Never underestimate inflation

It was worrying that President Bongbong Marcos was unaware of (or was in denial of) our current inflation situation. At this point, rising inflation and its toxic effects should be front and center of his concerns.

Headline inflation reached a three-year high of 6.1 percent this month, driven by skyrocketing food prices and fuel cost, declared the Philippine Statistics Authority. One peso in 2018 is worth a mere 87 centavos today.

Inflation is climbing across the world due to the shortage of oil, natural gas and wheat resulting from the Russian-Ukraine war. Supply chain disruptions owing to China’s COVID-induced lockdown exacerbates the situation. As of this writing, inflation is at 8.6 percent in the US, 8.4 percent in the Eurozone, 7.6 percent in Thailand, 21.3 percent in Pakistan, 78.62 percent in Turkey and a whopping 927 percent in Venezuela.

Inflation should never be underestimated as it has the power to impact policies, priorities, politics and poverty across nations. In short, it has the power to change the world order. This was confirmed by the WION news agency. Let me explain.

Inflation changes policies. In a period of acute price increases, governments typically shift their policies towards stabilizing prices and securing ample supply of essential goods at home. Hence, policies become more inward looking, more nationalistic and more protectionist. Even now, rising prices has compelled Indonesia to ban the export of palm oil. Argentina banned the export of soybean meal. Iran banned the export of potatoes. India banned the export of wheat and Turkey banned the export of beef. These protectionist policies impact countries like the Philippines which depend on imports for her basic food requirements.

Scarcity of food imports has driven prices up and/ or lead to food shortages. In Italy, for instance, the price of pasta has increased by 40 percent due to the shortage of wheat flour.

Here at home, a 25-kilo sack of good quality rice worth P1,200 last year is now P1,350. As for shortages, chicken and pork are becoming increasingly expensive as importations run low.

Inflation causes a shift in global priorities. It took decades to persuade governments to realize the urgency of climate change. Following intense lobbying by environmentalists, the United Nations finally adopted its Framework Convention on Climate Change in 1992. Through successive treaties, governments made nationally determined commitments to reduce their greenhouse gas emissions by a certain percentage until 2030. The Philippine government committed to reduce its emissions by 75 percent.

These commitments are now out the window for most. Governments are now more concerned about arresting price increases and generating savings wherever they can get it. As a result, energy derived from fossil fuels is making a comeback.

Despite commitments to shift to renewable energy, countries like Austria decided to re-open its coalfired power plants. In the US, the Supreme Court defanged the Environmental Protection Agency, taking away its powers to regulate emissions from fossil fuel power plants and mandate a shift to renewable energy sources.

The world’s priorities have changed. The name of the game is to keep prices down, even at the expense of accelerating global warning.

Inflation exacerbates poverty. There are 1.1 billion people living below the poverty line worldwide, of whom 25 million are Filipinos. Poverty sets off a chain reaction of medical consequences including malnutrition, miscarriages, infant morbidities and stunted growth. It breeds social problems such as crime, homelessness and unemployment.

Just as the world recovers from the economic effects of the pandemic, here comes festering inflation that erodes purchasing powers across currencies. It will be more difficult for those living in poverty to find relief.

Inflation induces political change. Rising prices translates to a discontented population. In severe cases, this could lead to social unrest. A discontented population will always clamor for political change.

We’ve seen this happen many times before. In India, despite his popularity, Manmohan Singh lost the parliamentary polls in 2014 due to high inflation during the months leading to elections. In the United States, the last 15 months of Jimmy Carter’s presidency saw prices soar due to an oil crisis brought about by the Iranian revolution. High prices caused Carter to lose his re-election to Ronald Reagan.

Today, food prices in the US are up by 10 percent while fuel cost is up by 8 percent. With midterm elections happening in November, we can expect a shake up in the American legislature. The American status quo will be broken.

Globally, 50 countries will go to the polls within the next 12 months including Brazil, Israel, Pakistan and Turkey. As inflation rates register all-time highs, experts expect a new cast of global leaders to emerge. With this comes a change in the world order.

In the Philippines, President Bongbong Marcos is hard-pressed to bring relief to his constituency, mostly consisting of the marginalized sector. Already battle scarred from COVID, the poor must now deal with stiff price hikes. If President Marcos fails to bring them relief, his popularity will dissipate and his honeymoon period will be cut short.

But President Marcos faces a conundrum. Mr. Duterte left him with an economy that operates with huge budget deficits and maturing debts worth P834 billion this year. How can he provide food and fuel subsidies at a time when he needs to tighten belts? Mr. Marcos will have to raise the funds somehow. He must impose new taxes without further burdening a population besieged with high inflation. He must raise funds without acquiring more debts. He must cut spending without choking economic expansion. He must spend on infrastructure and social services without widening the budget deficit. It’s going to be a tough balancing act.

We must never underestimate the perilous consequences of inflation. President Marcos will do well to be on top of it and count it as one of his priorities.

* * *