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Thursday, March 28, 2024

Taming inflation rate a big challenge to policy makers

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The twists and turns of the Ukraine war are causing global oil prices to gyrate. Consumers across the globe are feeling the pinch from higher crude prices, while a couple of nations have decided to curb their key exports to secure domestic supply and assure food security.

The war in Ukraine will likely keep crude prices high for some time unless the Organization of Petroleum Exporting Countries led by Saudi Arabia does the unlikely move to sharply increase oil production. Oil and gas supplies from Russia are being squeezed by the United States and its European allies in retaliation for the invasion of Ukraine.

Surging crude prices are hurting developing nations like the Philippines. The elevated prices have led to higher pump prices of gasoline, diesel, and other petroleum products. They in turn raised the transportation cost of commuters as well as vegetables, meat, and other food items shipped and delivered around the Philippines.

The Bangko Sentral ng Pilipinas, whose job is to manage the inflation rate, is finding itself in uncharted territory. The monthly inflation rate in the Philippines before and during the pandemic has generally been stable, rarely surpassing 4 percent. But with the war in Ukraine, the calm is being disturbed.

The inflation rate in July rose to an over three-year high of 6.4 percent from 6.1 percent in June—mainly driven by the weaker peso and higher food and petroleum prices.

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The central bank will not allow a runaway inflation because it erodes the purchasing power of consumers. The BSP from its end can raise the interest rates to induce savings and curb spending to arrest inflation. Other government agencies can move to increase the supply of certain food items like rice by way of imports. Or the state can remove some of the taxes and duties attached to petroleum products and other sensitive food items.

Trimming the taxes imposed of petroleum products and sensitive items, however, will require a delicate balancing act from the government. It needs revenues to fund healthcare and social welfare programs for the poor while taming the inflation rate at the same time.

Slowing the inflation rate is a big challenge for our economic managers. An unstoppable inflation will ultimately lead to economic recession, which the Filipinos cannot afford after grappling with COVID-19.

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