UniversityThe price to pay: Ramifications of rising PH inflation
The price to pay: Ramifications of rising PH inflation

In August 2018, the Philippine inflation rate soared to 6.4 percent, the highest in the past nine years. The following month, the Philippine Statistics Authority (PSA) reported it rising to 6.7 percent—a small increase, but still far above estimates. The reason, as PSA reported, was due to price increases seen on food, transportation, and utilities.

The Bangko Sentral ng Pilipinas (BSP), meanwhile, reported an average of 6.2 percent inflation in the third quarter of 2018, higher than the 4.8 percent reported from the prior quarter. This was also accounted for by rising food and oil prices. The BSP also added that while the current year-to-date inflation is at five percent, far above the government target of two to four percent, this is still within the revised forecast of 4.8 to 5.2 percent.

While this has raised concern from different sectors of society, Dr. Tereso Tullao, University Fellow and Director of the Angelo King Institute, has stated that the inflation rate should be viewed at the right perspective. “One of the reasons why it went up to 6.8 is that the computation of the inflation rate is based on the previous year’s inflation rate, and the previous year’s inflation rate—I think that was September—is also very low,” he explains.  

 

Inflation in a nutshell

Inflation is the rise in the prices of goods and services. Inflation, at a healthy amount of 2-3 percent annually, is helpful to the economy as it increases wages, and encourages consumption, subsequently stimulating the economy. However, it becomes detrimental if the rise in prices is not matched with an increase in the income of the people, thereby reducing the purchasing power of 
the currency.

Causes of inflation can be categorized into two broad kinds: demand-pull and cost-push. The first is the result when demand rises faster than what the economy can provide, while the second is the result when increasing costs result to higher prices.

In the Philippine context, specific causes of inflation may be evidenced by various international and domestic factors. First, a weakening peso, which is at its weakest in almost 13 years, means that imports would cost more. Having a trade deficit could also affect inflation because this results to a larger amount of imports than exports. Finally, when certain industries such as agriculture experience a crisis, prices may be affected.

 

Philippine inflation with context

According to Tullao, a 6.7 percent inflation is quite high when compared to current ASEAN economies. However, it is not high when compared to Philippine historical data. In the 1970’s, he cites, it has swelled to 30 percent. In addition, some countries such as Egypt and Venezuela are currently experiencing far worse conditions.  

In the current case of inflation, different people have cited multiple factors as reasons, such as the administration’s Build, Build, Build infrastructure program, the The Tax Reform for Acceleration and Inclusion (TRAIN) Law, the rising oil prices, and even the policies of United States President Donald Trump.

Last July, opposition legislators urged the administration to halt and review the effects of the tax reforms under the TRAIN law. This was after a 5.2 percent inflation rate had been recorded.

Then, in early September, finance undersecretary Tony Lambino cited rising oil prices in the global market—not tax reforms—as the cause of inflation. As of October 27, oil prices were at $67.72 per barrel, compared to $53.39 exactly one year ago. At the same time, President Rodrigo Duterte had also blamed Trump’s tariffs on Chinese goods as the cause of high prices.

On the contrary, Tullao believes that those reasons cited were not the main cause of inflation. Instead, the high inflation was due to a shortage in rice. “What happened was that there was an artificial shortage because the National Food Authority did not use the money allocated to the agency, but instead paid [off their] previous debt,” he argues.

Tullao surmises that this was because the agency wanted to present a clean balance sheet. However, as inflation began to speed up around June, NFA began importing, prompting Tullao to believe that inflation would decelerate. Only his prediction did not come true; inclement weather made it logistically challenging to unload the rice.

Nonetheless, now that the supplies have arrived, Tullao believes that prices will finally go down. “Hopefully, the prices will decelerate this October or November, but then of course you have Christmas shopping that will counter the deceleration,” he clarifies.

NFA’s under-importation of rice was not always the case. According to Tullao, back in Former President Gloria Macapagal-Arroyo’s administration, it had actually over-imported, after anticipating a price increase. But when the increase never materialized, Tullao cites that there was a lesson to be learned: “we should only import what is needed.”

 

Next steps

The Duterte administration is currently looking at economic measures to mitigate the rising prices of basic commodities, such as reducing tariffs on imported goods, and lowering prices for importing. Looking to increase the amount of unconditional money transfer, a monthly subsidy program, in order to help poor families cope with the rising prices of goods is also being considered by the government.

For the most part, Tullao believes that the government is taking the right steps in addressing inflation. According to him, it is good that the government is trying to increase supply as there was an abrupt change in the supply of commodities. The tariffication of rice may also serve as a source of additional income for the government, which may be used to subsidize displaced farmers as a result of importing. By increasing the interest rate, on the other hand, the BSP is mitigating excess expenditure. However, Tullao cautions against this, emphasizing the fact that it can potentially affect other macroeconomic factors such as investments, household consumption, and government expenditures.