Inflation: the gathering storm
The surging rise in prices we see today is simply a precursor of tougher times ahead. While the Bangko Sentral ng Pilipinas sees the inflationary trends lasting till November, I believe that what the economic forecast fails to take into consideration is the severity and duration of this inflationary spiral.
It is common among the street folk to attribute the surge in prices to the implementation of the TRAIN Law. Indeed, this has been a factor as it has raised the taxes on fuel thereby narrowing the gap between gasoline and diesel prices. There have been other increases brought about by the implementation of the TRAIN Law, but these have had a de minimis effect.
What the government failed to foresee was the rapidity with which commodities prices would rise due to increases in fuel prices. Today’s fuel prices at the pump are double the prices of a year ago and no end seems in sight. The effect on fares and its impact on the commuting public has been horrendous, and those citizens earning P20,000 or less per month, for whom the TRAIN Law has had minimal additional effect on take home pay, have had to suffer the most.
Even worse has been the confluence of factors that have led to the inflationary spiral. First is that prices of imported petroleum, for which the Philippines is still dependent for up to 30% of its energy needs, have risen tremendously. Today, the rough world price per barrel of crude oil is about $80 compared to about a year ago where it was in the mid to high $40s. There are a broad variety of reasons for this, foremost of which are the continuing tensions in the Middle East, which supplies about a third of the world’s petroleum needs.
Second, we had storms that affected the delivery of vegetables and rice in markets. It is quite laughable that the price of the spice sili has reached about P600/kilo and fish and bangus prices have risen almost 50%. Then there has been the scarcity of rice supply in the markets where the lowest quality brands have sold for P40 a kilo, until the government imported rice hits the markets (and are quickly gone) at about P28-P32 per kilo.
Then there is the approaching Christmas season. The yuletide season is normally a period of high expenditures and purchases. While this may accelerate monetary velocity and maybe do a lot of good for the economy, it contributes to a rise in food prices, which owing to the cost-push phenomena may result in a higher degree of inflation.
WHAT DOES THIS ALL MEAN?
To start with, the inflationary period will not be subsiding anytime soon, not even in November. The cost push triggered by increasing costs of imported petroleum products will continue until March before it subsides. By November, it may be possible for inflation to briefly reach double-digit levels before it starts levelling off and starting its descent possibly by March or April.
For savers, it means that they will have to seek investments that exceed the inflation rate, so as not to devalue their savings. For those who can afford it, seeking entrepreneurial activities may be a way to keep above the negative zone. Banks will never offer rates that beat inflation so savers will just have to look for better ways to prevent their savings from being eroded. For the small savers, however, it looks like the only way is to grin it and bear it.
During this period, the local stock markets are likely to be in the doldrums as the big international funds that stoke market rises will likely stay in the main markets, such as the NYSE, which is having a prolonged bull run. For mom-andpop investors it may be advisable to seek less volatile investment outlets.
For the vast majority of Filipinos, this prolonged inflationary rise will be a period of belt-tightening. For the government, it is now time to suspend the fuel taxes as provided by law. It may also be time to accelerate the "Build, Build, Build" program to stimulate growth and subsidiary investments. For business, it will be a time for growth as demand during inflationary times seems to trigger rises in spending. For legislators, it may be prudent NOT to be sucked into pressures for mandatory wage increases, as these will result in an acceleration of inflation and at its extreme end, may result in a Venezuelan-type scenario.
Times will be hard, but it is during these times that more savings should be converted to investments. More investments mean more employment opportunities and lead to greater easing of inflation.