"Back to normal? Not quite."
From my reading of what the economic managers of the Duterte administration have been saying about the inflationary surge of 2018—the steady rise in the inflation rate this year and the measures adopted by the authorities to deal with it—and about the likely inflation scenario for 2019, I have come to the conclusion that their view of the current inflation situation can be summed up as follows: “The surge in consumer prices throughout 2018 is subsidizing and will, as a result of the government’s remedial measures, make possible a return to the 2-to-4 percent annual inflation target set by the Bangko Sentral ng Pilipinas.”
The economic managers—the Secretary of Finance, the Governor of the BSP, the Secretary of Socio-Economic Planning, the Secretary of Trade and Industry and the Secretary of Budget and Management—appear to be saying that the Philippine economy has been undergoing an inflationary ride, that things are beginning to simmer down, that the inflation rate will return to target in 2019 and that all will then be back to normal.
Back to normal? Not quite. Inflationary episodes always leave an aftermath, and this year’s inflation is no different. The 2018 inflation has left—I really should say ‘is leaving’ because there is no certainty about a continued downward movement of prices in the months immediately ahead—behind debris from which the economy will recover in the months immediately ahead.
For starters, there is the upsurge of an inflationary psychology which has not been there in recent times and has a tendency to linger. Once inflationary psychology takes hold, producers begin to indulge in speculation, ever trying to guess whether their suppliers intend to raise their prices and often making pre-emptive price strikes. In that kind of environment—and that is the environment that has come to prevail—marketplace stability is not possible.
With their let’s-move-on mindset, the economic managers believe that the return of the inflation rate to the 2-to-4 percent target range means that things are back to normal and that all is now well. But things are not back to normal. Prices are now higher across the board, and prices, once raised, hardly ever come down. They’re sticky. The price increases that the 2018 inflation has caused producers to implement will have created changes in competitive positions; in the case of Philippine exports, this country’s competitive positions vis-à-vis certain foreign products may well have been negatively affected.
A further element of the aftermath—the debris—of the 2018 inflation has been the generally jarring effect that it has had, and continues to have, on international prospects of the Philippine economy. No longer can the economic managers speak strongly of this country’s sound macro-economic fundamentals. The new wave of price instability has caused foreign institutions and analysts to re-examine the state of those fundamentals. As a result, there have been downgrades in the projections of the Philippine economy’s growth in 2019 and 2020.
The Philippine economy took a beating in the year that is about to end. And largely because of a wayward locomotive called TRAIN 1.