Inflation is a powerful “destabilizer”

Dindo Manhit, President of the Stratbase ADR Institute

The signs of economic trouble have been brewing since the first quarter of this year with the whole nation being hit by the rising price of commodities. Socio-economic Planning Secretary Ernesto Pernia has admitted that inflation was the growth “spoiler” in the first three months of the year. The economy grew by 6.3% in the first semester, short of the government’s target pulled down by the dismal performance of the agricultural sector.

Local and international economic experts have noted the domestic risks faced by a “fast-growing economy” like the Philippines as well agricultural policies that affect food prices.

In April, the World Bank through its Philippine Economic Update warned of several domestic risks facing the country, including higher inflation, an overheating of the economy and high fiscal deficits.

Fitch Solutions cited in one of their research notes in August that elevated inflation due to higher excise taxes, rising global oil prices and sustained credit growth poses a slight risk to consumption. Inflationary pressure does present a downside risk over 2018 and beyond.

Some local economists are apprehensive that the government failed to address the higher inflation rate, widening current account, balance of trade and balance of payment deficits which are signs of the structural weaknesses of the economy. On the other hand, there was also a concern about lack of coordination among the government agencies because despite the continuous “pressure” of the economic managers for the Department of Agriculture to act quickly and decisively on the agricultural sector’s problem, there was little improvement in the past months.

Obviously, the acceleration of the inflation rates did not happen overnight. It was already a disaster in the making.  Last March, a Pulse Asia survey reported that 98 % of Filipinos affirm that the prices of basic commodities have risen since January and 86% reported they are strongly affected by the rise in the prices of basic commodities.

With the inflation rate reaching 6.4% in August, the government has blamed external factors such as higher world oil prices, increasing US interest rates, and the depreciation of the peso. Although government downplayed the contribution of the TRAIN law to inflation, the timing of its passage cannot be ignored as an aggravating factor.

The main culprit now is food inflation, which surged by 8.5%. For the poor (lowest 30%), inflation is estimated at 7.4%.

It may be true that the international factors are major drivers of inflation, but our ASEAN neighbors seems to be handling it better as shown by their current inflation indicators. Vietnam’s inflation rate in July was only 4.5%, Indonesia 3.2%, Thailand 1.5%, Malaysia 0.9% and Singapore 0.6%.

The Department of Finance noted that food abundant and agriculturally-productive Region III and CAR have the lowest inflation rates at 3.6 and 4.1 percent, respectively. This strongly suggests that reforming agriculture is key to bringing down prices.

Unfortunately, since the poorest 30% of Filipinos spend at least 60 percent of their earnings on food, they are suffering more than the higher income population.

The destabilizing factor of the surge in inflation especially on food prices, utilities and transportation cannot be underestimated. To prevent the government from losing its political capital and credibility they have to show that they are on top of the inflationary “crisis”.

The “blame game” among the government agencies will not help resolve the food price “crisis”. The public expects more accountability and decisive actions from our leaders to prevent a reversal of gains in poverty reduction and hunger mitigation.

The bigger challenge now is to implement mechanisms to mitigate the inflationary effects of the TRAIN Law, higher global oil prices, as well as the continuous drop in the exchange rate. Moving forward, the government should balance its need for increased revenue with ensuring that its reforms will not inadvertently burden Filipino consumers.

It will also be a test of leadership and governance. The entire government needs to act as one to curb the effects of the inflation monster before it destabilizes the country’s economic growth and aggravates the plight of the poor Filipinos.

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