Inflation storm brewing

FILIPINOS queuing for hours to buy cheap rice from the government. Families eating fewer meals a day to save money. Locals venting their anger against President Rodrigo R. Duterte on social media.

These are the images and stories that have dominated media coverage in the Philippines after inflation soared to more than six percent in August, far higher than the rest of Asia.

Pressure started at the beginning of the year with higher oil prices and tax increases on fuel, sugary drinks and cigarettes, and quickly moved to rice, the nation’s staple food, because of supply shortages.

Now, everything from electronic gadgets to haircuts to tshirts cost at least 10% more than a year ago, according to anecdotal evidence in Manila.

Alongside an almost eight percent slump in the currency this year, consumers are hurting.

A sentiment index contracted for the first time in more than two years, a worrying signal in a country where private consumption makes up about 70% of gross domestic product.

Consumers like Nica Aguilar, 30, are either switching to cheaper brands or changing daily routines to adapt. The energy compliance officer, who works in the Ortigas business district in Metro Manila, said she now uses part of her lunch break to cut down on her parking bill after hourly fees rose by 25%. She leaves her office to re-park her car, taking advantage of a cheaper rate for the first four hours.

Mr. Duterte’s government is now scrambling to get on top of the problem as mid-term elections loom next year.

Import rules on rice and sugar will be eased, while the police have been roped in to check for overpricing.

The central bank, which initially faced criticism for being too slow to act, has delivered 100 basis-points of interest-rate increases since May and pledged further strong action.

“Inflation is the most political of all economic risks because it can be felt immediately,” said Gene Pilapil, a political science professor at the University of the Philippines in Quezon City.

The Duterte administration is facing its first major economic test and could lose public support should prices go out of control, he said.

Two years into his six-year term, Mr. Duterte’s popularity has so far been supported by a strong economy, rising wealth and a tough anti-drug and anticrime stance. The most recent opinion poll showed his popularity may be waning.

“The 2019 elections were supposed to be a clear victory for the administration but with inflation rising, it could become interesting,” said Mr. Pilapil.

Inflation accelerated to 6.4% in August, the fastest pace in nine years, with more pain in store as a super typhoon threatens farmlands in the Philippines just before the rice and corn harvest.

Economic growth weakened to a three-year low of six percent last quarter, while the peso slumped to the lowest level since 2005 on Wednesday.

Trade Secretary Ramon M. Lopez said the police are inspecting warehouses, markets and grocery stores and arresting those who are raising prices unjustly. Officials also met with manufacturers to convince them not to increase prices yet and have considered further easing import rules for various staples such as rice, fish and sugar, he said.

“Inflation is being addressed and we have both monetary and non-monetary tools” to solve the problem, Finance Secretary Carlos G. Dominguez III said on Wednesday.

With sales contracting, some companies are agonizing between raising wages and retrenching staff or risking workers picketing and closing shop.

“Our workers are pushing for an increase. Prices are so bad now, they’re threatening to strike,” said Vincenzo Tagle, who helps run his family’s car parts and repair company in Manila, employing 60 people.

Elsewhere in Southeast Asia, governments are taking stronger action to curb prices. In Indonesia, President Joko Widodo slapped controls on fuel costs and ordered additional imports of goods from salt to buffalo meat. In Vietnam, authorities are boosting subsidies on fuel and freezing electricity prices.

Central bank Governor Nestor A. Espenilla, Jr. has repeatedly said a broadening of price pressures to wages, transport costs and services would be a concern. He has flagged a rate hike could be on the cards at the Sept. 27 policy meeting.

“It’s only appropriate to aggressively tighten policy,” said Jose Mario I. Cuyegkeng, a senior economist at ING Groep NV in Manila, who is forecasting a 50 basis-point increase this month.

Strong rate action will anchor price expectations and support a weakening currency, he said. —