Monday, March 1, 2021


The inflation challenge


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ALTHOUGH we are, for what we believe are very good objective reasons, generally firm in our confidence in the skill and wisdom of our country’s monetary authorities and economic policymakers, we share the growing sense of alarm of the Filipino people about the specter of inflation, which has increased significantly over the past couple of months. If inflation was just a “Philippine problem,” we might not be so concerned, but there is growing evidence that factors larger than our leaders can control are at work, which may pose a threat to the country’s economic recovery if aggressive action is not taken.

Inflation in January accelerated to 4.2 percent, a significant increase from the 3.5-percent inflation rate in December and the highest since January 2019 when it reached 4.4 percent. The latest inflation result was troubling on two counts. The rate exceeded, albeit by a small margin, the upper limit of the Bangko Sentral ng Pilipinas’ (BSP) forecast range of 3.3 to 4.1 percent. The other worrisome factor was the source of the increase. The January inflation rate was driven by a sharp rise in food prices: 6.2 percent overall in January, compared with just 4.8 percent in December, when prices are typically higher due to the holiday season; and shocking 17.1 percent and 21.2 percent increases in the prices of meat and vegetables, respectively, according to data from the Philippine Statistics Authority (PSA).

The BSP follows a policy of inflation targeting, with the aim to keep the inflation rate within an ideal range to promote economic expansion. Typically, this is from 2 to 4 percent. Monetary tools such as interest rates are used to either increase or decrease the amount of money moving around in the country’s economy, and thus moderate inflation. An increase in benchmark interest rates, for example, tends to reduce spending and lower inflation.

At the latest meeting of the Monetary Board earlier this month, it was decided not to make any changes to interest rates. Although inflation has increased, monetary authorities felt it was still acceptably close enough to their target range to adopt a “wait and see” attitude.

We won’t second-guess that decision, but the economy may have entered a phase in which monetary tools alone are insufficient to manage inflation, given its source and the unique circumstances that are currently prevailing. Increasing inflation at a time when consumer demand is lower than normal, as it has been since the beginning of the pandemic, is rather unusual, as prices usually decrease in response to decreasing demand. If one looks at the breakdown of the latest PSA inflation data, if the food component is removed, prices otherwise reflect a “normal” pattern one would expect in the current circumstances.


Food prices are the obvious culprit, but, unfortunately, the usual means of managing inflation have little effect on them. While at least some of the causes of high food prices have been identified — a subject we have already discussed at length in recent weeks — it turns out that the problem is more widespread than we realized. In a recent analysis, think-tank Oxford Economics detailed how sharply higher food prices are bedeviling most of the world’s emerging markets, including neighboring countries such as Indonesia, Thailand, Vietnam and Malaysia that we usually turn to for lower-priced imports to augment our own food supplies.

Another aggravating factor that has emerged in recent days is an increase in oil prices, which climbed to above $60 a barrel earlier this week. Combining that with persistent upward pressures on food prices makes for a very difficult scenario, one which monetary authorities may not be able to control, even if they are doing exactly the right things with the tools at their disposal.

Of course, the responsible officials in the government’s economic team and in other concerned agencies such as the Department of Agriculture and Department of Trade and Industry are no doubt well aware of these conditions and are preparing appropriate measures. Early action to implement those will go a long way toward allaying public concerns about rising prices, and we look forward to hearing the plan of action.



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