To BSP: No to stagflation as baseline scenario

Published May 19, 2022, 12:05 AM

by Diwa C. Guinigundo


Diwa C. Guinigundo

Late last year, US Federal Reserve Chairman Jerome Powell admitted before Congress that it was probably time for the Fed to stop using the word “transitory.” Earlier in the first quarter of 2021, Powell assured America that as the US economy recovered, inflation was likely to rise but it would be temporary. Inflation turned out more durable. The labor market continued to tighten. With the latest April 2022 inflation reaching 8.3 percent, market analysts in December 2021 were then correct that the real policy rate was too low and the US Fed should have tightened earlier. Mohamed El-Erian described US inflation as “frustratingly high,” emasculating consumer spending. Stagflation could be the baseline forecast for the next two years.

This was how the US Fed found itself behind the curve, adjusting its policy rate higher than the usual 25 basis points. We see today the cost of moving too late, and doing too little to curtail inflation pressures and re-anchor inflation expectations.

All eyes are now on our Bangko Sentral ng Pilipinas (BSP), and its monetary policy decision in its meeting today. It has been patient in keeping the benchmark interest rate negative for nearly two years to nurture economic recovery. While patience has its virtue, patience could be a liability in inflation management.

The BSP would rather wait for another quarter of positive GDP growth, although the deepest recession in decades have been reversed by four consecutive quarters of positive economic growth. The labor market also appears to be on the mend with joblessness down and underemployment showing some easing as well.

More recent developments could force the hand of the monetary authorities to finally move.

While awaiting more evidence of second round effects, the BSP could have missed the signs of inevitability of a rate adjustment. Its projections already indicated an above-target forecast of 4.3 percent in 2022 and an elevated forecast of 3.6 percent in 2023. Economic recovery was strong last year at 5.6 percent. Government growth target of 7 to 9 percent target this year is very bullish.

Some leading indicators are also pointing to the north. Average capacity utilization continues to rise.

Overall Purchasing Managers’ Index has the same narrative of expansion.

Actual inflation numbers also confirm the urgency of rate adjustment. Inflation for April 2022 escalated to 4.9 percent as if ushering in a period of sticky high inflation. In fact, stripped of seasonal factors, month-on-month inflation in April 2022 stood at one percent or an annualized inflation rate of 12 percent.

This past week, we started to see the writings on the walls. The labor sector’s demand for wage hikes in minimum wages was recently approved by the regional wage boards in both Metro Manila and Western Visayas. In NCR, daily wage will increase by ₱33. In Western Visayas, the approved daily adjustments were higher at between ₱55 for industrial and ₱110 for commercial workers. Agriculture workers will receive ₱95 additional daily wage. If high inflation persists, this may not be the last round of wage increases. Inflation undoubtedly is not temporary.

And inflation is getting more broad-based. The increases covered almost everything in the consumer basket, from beverages and tobacco to restaurant and accommodation services. The Philippine Statistics

Authority also reported that the seasonal factors such as the degree of demand for selected commodities have also climbed for all items. Anecdotally, some broadsheets also reported that “vote-buying spree drives phone sales.” These incidents were reported in Surigao del Sur where many restaurants and meat shops claimed early closure because their supplies were emptied.

As if these price run-ups were not enough, the Department of Trade and Industry approved last week the increase in the suggested retail prices (SRPs) for 82 out of 218 stock-keeping units of basic commodities including canned sardines, processed milk, and instant noodles. The reason: the cost of inputs has risen.
What could further drive inflation up?

It is money supply and access to credit. Total domestic liquidity or M3 and domestic credits, after the reopening of the economy, are now expanding by nearly eight percent.

Yet, we are puzzled that some market analysts remain convinced that the BSP needed more time to “to sift through data and ascertain if economic recovery has been entrenched.” The economists in the BSP are smart enough to have assessed the implications of the high first-quarter growth and the latest inflation trajectory given April’s 4.9 percent.

We cannot emphasize enough that rising inflation penalizes everybody particularly the poorest among us. It is not therefore surprising that the recent Pulse Asia survey of March 2022 should report that “controlling inflation” was considered the priority concern of 58 percent of all survey respondents. That means one out of two Filipinos is troubled by rapid inflation. Suppressing price surges is expected of the government.

Equally concerning are the possible consequences of a monetary policy that might already be behind the curve. A reactive monetary policy risks “a frustratingly high inflation” and possible setback in economic recovery. Our prayer is for the BSP to avoid playing catch-up starting today. Nobody relishes looking at stagflation as a baseline scenario.

Note: this column will take a break for four weeks. I will be joining the family in Washington DC to attend my two sons’ LLM graduation at Georgetown. I can be reached at [email protected]