In­fla­tion rate down, is it okay now?

Cebu Daily News - - OPINION - Per­ry­fa­[email protected]­hoo.com

The gov­ern­ment placed the coun­try’s in­fla­tion rate last month at 6.0 per­cent. It is ac­tu­ally lower in Metro Manila at 5.8 per­cent and higher out­side Metro Manila at 6.2 per­cent.

Last month’s in­fla­tion rate is lower than the 6.7 per­cent in­fla­tion rate recorded in each of the two pre­ced­ing months of Septem­ber and Oc­to­ber. This is good news. What is not good is that in the first eleven months of the year, the av­er­age in­fla­tion rate hov­ers at 5.2 per­cent. In the same eleven months last year, the in­fla­tion rate was only 2.8 per­cent.

In the gov­ern­ment’s 2016 Fam­ily In­come and Ex­pen­di­ture Sur­vey (FIES), the bot­tom 30 per­cent of our to­tal num­ber of house­holds had an av­er­age an­nual in­come of about P111,000. This amounted to P9,250 a month. Let us as­sumed that it had in­creased to P10,000 a month at the start of the year. With the 5.2 per­cent av­er­age monthly in­fla­tion rate since Jan­uary to now, the fam­ily in the bot­tom 30 per­cent could only buy now P9,480 worth of goods and ser­vices. The P520 dif­fer­ence is lost to in­fla­tion. They need that much of in­crease in in­come to main­tain their stan­dard of liv­ing this year.

Based on the same 2015 FIES, the up­per 30 per­cent of our to­tal num­ber of house­holds earned about P42,300 a month. Again, let us as­sume that it had gone up to P50,000 a month by the start of the year. De­duct­ing for the 5.2 per­cent in­fla­tion rate, each fam­ily in the up­per 30 per­cent could now buy only P47,400 worth of goods and ser­vices. They lose P2,600 a month to in­fla­tion. Rich and poor, in­fla­tion hurts us alike.

The coun­tries in­fla­tion rate shows that much of it ac­tu­ally came from the in­crease in the prices of food. An av­er­age Filipino house­hold spends about 40 per­cent of its in­come on food con­sumed at home and 5 per­cent con­sumed out­side of home. The trou­ble is that the bot­tom 30 per­cent spend a greater part of their in­come on food, most prob­a­bly at 60 to 70 per­cent. With in­fla­tion rate much higher in food than the over­all in­fla­tion rate, the poor must be stag­ger­ing in hunger from its ef­fect.

As for the up­per 30 per­cent, they prob­a­bly spent 10 to 20 per­cent only of their in­come on food. Thus, they re­ally are not badly af­fected by the high prices of food prod­ucts as the bot­tom 30 per­cent. Add their re­duced tax pay­ments be­cause of the Train law, they must be laugh­ing away eat­ing more out­side.

As the BSP is wont to say, it fights in­fla­tion by rais­ing the in­ter­est rate. With the BSP overnight rate set higher this year by 1.75 per­cent from 3.00 per­cent to 4.75 per­cent, the bank lend­ing rates were also ex­pected to move higher. Bank lend­ing rates could be twice or thrice higher than the BSP overnight rate, de­pend­ing on the bor­rower. Prime bor­row­ers with very lit­tle pos­si­bil­ity of de­fault are charged the low­est rate.

When in­ter­est rate goes up, ex­pect in­vest­ments, in­clud­ing the in­ter­est rate sen­si­tive con­sump­tion ex­pen­di­tures, to fall. This will lead to the eas­ing up of ag­gre­gate de­mand in the econ­omy, hence, lower in­fla­tion rate. This is true but only after a lag of about a year. In the short run, the ef­fect of high in­ter­est rate is to raise the cost of do­ing busi­ness.

So was it be­cause of the BSP’s move to raise the in­ter­est rate that cut down our in­fla­tion rate? That I am not so sure, es­pe­cially that much of our in­fla­tion was cost­push and not de­mand-pull.

When in­ter­est rate goes up, ex­pect in­vest­ments, in­clud­ing the in­ter­est rate sen­si­tive con­sump­tion ex­pen­di­tures, to fall.

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