Inflation everywhere
No, this is not about inflation being driven by the growth of the money supply as Nobel Laureate Milton Friedman talked about it in India in 1963. That inflation is always and everywhere a monetary phenomenon is true in the long run during episodes of persistent inflation. In the short run supply shocks could also affect prices.
And whether we like it or not, everyone complains when prices of basic commodities and services are soaring, but when this happens for extended period, everyone is more than worried because inflation eats into his income and living standard. That’s why central banks have to manage inflation by regulating monetary growth or adjust interest rate to influence nominal spending and ensure price stability. In some countries, they focus on the exchange rate.
Thus, inflation is so ubiquitous, we always see it and hear it everywhere.
For instance, we were all elated when the Philippine Statistics Authority reported the 3.9 percent inflation for December 2023, the first time in 22 months to hit the 2 percent-4 percent inflation target. But we were somewhat disappointed because the average inflation for 2023 remained out of bounds for the last two years. Risk-adjusted forecast by the Bangko Sentral ng Pilipinas (BSP) also indicates an out-of-target inflation this year at over 4.0 percent.
Two years ago, inflation hogged the business headlines when as early as March 2022, it leaped over the target and never looked back until December 2023. Believing the global shocks were transitory, and the Philippines did not have to consider the US Fed’s tightening moves at the time, the central bank hesitated to adjust the policy rate even as its own forecasts pointed to a breach for that year and the next. Corrosive as it was, the rising inflation reduced the real policy rate to negative, foreign portfolio investment abandoned the domestic capital market and the peso depreciated close to ₱60 to a dollar.
Inflation took to task the new governor in July 2022 to do immoderate tightening in an off-cycle monetary policy meeting to compensate for the previous weak monetary response. It was costly because it required more and more frequent interest rate increases to also address the relentless shocks coming from both sides. The new leadership at the BSP beginning July 2023 has to sustain the remaining mopping up operations.
With inflation on a downtrend and relatively more favorable forecasts this year and the next, inflation promises to take the back seat to the cause of achieving high growth and regaining fiscal space in the last four and a half years of the Marcos administration. Are we about to achieve price stability, as Allan Greenspan suggested, when expected changes in the general price level do not effectively modify business and household decisions, when we don’t talk about prices even as we spend, or market chatter starts excluding inflation from the list of to-watch indicators?
Looking back, inflation became a byword towards the end of 2022 and the beginning of last year. By all indications, the President’s pledge to bring down the price of rice to ₱20 a kilo was impossible because one, global rice prices remained elevated; two, cost of production continued to be prohibitive; and three, the issue of logistics and smuggling proved to be a real setback to normalizing rice prices. With its enormous weight on the consumer price index, rice was for a long period, the heavy lifter of inflation.
During the same period, onion became the face of inflation in the Philippines. During the Christmas holidays in 2022, onion was priced higher than beef and chicken, escalating by more than 10 times. Even Time observed that the country had to import 22,000 tons of onions to boost the local supply and arrest the stiff climb in onion prices. Reaching ₱600 a kilo, onions were at least 25 percent-50 percent more expensive than beef or pork. At that price, onions were worth more than the minimum wage of non-farm workers in the Philippines.
It's not surprising that the President decided to form an inter-agency body to rein in sharp price uptrends of basic commodities and power, and strengthen antiinflationary initiatives “to improve the economy and quality of life of Filipinos.” This was in March 2023. Although signed in May 2023, Executive Order (EO) 28 formally created the Inter-agency Committee on Inflation and Market Outlook which would serve as an advisory body to the Economic Development Group on anti-inflation measures.
Except for some updates on inflation strategies the Committee intended to undertake, and the NEDA’S reassurance that the government would sustain its support to the most vulnerable sectors to inflation, we find it difficult to extract any more updates on what the inter-agency committee has actually achieved.
Why, even restful sleep could be disturbed by inflation.
The President himself admitted that “I lose sleep every night” over inflation. This was in January 2023 when he also indicated his determination “to bring down, to make sure that the inflation starts to come down in the first quarter and things will normalize after that.” Obviously, the President was not impressed because the January 2023 inflation, announced the following month, peaked at 8.7 percent. When he decided to form the inter-agency committee, he must know that inflation in February and March remained high at 8.6 percent and 7.6 percent with rice, onion, garlic and salt hitting the international press for their phenomenal rise.
But what should worry the President more than his sleepless nights in Malacañang is when the local population continues to be restless and concerned about the government’s failure to arrest inflation.
At least for the whole year of 2023, Pulse Asia’s periodic surveys consistently indicate that based on the national survey response, majority of Filipinos consider “controlling inflation” the most urgent national concern followed by three other economic concerns: adjusting workers’ pay, providing more jobs and mitigating poverty in the Philippines.
Inflation, not surprisingly, was also behind the President’s major decline in his approval rating. While 65 percent of the 1,200 respondents approved of his performance in September 2023, this was lower by 15 percentage points from 80 percent in June.
We don’t know the mental dynamics in the Palace but it is not far-fetched that this persistent of a scourge as inflation could also be behind the recent shifts in the leadership of some economic agencies. With more upside risks to inflation this year, we may be set to see more.