WORRISOME INFLATION
The Philippine Star
03/07/08

It has become increasingly difficult to not mind the steady but raging rise in prices of basic consumer products. Latest government figures have confirmed that inflation is on a sharp continuing uptrend, one that threatens to breach estimates made by our economic planners.

Of course, our countrymen don't need an official pronouncement to confirm what they have been experiencing in the past months. In November last year, milk prices started moving up by more than six percent. Rice followed, albeit, at a slower pace.

Even the price of instant noodles, a favorite meal of our less privileged countrymen, could not be restrained its upward price swing. Last month, fish and pork prices broke their comfort levels, partly because of seasonal supply-demand imbalance for both pork and fish.

Sharply higher food prices

We will be seeing higher food prices in the coming months. Our panaderos are already threatening to increase the price of pandesal and loaf breads by about 20 percent, and this is just after they had implemented a price hike a few months ago.

Government data says that the annual inflation rate for food alone at the national level climbed up to 7 percent in February from 6.2 percent in January.

All the food groups showed higher annual price gains in January from February. Annual inflation in rice went up to 7.7 percent from 7.5 percent; corn, 5.2 percent from 4.2 percent; cereal preparations, 9.0 percent from 6.8 percent; dairy products, 11.8 percent from 9.8 percent; eggs, 8.3 percent from 8.1 percent; fish, 7.9 percent from 7.0 percent; fruits and vegetables, 11.1 percent from 10.5 percent; meat, 4.4 percent from 3.3 percent; and miscellaneous foods, 4.1 percent from 3.5 percent.

Strong peso to the rescue

But the Bangko Sentral ng Pilipinas seems to be nonchalant about these figures or the creeping upward trend in recent months, preferring to stand pat with its earlier statements that inflation will stay within the target range of 3 to 5 percent.

The central bank believes that the strong peso will once again save the day, more so with the peso appreciating last year against the US greenback at about 19 percent, earning it the distinction of being the best performing currency in Asia.

Perhaps there is indeed wisdom in the BSP's projections. After all, the Philippines continues to be one of the countries in the region least affected (in relative terms) by the rising cost of basic commodities. Last year, domestic inflation averaged only 2.8 percent, the lowest since 1986, again courtesy of a strong peso.

Our neighbors have not been so fortunate though. China, Indonesia, Taiwan, South Korea, Singapore, and Hong Kong have been reporting higher-than-expected inflation rates. China, in fact, has been besieged by high prices, something that they had not seen in over a decade.

In fact, more than half of the countries in Asia have seen inflation at levels higher than forecasted or targeted by their respective central banks. And there seems to be no relief in sight, at least for the next six months, as monetary policies choose to track what the US Federal Reserve does.

Managing inflation

The Philippine central bank has been slashing its overnight rates almost in tandem with the Feds on the back of robust economic growth figures reported for 2007. But with mounting fears of a runaway inflation, the BSP may opt to be a little more conservative and consider not touching its borrowing and lending rates in its next meeting next week.

The BSP sees a “hump-shaped” inflation graph this year, with recovery during the downward slope expected in the second quarter of the year. Aside from using interest rates to curb inflation, the central bank also utilizes the peso by buying in the market when it wants to decelerate the currency's appreciation.

The sharp rise of the peso against the dollar, according to the central bank, does more good than harm: inflation is reduced, government expenditures slow down, and the domestic productivity perks up.

Even if every peso appreciation against the dollar results in a P2.7-billion reduction in government revenues, largely because of lower customs collections, this is offset by a decline of P4.1 billion in expenditures due to lower cost of foreign debt servicing. Thus, the resulting math is still positive for the economy, according to the BSP.

An uneasy view

We should feel secure that the government's army of economists has a firm grip on how to manage the inflation threat. And yet, I'm not. Having been an oilman for a big part of my life, I have seen how oil prices have wreaked havoc on economies, especially in developing countries that have a high dependence on imported oil.

The world has experienced spikes in crude prices during times of crisis, but never sustained for as long as what we now are seeing, and at levels never before imagined. We have entered the era of the $100-a-barrel-oil, which is more than double what we were used to just a year ago.

Neither am I comfortable with government's over-reliance on repatriations of our overseas working class, seen as a major reason for the strong peso and the continued increase in consumer spending.

Not only is there continued tension all over the world because of a weakened US economy, China is also showing signs that not everything is well. And this is slowly creeping into the global reality, fueling additional worries.

China is beset by higher production overheads, largely because of oil prices. But labor wages are also rising, and cheap China-made products may become a thing of the past as manufacturing costs are yanked up even as demand for better-quality products adds to the pressure.

Also, the strong peso has cut our OFW-dependent Filipino families' spending budgets by roughly 20 percent. With higher commodity prices and decreased buying power, a big chunk of our population could be in for a power-packed knock-out. Tightening of belts may be the order of the day.

Lastly, we still don't know where the current political noise is leading to. And this is definitely one factor that the BSP has not inputted in the “hump-shaped” scenario. Truth be told, we are facing rough sailing ahead.

Should you wish to share any insights, write me at Link Edge, 25^th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com.

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