Weslene Uy, Resident Economist of the Stratbase ADR Institute
In August, inflation clocked in at 6.4%, once again exceeding official targets and market expectations. The Bangko Sentral ng Pilipinas (BSP) projected inflation to be within 5.5% to 6.2%. Last month’s inflation also marked the highest increase in almost a decade. Month-on-month inflation also picked up to 0.9% in August from 0.5% in July, after it started losing its momentum in the last few months. For the first eight months of the year, inflation already averaged at 4.8 %, exceeding central bank’s upper end target of 4% for 2018.
Our top officials scrambled to come up with a united front in response to the ongoing inflation saga. President Duterte blamed Donald Trump because the US imposed tariffs on China, the Philippines’ top trading partner. Presidential spokesman Harry Roque admitted that inflation was higher than usual but should be nothing to be worried about. He attributed inflation to strong domestic demand and faster imports of materials for the government’s infrastructure program. Contrary to Roque’s remarks, the central bank governor, for his part, blamed it to an “unfortunate confluence of cost-push factors” and remarked that “these warrant more decisive non-monetary measures to fully address.” Socioeconomic Secretary Ernesto Pernia followed the same tune, adding that the agriculture sector must act quickly to boost output and introduce policy reforms.
Electricity, gas and other fuels contributed the most to inflation in August. Unsurprisingly, the operation of personal transport equipment was also a significant inflation driver for the month. These items are sensitive to global oil price fluctuations, which have gone up by almost 20%, and to exchange rate vacillations, with the peso losing its value against the dollar by around 4% since the start of the year.
Agricultural products such as fish, rice, vegetables and meat dominated the list of top inflation drivers. The thinning rice supply in some parts of the country led to a 7.1% spike in rice prices. The National Food Authority (NFA) and the interagency NFA council have only pointed their fingers at each other for the delay in rice imports. Fish prices were also elevated as the Agriculture department restricted commercial vessels from fishing in municipal waters, which, in turn, limited fish supply. Vegetable production was affected by the onslaught of typhoons, while meat prices also went up as corn, a key ingredient in animal feeds, became more expensive.
Unfortunately, these are the very same commodities that regularly feature as the top inflation contributors, which means that our officials have fallen short of introducing effective reforms in the sector. Sadly, we have only witnessed the Agriculture Secretary respond to this fiasco by enjoying a meal of weevil-infested rice and round scad on live television.
While consumer expectations are usually subdued in the third quarter before recovering in the final quarter of the year, it reached its lowest level under the Duterte administration as consumer sentiment became pessimistic. Business outlook, while still positive, also reached its lowest level since 2014. A common denominator of the less optimistic outlook is the expectation of higher commodity prices. The elevated inflation outlook also plays a crucial role in determining inflation, as consumers and businesses tend to adjust their behavior based on their expectations.
In response to the continued ascent of commodity prices, the central bank raised interest rates by 50 basis points over a six-week period in May and June, and another 50 basis points in August. BSP is reportedly contemplating on a fourth policy hike on its next meeting in September. Yet, critics say that the rate tightening came in too late, as it may take several months for its effect to be felt. Further, since inflation is predominantly supply-driven, hiking interest rates may not be the most appropriate policy response. The rate tightening has also dampened economic expansion, which recorded a 6% growth during the 2nd quarter of the year — interrupting ten straight quarters of economic growth above 6.5%.
By the government’s own estimates, the TRAIN Law has only added 0.4 percentage points to inflation. Yet, those at the bottom 30%, the same segment who did not benefit from the cut in personal income taxes and hit with higher commodity prices, need all the help they can get. While the implementation of these social programs under the TRAIN was delayed, the soaring prices have further crippled those who were already marginalized to begin with.
The Unconditional Cash Transfer, for example, only started its implementation in June this year. By August, only 6.1 million beneficiaries have received the cash transfer. The remaining 3.9 million beneficiaries are still set to receive their cash transfers in the fourth quarter of the year. The 179,000 beneficiaries of the Pantawid Pasada program, which was only launched in July, will receive their cash cards in September. The Philippine Identification System Act was signed into law in August, and while it would be helpful in targeting program beneficiaries, it will only be enforced next year. The rice tariffication bill, which economic managers have long been pushing for, has passed the lower house on third and final reading in August and will be up for deliberations in the Senate. Again, it will take some time before these reforms materialize.
The inflation mess is the failure of our top officials to coordinate the appropriate policy response to several long-standing issues. The administration has lined up several grand plans within its term, but unless it manages to address these issues, it will only risk biting more than it can chew.