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Lower Inflation is Always a Boon to Consumers

A lower inflation gives us all the more reason to be optimistic this year. It means consumers get the most bang for their buck and are more confident to spend, which will eventually help the economy grow.

 

Lower prices induce spending and business activities. Many shopping malls hold bargain sale during off-peak periods to entice shoppers with discounted prices. As a result, sales go up and businesses thrive. The same is true with the economy, where inflation is an important determinant of demand and spending.

 

The Philippine Statistics Authority reported that inflation rate softened to 6.6 percent in April. While the rate remains elevated compared with the government’s long-term target range of 2 percent to 4 percent, the latest figure is a big improvement from the 14-year high of 8.7 percent in January.

Inflation has been an exacting issue among economic officials and monetary authorities not only in the Philippines but also in other parts of the globe since last year, when the lifting of mobility restrictions suddenly led to a spike in demand for commodities—including petroleum products.

 

The economic recovery-induced demand for commodities, combined with the geopolitical tension in the eastern part of Europe and the logistics nightmare that ensued after the imposition of pandemic-related border controls led to a double-digit inflation rate in both advanced and developing economies.

 

It was so high in many countries that no less than the US Federal Reserve raised its interest rate from near zero at the height of the pandemic to a range of 5 percent to 5.25 percent to tame consumer prices.

 

The Bangko Sentral ng Pilipinas also adjusted the overnight borrowing rate from 2 percent in 2021 to 6.25 percent effective March 24, 2023. These adjustments are meant to hit the brakes on business activities that induce strong demand and higher prices.

 

Fortunately in the Philippines, the economy continues to grow despite the elevated inflation and the high interest rates, based on the sustained increase in bank loans and domestic liquidity. This is why many economists believe that the gross domestic product would continue to register growth above 6 percent in 2023.

 

The inflation downtrend from 8.7 percent in January may give the BSP a reason to break off its monetary tightening cycle, although it may also consider the latest Fed action to maintain the differential in US and local interest rates. A narrower differential, for one, may force investors to abandon the peso in favor of the US dollar.

 

The value of the peso, by the way, also plays a crucial role in stabilizing inflation as it also dictates the cost of imported goods. The local currency has recently stabilized within a range of 55 to 56 per US dollar, an improvement from an all-time low of 59 a dollar registered in October 2022.

 

All these factors are at play to maintain price stability. The government and the BSP are working together to keep prices and foreign exchange rates stable to ensure steady economic growth. When prices fluctuate, business plans are disrupted and companies are discouraged from expanding and hiring more employees.

 

BMI Research, a member of Fitch Group, expects household spending in the Philippines to grow 5.5 percent in 2023, following an 8.7-percent expansion in 2022. It also predicts annual household spending to rise 5.9 percent until 2027, which is higher than most countries.

 

It says while inflation will likely remain elevated, nominal income growth will outpace inflation, which translates into real income growth for consumers, providing greater propensity for spending.

 

I am confident the BSP will respond appropriately to inflation risks by carefully studying the inflation dynamics. Aside from controlling liquidity and interest rates, however, inflation management should also address issues such as supply, logistics and distribution, which are within the purview of the national government.

 

President Ferdinand Marcos Jr., who has a good grasp of the situation, convened an Inter-agency Committee on Inflation and Market Outlook to study the different price pressures and take the necessary action. The committee serves as an advisory body to the Economic Development Group on measures that will keep inflation, particularly on food and energy, within the government’s target range.

 

Per the National Economic and Development Authority, which chairs the committee, timely and enough importation is a short-term measure being considered to manage food inflation.

 

While the measure seems unpopular among farmers, it acknowledges the fact that we have a growing population and we need to augment our food supply to feed our people. Among the food commodities that we need to import are dairy products, wheat, rice, meat, fruits and vegetables. The committee believes importation is needed to fill the domestic supply shortfall of basic goods.

 

Of course, we should also support our agriculture sector to boost local production, attain sufficiency and tap the export market. As other countries also have increasing demand for food, we need to make sure that most of our requirements can be obtained locally.

 

Aside from importation as a short-term solution, the committee presented medium-term measures to manage food inflation. These include boosting productivity and resiliency of the local agriculture sector and promoting private investment in facilities, transport and logistics systems to bring safe and nutritious food closer to consumers.

 

I hope that inflation will sustain its downtrend in the coming months to give consumers more incentives to spend and in the process support economic expansion that will generate jobs and improve Filipinos’ income.

 

 

Source:

Business Mirror/Author/MannyVillar