Not much good news in low inflation rate

THE government’s economy minders took an upbeat tone with their discussion of the August inflation figures last Friday because putting the best face on problematic indicators is their job, but the unfortunate reality is that announcements of “signs of an economic recovery” are still more hopeful than literally predictive at this point.

The August headline inflation rate was 2.4 percent, lower than the 2.7-percent consensus forecast and the 2.7-percent inflation rate in July. Core inflation, which omits comparatively volatile food and energy prices, similarly declined to 3.1 percent from 3.3 percent in July.

The Philippine Statistics Authority (PSA) attributed the somewhat unexpected decline in the inflation rate to “the deceleration in the inflation for the heavily-weighted food and non- alcoholic beverages, which slid at an annual rate of 1.8 percent during the period, from 2.4 percent in the previous month.”

That factor was characterized as being a generally good thing, as it indicates that both the volume and movement of food supplies are relatively stable. The deceleration in inflation of food prices also helped to offset a slight increase in inflation of housing, water, electricity and fuel to 0.9 percent from 0.8 percent in the previous month. Thus, the official line is that the relative stability of prices for the essentials of existence together with the “strong fundamentals” of the economy in spite of the coronavirus pandemic are harbingers of the imminent economic recovery.

Looking at the situation broadly leads to three observations, none of them particularly encouraging.

First of all, saying that “inflation was lower due to slower acceleration of food prices” is like saying someone died of cardiac arrest; it is true in a very literal sense, but there must be an underlying cause. A person’s heart does not just stop for no reason, and likewise there is a reason beyond the existence of ample food supplies and a lack of obstacles in the food supply chain for slower food inflation. Ample supplies and a functioning supply chain are the default condition, which only has practical relevance to the inflation rate in the breach — a failed harvest, agricultural losses due to storms, or other interruptions to the flow of goods.

Under the current circumstances, particularly with the partial lockdown reimposed for half the month on Metro Manila and the surrounding provinces, movement in the food supply chain is slower, and with demand for food ordinarily being rather inelastic, that should have resulted in a slightly faster rate of inflation for the food component of the consumer price index basket. However, the opposite happened, which can only mean that demand declined.

That is the second observation elicited by August’s inflation turnout: Weak demand across the economy is either being ignored by policymakers, or — as is more likely, because they are not stupid people who could overlook the demand factor — is intentionally being avoided in the discussion so as not to further discourage spending. Look at any analysis by a reputable non-government outside institution — HSBC, ING Bank, Moody’s and others — and

weak demand is prominently recognized as the key factor in the ongoing economic downturn and the biggest stumbling block to the hoped-for recovery.

The third observation is that at least some of the country’s “strong fundamentals” may be ironically applying the brakes to economic momentum. One is the traditionally risk- averse character of the financial system and economic policy in general. Banks are wellcapitalized, and in spite of business failures during the pandemic and associated recession, are not at any significant risk due to bad loans. In fact, the economy is awash in cash, even if the government itself routinely complains it does not have enough of it to fund a proper pandemic response. Money supply and bank lending both expanded in July (the most recent month for which there is data), albeit at a slower pace than in June, and the country’s gross international reserves (GIR) hit

an all-time high of $98.6 billion, almost three times the amount considered necessary to maintain economic stability.

Under ordinary circumstances, this overabundance of money would be inflationary; the fact that it is not is further evidence of weak demand. Part of the reason for the weak demand may be the government’s underspending on the coronavirus response, which is also indicated by the high GIR and general surplus of money in the financial system; out of the 11 members of the Association of Southeast Asian Nations, the Philippines — which arguably has the biggest pandemic problem — has the fourth-lowest spending, both in terms of percentage of its 2019 gross domestic product and per capita.

Another way in which the Philippines’ fiscal conservativism is a handicap misinterpreted as an advantage in the current environment is the strengthening of the peso. On Monday, the peso was trading at about P48.60 to $1; a year ago, the exchange rate was about P51.62 to $1. That is considered a positive in terms of government debt service (for overseas debts) and imports, but both of those factors are irrelevant at the moment. Servicing the mountain of debt incurred by the government

since March will not become a practical issue for at least several months, if not longer, and lower effective prices for imports have no impact if demand is weak and no one is buying them. What is a negative and more immediate concern is that a strong peso lowers the value of exports, and it is doing so at a time when exports are already severely weakened by the local and global economic downturn.

It has been pointed out by a number of other analyses over the past several weeks and months, but the conclusion is worth repeating: Under the current circumstances, promoting consumer and business confidence in the economy,

and encouraging demand growth should take precedence over maintaining “stable fundamentals,” otherwise the anticipated recovery will not be “V-shaped,” or “hockey stick-shaped,” or “L-shaped,” but will rather look like the letter “I,” if the “I” was lying on its side. The Philippines’ economic management has been fairly competent over the past several years, and has left the country in a good position to take some risks and pursue some courses of action that might be dubious under different circumstances.