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t a Senate hearing yesterday, Thursday, Aug. 16, Bangko Sentral ng Pilipinas and administration (Department of Finance and Department of Agriculture) officials sounded sanguine about inflation. They did not seem worried about the inflation rate which under President Duterte had risen to its highest in six years.
BSP Deputy Governor Diwa Gunigundo, in fact, thinks the rate of increase in prices will come down from the current high of 5.7 percent in July to below 5 percent so that the inflation rate for next year (2019) will moderate to 3.7 percent and further to 3.2 percent in 2020.
Gunigundo is telling only half of the story. He talks of an “average” inflation rate for January to July of 4.5 percent, instead of the July inflation rate of 5.7 percent.
When did a consumer buy a kilo of rice, vegetable or even hamburger on an average basis? Any food bought during January to June has already been consumed or become fertilizer by July. It’s foregone cost. When it comes to basic commodities, what matters is current prices, not average prices.
Inflation is not like a grading period in school here your grades are “averaged” monthly or semestrally to determine your average grade or your standing in class at the end of the school year. Average, of course, is when you refer to people of lesser capability or intelligence. Even then, a consumer won’t like being referred to as having average mentality.
Most of the lowering in inflation rate in the future is what you call “base effect.” Meaning the rate has gone up so high that the rate of increase must slow down. So an inflation rate of 5.7 percent means that from 100 points in 2017 the index went up to 105.7 points in July this year.
If prices rise by another 5.7 points, the index will rise to 111.4 (5.7 plus 105.7). The inflation rate reflected is not another 5.7 percent but 5.39 percent (111.4 minus 105.7 is 5.7; 5.7 divided by 105.7 is 5.39).
Since 5.39 is lower than 5.7, you can say inflation is lower because of base effect. It does not mean prices have stopped rising. It still means prices have kept rising on top of already very high prices of goods.
In the meantime, the BSP has raised interest rates three times to a total of one percentage point. If early this year, you could borrow loans at 6 percent, the rate is now 7 percent. Higher interest rates increase the cost of doing business because it makes capital (borrowed money) more expensive. Businessmen, of course, pass on the higher cost of money to their consumers—you and me. And the problem with rising interest rates is that banks don’t bother to revert to the original or lower interest rates even if the inflation rate has come down.
Summing up, BSP DG Gunigundo blames three factors for the rapid rise in prices to five-year highs on three factors – 1) the rise in crude prices from $57-58 per barrel in end-2017 to $72-75 (every dollar increase translates into 0.3 percent-point on inflation); 2) the weather, and 3) the TRAIN Law.
Government technocrats have various estimates on the direct impact of TRAIN on the inflation rate – 0.4 to 0.7, which means that the July inflation could have been just 5 (without the .7), were it not for TRAIN.
At the hearing, Senator Bam Aquino wanted to know the indirect or cascading impact of TRAIN on the inflation rate. The BSP and DoF could not give a ready answer. My estimate: Without TRAIN, inflation should have been two percentage points less.
Just how bad can inflation be for you? Aside from burning holes in your pocket, high inflation could destabilize purchasing power, destabilize the economy, and destabilize a sitting government. Inflation hurts the poor more and deeply because according to one UP economist P61 of their budget is eaten up by food. The rich spend only 40 percent of their budget on food. Inflation also deepens poverty because income is a matter of purchasing power. The P10,000 you used to earn could buy P570 less or 14 kilos of rice less. Inflation will worsen poverty and poverty incidence.
Recent history is replete with stories of strongman governments brought down by inflation spiral.
“Inflationary crises, like the one looming over Turkey, are bad news for any government, but they are especially dangerous for a certain subset of authoritarians: Populist strongmen,” says an analysis by the New York Times yesterday.
“They [populist strongmen] are unusually prone to creating this sort of crisis, unusually inhibited from fixing it and unusually slow to recover. They have, on average, higher rates of inflation and more artificially undervalued currencies. Their central banks are less independent, making them less capable of intervening,” says the NYT article on inflation and strongmen.
Recalls the NYT: “Before Turkey, there Nicolás Maduro in Venezuela and his predecessor, Hugo Chávez, who oversaw their country’s fall from prosperity to ruin, partly by plowing into an inflationary crisis.”
“When this happens in democracies, elected leaders are typically replaced with new ones who eventually rein inflation in. It has happened many times in Latin America alone: In Nicaragua, Chile, Peru and Argentina. Other sorts of authoritarianism, run by a party, military or monarchy, may collapse, as happened in Brazil, but often they have the will and flexibility to impose some sort of reform.”
“Populist strongmen—because of their relationships to their citizens, their fellow elites and to their own policymaking apparatus—tend to be different. Mr. Maduro printed more money, worsening the crisis dramatically. A decade earlier, Robert G. Mugabe of Zimbabwe did much the same thing, to much the same effect.”
Now, will high inflation hurt President Duterte? One thing you can say about the President: He is not your average political leader.