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The Inflation Rate in Perspective

Inflation affects all aspects of the economy, from consumer spending, investment decisions and job generation to government programs, tax policies and interest rates.

 

It is government’s job to rein it in to avoid an erosion in the purchasing power of the people. The inflation rate hit 8.7 percent in January 2023 but I expect it to eventually taper off in the coming months. Border and trade restrictions in many countries are easing, including those in China—a major supplier of industrial goods and components.

 

Inflation inarguably remains a major concern for the Philippines and other countries. Even the most advanced economies saw soaring inflation last year, with the Euro area reporting 9.2 percent, the United Kingdom, 10.5 percent and the United States, 6.5 percent in December 2022. 

 

Japan, which used to register near zero price changes in the past, recorded an inflation rate of 4 percent, the highest in four decades. Globally, inflation averaged more than 8 percent last year.

 

Among G-20, or the group of the 20 largest economies in the word, Argentina had the highest inflation of 94.8 percent in December, followed by Turkey with 64.3 percent and Russia with 11.9 percent.

 

As a mid-income economy in Southeast Asia, the Philippines was not spared by global developments that led to unrestrained price surges. The grounding of cargo ships and airlines at the height of the pandemic in 2020 and 2021 eventually led to a logistics nightmare in 2022, when demand for commodities suddenly rebounded. These developments were compounded by the border lockdown in China and the war between Ukraine and Russia that disrupted the global food supply.

 

Because of the sudden spike in demand, global crude prices have gone through the roof, leaving oil-importing countries such as the Philippines highly vulnerable. As the US began raising interest rates to contain inflation, emerging currencies such as the peso depreciated substantially against the US dollar. The weaker currency made the impact of imported inflation all the more painful.

 

The inflation rate, or the change in the consumer price index, reached 8.7 percent in January 2023, the fastest in more than 14 years, per the report of the Philippine Statistics Authority. While I would not want to play down the impact of the latest data, we should analyze it against the backdrop of global developments. Simply put, it is a part of our adjustment in the post-pandemic era.

As inflation began to spike across countries, central banks responded with tighter monetary policy. Volatility in financial markets increased, and the peso depreciated, leading to higher importation costs, concurs the Bangko Sentral ng Pilipinas.

 

A confluence of global and local supply shocks drove food prices higher, including higher energy prices that led to increased fertilizer and farming costs. The African Swine Fever and Avian Influenza affected meat production in the Philippines, aggravated by the impact of successive typhoons on agricultural production. 

 

As the domestic economy continued to recover from the pandemic, robust pent-up demand began to contribute to price pressures. Such price pressures spilled over to other commodities and services, such as transportation and restaurant services. Then came the petitions for higher transportation fares and minimum wage increases.

 

The Philippines in perspective is part of the global trade and we are in fact a major food importer. While we export tropical fruits, coconut and fish, we also ship in food items, such as rice, wheat, apples, grapes, meat and dairy products. We secure more than 90 percent of our fuel from other nations. The actual value of producing these products and the transportation and distribution costs from the production site to the retail market determine the final prices paid by consumers. Other contributing factors are import tariff, taxes and retail store markup.

 

When we emerged from the pandemic-induced recession in 2020 and part of 2021, the supply chain was not adequately prepared to handle the surge in consumer demand in 2022, resulting in price spikes. Slowly, the market has coped with the situation, and is expected to return to normal operations soon. 

 

This is why I believe that inflation will eventually ease in the coming months. The Development Budget Coordination Committee, which consists of economic managers, predicts the inflation rate will moderate to a range of 2.5 percent to 4.5 percent in 2023 before returning to the target range of 2 percent to 4 percent in 2024 until 2028.

 

Keeping the inflation rate within the government’s target range will make economic growth more inclusive and sustainable. Stable prices contribute to conducive business environment, where predictability allows companies to chart their expansion and hiring plans.

 

Global developments are mostly beyond our control, but this is not to say we cannot do anything to keep prices manageable. The government and the central bank are doing their parts to mitigate the impact of imported inflation. The government, for one, has decided to liberalize rice importation to bring down the cost of the staple. It also authorized the importation of onion and sugar to stabilize local prices.

 

I agree with the government’s specific measures to cushion the impact of inflation, including the modernization of the agriculture sector and ensuring energy security. Short-term measures include the temporary easing of import restrictions, price monitoring and targeted social support.

 

The government and the BSP are capably managing the situation, and we will soon see inflation rate return to a level typically suited to a rapidly growing economy such as the Philippines. The rising inflation rate can be contained—it should not derail the country’s economic expansion.

 

 

Source:

Business Mirror/Author/MannyVillar