‘Inflation to remain at favorable levels’

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Good macroeconomic fundamentals will keep inflation at favorable levels even if the government continues spending for the P8.44-trillion “Build, Build, Build” program, a senior Finance department official said.

The rise in consumer prices, Finance Undersecretary Gil Beltran said, remains within expectations with its average of 3.2 percent in the first 10 months of 2017 actually lower than the last seven years’ 3.16 percent.

“The consumer price index or CPI (consumer price index) is the most watched indicator for price movements.
From 2010 to 2016, during the period when the economy grew by 6.3 percent annually, CPI inflation averaged 3.16 percent,” said Beltran, who is the department’s chief economist, in a report to Finance Secretary Carlos Dominguez 3rd.

“During the first 10 months of 2017 when the economy grew by 6.7 percent, CPI inflation averaged 3.13 percent, slightly lower than the 7-year average,” he added.


Beltran further said that inflation could be tamed if the country’s production growth kept up with rising population and growing incomes.

“This implies maintaining good macroeconomic fundamentals. This means that government should continue to spend for infrastructure and social services and that the Bangko Sentral ng Pilipinas should maintain a level of money supply appropriate for the goods and services produced by the economy,” he said.

To counter the high and immediate impact of low agricultural production, Beltran said the government must continue putting up needed infrastructure such as farm-to-market roads and irrigation. The Agriculture department should also extend the appropriate extension services.

The financial sector, meanwhile, should also provide credit and guarantee services to farmers so that replanting can be done immediately after typhoons.

Citing a 2014 study by the Finance department, Beltran noted that growth, money supply and inflation expectations were among the key factors affecting inflation.

For example, a percentage point rise in real GDP reduces CPI inflation by 0.77 percentage point. Also, a percentage point in M3 or domestic liquidity growth raises inflation by 1.8 percentage point.

Using CPI lagged by one month as proxy for inflationary expectations, a percentage point rise in the previous month’s CPI raises inflation by 0.8 percentage point.

“This implies that there is a need to sustain economic growth and maintain appropriate monetary policy,” Beltran said.

“There are alternative measures of inflation. While CPI reflects the inflation for a basket of commodities that comprise the consumer’s budget, there are other inflation measures that reflect a wider array of goods and services that the whole economy produces and consumes,” he added.

He mentioned the gross domestic product (GDP) deflator, which shows an inflation rate of 2.1 percent for the third quarter —down from 2.7 percent in the first quarter and 2.5 percent in the second quarter.

“Second, we have the manufacturing sector producers’ price index which shows the movements of production costs of the manufacturing sector. It shows that the manufacturing sector’s inflation rate has been declining by 3.63 percent annually from 2012 to 2017, implying rising competitiveness for the sector,” Beltran said.

The general wholesale price index, meanwhile, is an indicator designed to measure changes in the price levels of commodities that flow into wholesale trade intermediaries.

“Wholesale prices have risen by 1.2 percent annually from 2012 to 2017 but there was a sudden spurt by 4.6 percent in 2017 as petroleum prices began to normalize. Since the sector is involved in transport and distribution, it is susceptible to movements in prices of transport inputs, mainly gasoline and labor,” he said.

Beltran also said that food inflation mirrored overall CPI movements. When CPI inflation spiked in 2014 at 4.18 percent, food inflation also spiked to its highest in five-years at 7 percent.

“It was observed that as food inflation rises, CPI inflation also rises. For the first 10 months of 2017, food inflation averaged 3.8 percent, higher than the 2.1 percent in the same period of 2016,” Beltran said.

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