Inflation

In every public opinion survey conducted, regardless of the prevailing inflation rate, the rising prices of commodities is always top-of-mind. Therefore, it is always politically profitable for opportunist politicians to pounce on every movement in the inflation rate to grandstand by demanding for more subsidies – or in the present case, the withdrawal of taxes.

Politicians are always quick to give away money from the public fund. They legislated free tuition for public tertiary education institutions. They want universal health care coverage and free vaccination. But they do not want to worry about how to raise revenues to fund the subsidies they give away.

If the populist politicians get their way, government will be forced to bankruptcy. We will become another Venezuela or another Greece. The poor will end up in a worse condition.

Then we have the most opportunist of them all: the leftist groups.

These groups will march at the drop of a hat, make demands that they think will win them public support in the short term, even if these demands will be injurious to all in the long term. Agitprop is everything.

Lately, leftist groups are back in the streets again. They are demanding two things, basically: an increase in the minimum wage to P800 per day and the “nationalization” of the oil industry. Neither makes any sense.

If we increase the minimum wage to the level they want, the inflation rate will likely kick up to 20 percent or more. Employers will be more reluctant to hire workers, pushing up the unemployment rate. Our most vulnerable industries will likely be pushed over the edge, producing economic chaos in place of the healthy growth we now have.

“Nationalization” has always been the leftist euphemism for subsidizing fuel. This is the formula that brought on the debt crisis our economy experienced three decades ago. Government borrowed heavily to finance the Oil Price Stabilization Fund that kept fuel prices artificially low and encouraged wasteful consumption of highly polluting fossil fuels.

Nothing could be more regressive than subsidizing fuel. The richest fifth of all consumers account for 90 percent of oil consumption. If we subsidize fuel, we subsidize the richest among us.

Breaking down the factors causing inflation, we find that next to fish prices it is the higher cost of personal transport that fuels (no pun intended) the elevated inflation rate we are currently experiencing. The price of fish is likely the result of tighter supply, a problem we should look at more thoroughly. The price of fuel is dictated by the global oil cartel.

Let this be noted as well: the fuel excise tax recently imposed is far below similar taxes imposed elsewhere. Use of fossil fuels imposes huge social costs on the community and this should be reflected in excise taxation. That is the best practice everywhere.

We can have tightly targeted fuel subsidies, of course, aimed at bringing relief to commuters using mass transport. But these transport subsidies, we should note, brought moral hazards in the past. When it is cheaper to inefficiently consume fuel than properly tune up bus and jeepney engines, we see a proliferation of smoke belchers roaming the streets to kill us all.

I think that the current elevated inflation rate is being over-dramatized for political effect.

In April, our inflation rate climbed to 4.5 percent. Over the first four months of this year, however, the average inflation rate is 4.1 percent or slightly above the targeted range. It is still possible, especially if oil prices begin to climb down from their present cartel-induced highs, to bring down the annual inflation rate to well within target.

In the eighties, when our economy was wracked by the debt crisis (partly induced by subsidies our revenues could not afford), the inflation rate climbed to 50 percent. In the first decade of this century, inflation averaged seven percent to 10 percent. The inflation rate climbed down to the three percent level the past few years only by the benign combination of cheap oil and low interest rates. That benign combination could not hold forever. This context is important. Rapid economic expansion is always accompanied by elevated inflation rates. Conversely, economic stagnation invited deflation, a vastly more dangerous economic cycle.

Our economy grew at 6.8 percent last year. We could grow by seven percent or better this year. That pace of growth creates its own inflationary pressures, estimated at over two-thirds the present inflation rate.

TRAIN-1 put more money in the hands of consumers. Fully 90 percent of wage earners received a boon in income, translating into higher consumer demand. In addition, the massive infrastructure program has created hundreds of thousands of new jobs. This further boosts demand and strains existing capacity.

Add to this the 20 percent rise in oil prices experienced since the start of the year, a cost magnified by the depreciation of the peso. By the DOF’s calculation, TRAIN-1 accounts for just 0.4 percent of the total inflation rate. That means that if prices rose from P100 at the start of the year to P104.50 by this time, TRAIN accounts for only 40 centavos. Those 40 centavos enables government to fund infrastructure projects and expanded social services to make our growth more inclusive.

Those who vilify the tax reforms overlook their importance in making our system fairer, simpler and more efficient. Reforming the tax system will enhance our growth and help make our society more just.

Those who hyperventilate about tax reforms causing inflation are merely being cynical.