Nowhere but up? Dissecting inflation

Weslene Uy, Senior Economic Research Analyst of the Stratbase ADR Institute

While on the sidelines of the ADB Meeting last week, Socieconomic Secretary Ernesto Pernia announced that consumer prices rose by a five-year high of 4.5% in April. This marks inflation’s continued ascent for the fourth straight month in 2018.

The latest inflation data comes after a series of poll results revealed how most Filipinos have been strongly affected by the increase in commodity prices in the last three months, and that, inflation and wage increase are top concerns for Filipinos. This indicates that inflation and wages are twin concerns that should be front and center of our policy makers’ agenda.

INFLATION DRIVERS

Although April’s inflation figure is within the Bangko Sentral ng Pilipinas’ (BSP) forecast of 3.9% to 4.7% for the month, the figure sits at the higher end of the range. The government attributed the faster increase in prices to the uptick in food and sin products, in addition to higher oil prices. Indeed, prices of food and nonalcoholic beverages, which account for over a third of Filipinos’ total consumption, increased by 5.5% and 9.4% in April, respectively.

Transport prices also increased by 4.9%, driven by the 17.8% rise in costs of private car owners. In addition to higher excise taxes on petroleum products, global oil prices (Dubai crude) have risen by 30% per barrel. The peso has also depreciated against the dollar by 4.5% year on year, making it more expensive to import oil products.

The prices of sin products surged the fastest, increasing by double digits and increasing by 20% in April, although alcohol and tobacco only accounts for less than 2% of the consumption basket.

The BSP’s survey of private sector economists reveal that inflation may reach 4.1% in 2018 and could reach as much as 5% due to second-round effects from higher taxes.

Upside risks to inflation include the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law, indirect effects such as higher wages and transport fares, and higher prices of goods and services due to TRAIN. Other inflationary pressures include higher global oil prices, increased utility prices, and weaker peso. Amid surging inflation expectations, there are persistent and growing calls for the BSP’s Monetary Board to raise interest rates as it convenes this week. Amending the Agricultural Tariffication Act to lift quantitative restrictions on rice imports could also cushion the increase in rice prices, however, the bill is still languishing in both houses of congress.

THE BOTTOM 30%

For the bottom 30% income households, the inflationary impacts are even greater, as prices rose by 5.8% in the first quarter of the year, compared to approximately 4.4% for all income households, using 2000 prices. This is the highest rate in over three years, when inflation reached 6.8% during the third quarter of 2014. For this income group, food, beverages and tobacco, which account for roughly three quarters of consumption, drove prices up by 5.9%. Fuel, light, and water, however, decelerated slightly to 6.1%, compared to 6.2% during the same period last year.

Unsurprisingly, those in the informal sector would be worse off under the TRAIN law since they will have to pay for higher prices of commodities without benefitting from the relief of lower income taxes.

To cushion the poor against higher prices, the government is rolling out its unconditional cash transfer of P200 per month in response to the TRAIN law, covering 10 million Filipinos and expanding the current 4.4 million beneficiaries of the Pantawid Pamilyang Pilipino Program. For this year, P25.67 billion has already been allocated for unconditional cash transfers.

Yet, the simultaneous release of the unconditional cash transfers has only complicated an already imperfect system.

In some parts of the country, the payouts for cash grants have been delayed, with some beneficiaries not receiving their cash grants worth two months. Clearly, the arduous bureaucratic process has yet to be resolved.

In addition to the delays in the cash transfers, Dr. Dennis Mapa, dean of the UP School of Statistics, also observed that the P2,400 transfer may not be sufficient, especially as the poor tend to have larger household sizes. According to Dr. Mapa, higher incomes and lower inflation are important in reducing poverty rates.

Unfortunately, real wages, or wages adjusted for inflation, have remained largely stagnant. The World Bank notes that wages only increased by 4% from 2006-2015, indicating that economic growth has not benefited a wider segment of the population.

THE BRIGHT SIDE

Revenue collections, like inflation, turned out to be higher-than-expected for the first quarter of the year. This, of course, is a welcome development. From January to March of 2018, BIR revenues exceeded its target by 16.8%. The higher excise taxes from the TRAIN law have also surpassed collection goals and have been instrumental in boosting revenue collections. Meeting the collection target is important, especially since 70% of incremental revenues from the TRAIN was earmarked to finance the administration’s flagship infrastructure program.

While it is unfair to pin the rise of prices solely on TRAIN, the timing of its implementation, in conjunction with other external factors such as higher global oil prices and a weaker peso, all contribute towards the burden of inflation.

Unfortunately, in its rush to approve the TRAIN into a law, the government may have overestimated its readiness to roll out social safety nets, and in the process, have unintentionally encumbered the poor even more.

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