Inflationary psychology
Inflation is defined by the International Monetary fund as “the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. to measure the average consumer’s cost of living, government agencies identify a basket of commonly purchased items and track over time the cost of purchasing this basket.”
Objective comparisons between countries are usually invalid as the key to the data is “the cost of purchasing this basket.” Housing expenses, rent and mortgages constitute the largest component of the US consumer basket. In the Philippines, the largest household expense is food, accounting for at least 70 percent of all spending.
Production costs for agricultural products in the Philippines are primarily fertilizer and transportation. And both of these prices are reflected from the global price of crude oil, which the Philippine inflation rate tracks and is correlated.
The good news then is that Brent crude oil hit an intraday 2022 high (also the highest since 2008) at $134 in May. It is now trading below $100. Local fuel prices have decreased.
But inflation is not only an economic event. It is also a psychological event. Inflation psychology is real. The belief that prices will continue to go higher tomorrow causes producers/distributors to raise their prices today and consumers to buy today rather than tomorrow, creating an artificial increase in demand.
“Academic economists” and “economist-want-to-be politicians” fuel this psychology, particularly the latter that tend to read the headlines one time and not the data continuously.
Not only is oil off its 2022 highs. Wheat was $12.73 per bushel and is now selling at $7.88. Corn was above $8 and is down to around $6. In early March, nickel prices briefly topped the $100,000 mark and an average price of $50,000. It is back to the $23,000 level. Iron Ore has decreased 4.86 percent since the beginning of 2022 and is 50 percent below the 2021 high. However, the trend of commodity prices has been in a general and obvious uptrend since 2000 with a peak and subsequent decline after the 2008 global debt crisis.
Certainly, a weaker peso (down 11 percent against the dollar in 2022) does offset some of the fall in global commodity prices.
Because there is a genuine and persistent inflation psychology, once prices start going higher, people believe that the trend will continue. Amundi Asset Management wrote to its investors in April: “The inflation psychology is kicking in. Since the start of the year, inflation data has exceeded the expectations of many analysts and commentators. The propagation of narratives across economic agents and through the media ensures that the self-fulfilling prophecy of inflation is ultimately realized.”
If you think that prices are going to go higher, they do because your individual actions as a producer and consumer create the price increase.
We are at the point that even if oil and other raw material and consumer good input prices go down, end-user prices may not follow. Businesses as well as individuals are trying to make up the losses from the business disruptions of 2020 and beyond.
Look at the menu of your local restaurant and you will see price increases beyond the percentage increase of current raw material costs. They do not want to raise prices again tomorrow and also put in a few pesos extra to help recover the losses in the past two years.
Inflationary psychology is why when prices go higher, they do not go back down as fast if at all. The only factor that will bring consumer prices down is “price competition” between suppliers, and that may take a year or so to kick in.