small businesses can deal with inflation
You can take practical steps to keep your business steady when prices rise:
- Cut expenses by switching to lower-cost suppliers, renegotiating leases or trimming non-essential spending
- Monitor your profit margins so you know when profitability is under threat, and keep an eye on your gross profit margin as supplier costs change
- Raise prices strategically, for example by offering loyal customers flexible payment terms; a clear approach to increasing prices makes rises easier to accept
- Manage cash flow and protect liquidity, since credit is usually dearer during inflationary times; a simple cash flow forecast helps you plan ahead
What is a healthy inflation rate?
Low, stable and predictable inflation is generally seen as healthy, because it gives businesses more certainty over costs and pricing without the risk of falling prices. When inflation stays within a modest range, you can plan and set prices with more confidence.
In the Philippines, the government and the Bangko Sentral ng Pilipinas (BSP) set a medium-term inflation target of 3.0% with a tolerance band of plus or minus 1.0 percentage point, a 2% to 4% range for 2025 to 2028.
Manage inflation's impact with Xero
When prices shift, quick access to accurate numbers makes every decision easier. Xero gives you real-time reporting, cash flow tracking and clear financial insights, so you can see how inflation is affecting your business and act early. Start today and get one month free to keep your margins and cash flow in view: get one month free.
FAQs on inflation
Here are quick answers to common questions Philippine small business owners ask about inflation.
What causes inflation?
Inflation is caused by demand outpacing supply, rising production or import costs, and growth in the money supply. A weaker peso and global price shocks can add to the pressure.
Is inflation good or bad?
Low, steady inflation is normal and often comes with a growing economy. It becomes a problem when prices rise faster than your revenue or wages can keep up.
How is inflation measured?
Inflation is measured through a consumer price index that tracks price changes for a basket of household goods and services. In the Philippines, the PSA publishes this figure each month.
What is a healthy inflation rate in the Philippines?
The BSP aims to keep headline inflation between 2% and 4%, built around a 3.0% target with a one percentage point tolerance band. That range is treated as manageable for the economy.
What is hyperinflation?
Hyperinflation is an extreme, rapidly accelerating rise in prices that quickly destroys the value of a currency. It is rare and far more severe than the everyday inflation most businesses plan for.
Related terms
Learn more about inflation
Handy resources
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.