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FILIPINOS’ fears about skyrocketing prices have proven valid, as
the average increase last month hit the double-digit levels,
accelerating to a 14-year high of 11.4 percent. Inflation was last
this high in May 1994, when price increases averaged 11.5 percent.
What many news reports failed to highlight is
that last month’s inflation rose by nearly 500 percent from only
2.3 percent a year ago. Price increases last year averaged a 21-year
low 2.8 percent. With the unrelenting surge in prices, year-to-date
inflation already averages 7.6 percent, or well above the government
target of between 3 percent and 5 percent.
This is a major loss of face for the Bangko
Sentral ng Pilipinas (BSP), which is one of the central banks around
the world that tie their performance to how effectively they tame
inflation. Expect the BSP to explain to the President and Congress
in a formal communiqué why it has failed to handle the present
runaway inflation, which is the Philippine central bank’s mandate
under an inflation-targeting framework.
For months, monetary authorities had been
blaming the price surge on supply-side factors, which is BSP speak
for things beyond a central bank’s control. True, part of the
problem of rising prices lay in so-called supply-side shocks. But
the BSP can no longer hide behind the comfortable rhetoric that core
inflation, which excludes cyclical items like food and oil, remains
manageable. By its own reckoning, core inflation had likewise
accelerated to 6.6 percent last month from 6.2 percent in May.
Legitimate demand drives inflation
There is scope for playing down headline
inflation numbers in the face of a stable core rate. But the issue
that has confounded many central banks, economists and financial
market experts of late is whether the current episode of high prices
of oil and other commodities were a cyclical or a structural
phenomenon. If cyclical, then the core inflation should comfort us.
But if the present high-inflation episode were structural, then we
have something to worry about.
In the US, policy-makers are trying to demonize
the matter by pushing for legislation aimed at curtailing financial
speculation in prices of oil and other commodities by hedge funds
and other institutional investors. But various market observers have
said that speculative plays account for less than 10 percent of
oil’s current price surge.
In short, there is reason to believe that
legitimate demand has largely been responsible for the present
high-inflation environment. And by legitimate demand, we mean
purchases by people who actually use the commodity.
Take the case of China, whose double-digit
economic expansion has experts forecasting the world’s fastest
growing economy may have overtaken the US as the top oil consumer.
Add to that other emerging markets such as India, Russia and Brazil.
Having said the above, we believe the BSP has
some explaining to do on why it was far behind the curve in terms of
tightening the reins on the economy. At least two foreign observers,
including the International Monetary Fund, had suggested that the
Philippine central bank may have been sleeping on its job by easing
on interest rates for far too long.
Was the BSP too distracted by the US Federal
Reserve’s own easing, in an attempt to keep the differential
between local and US interest rates steady? Or were local monetary
authorities overly concerned by the huge loss the BSP incurred from
its defense of the dollar amid a strengthening peso? If we recall
correctly, dividends remitted to the government by state-run
corporations fell sharply due largely to the central bank’s huge
loss last year.
We all knew that the Philippines’ largest
export market, the US, was widely expected early this year to fall
into a recession. The national government in turn announced a fiscal
stimulus, not only because it saw such a tack in the US went well
with the public, but also since some measure of state support to the
poor would prevent them from falling further behind. Targeted
subsidy is a best practice especially if a country suffered from
wide disparities in income and wealth such as what we see in the
Philippines.
The one-million-peso question is why the BSP
continued to cut interest rates in January, and kept them steady
well into the first quarter, when all around Asia their peers were
already raising their rates to head off inflation. We can already
see the consequences of such a tack. Next to Vietnam and perhaps
China, the Philippines has registered the highest inflation rates in
this corner of the world.
Wage earners suffer most
We raise this matter because there is more at
stake here than the BSP losing face. Everyone knows that wages, the
only income source of most Filipinos, are slow in catching up to a
general rise in prices.
The government recently abandoned its
balanced-budget aspirations this year, acknowledging the need to
jack up state spending to cushion the public from the double-whammy
of a slowing economy and rising inflation. Unless it widens the net
of state support, we fear many Filipinos would fall through the
holes of a poorly funded subsidy scheme.
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