Why inflation needs to be tamed: A countryside businessman's view
By John Tria
Published Nov 21, 2022 12:02 am
#MINDANAO
John Tria
The good news of a robust 7.6 percent growth in the third quarter was dampened a bit by a headline story about higher inflation at 7.7 percent for October, pushing year-to-date inflation at 5.4 percent. As expected, higher food and fuel prices, which are key components of Pinoy spending, pushed these figures up.
As a non-economist and an entrepreneur observing the economy over two decades, I have experienced its ups and downs and how it has affected the businesses I run.
I find that there are four outcomes that high inflation may bring. One is, times will be tougher for the majority of Filipinos who will have to bear higher prices, and reduce their spending.
For businesses, persistent high inflation will create a second double edged negative outcome, a combination of higher input costs and a lowered demand for the products and services. For the million or so businesses in this country, more than 90 percent are micro, small and medium enterprises, they depend on demand from nearby buyers to sell their products and services. As this demand and consumption shrinks, businesses have to bear higher costs, or raise prices.
This is an especially acute problem for most countryside businesses that do not sell outside their localities, as demand is not as robust as it is in urban areas where markets are wider. For example, in smaller towns, stores and restaurants close earlier, as customer demand tends to abate in the early evening. That is unlike in larger cities where store hours may extend until after dinner. Lowered purchases form an already small set of customers exacerbates this problem.
The third outcome is, as inflation persists, the common response is for central banks to tighten money supply by raising interest rates, as the BSP has been doing for the past several months. This is to contain inflation by lowering money in circulation that in turn, reduces money to buy things, thereby lowering demand, and affecting sales of businesses.
Higher borrowing rates, however, further limit business capacity to borrow for things like operating capital to keep businesses running despite already lower demand and higher input costs. As higher costs eat into profit, capital accumulation potential is depleted, hindering savings that could propel the growth of business.
When combined with higher borrowing costs due to higher interest rates, the fourth outcome is that business expansion plans are not pursued as strongly as designed, with the reduced demand threatening to eat into expected returns from investments. Investor sentiment, which we hear often, is “softened.” Remember, that investors invest in a country not because of its politics, but because its business encourages business growth, that helps their investments grow.
Thus, for both producers and consumers, inflation that exceeds the band set by the BSP is not a very good situation, especially if, like it is at the moment, it is persistent beyond forecasts. Thus, inflation needs to be tamed as soon as possible.
We have learned enough to know that this inflation is not temporary as some thought at the start of 2022, and the war in Europe has exacerbated the already tough economic conditions brought about by the global pandemic and high logistics costs.
Thus, a tough balancing act will be needed to lower inflation by monetary means while keeping some liquidity for small businesses to keep their heads above water.
Both government and the private sector will need to work closely to put measures in place to lower inflation. This includes local governments and local business groups looking into ways to bolster local economic growth while keeping costs low. Our regional development councils need to be at the forefront of these ideas and efforts, since all participate in it. New ideas, both short and long term, will be needed, and measures to execute these measures crafted to maximize their positive effects and reduce the negative impact on local economies.
John Tria
The good news of a robust 7.6 percent growth in the third quarter was dampened a bit by a headline story about higher inflation at 7.7 percent for October, pushing year-to-date inflation at 5.4 percent. As expected, higher food and fuel prices, which are key components of Pinoy spending, pushed these figures up.
As a non-economist and an entrepreneur observing the economy over two decades, I have experienced its ups and downs and how it has affected the businesses I run.
I find that there are four outcomes that high inflation may bring. One is, times will be tougher for the majority of Filipinos who will have to bear higher prices, and reduce their spending.
For businesses, persistent high inflation will create a second double edged negative outcome, a combination of higher input costs and a lowered demand for the products and services. For the million or so businesses in this country, more than 90 percent are micro, small and medium enterprises, they depend on demand from nearby buyers to sell their products and services. As this demand and consumption shrinks, businesses have to bear higher costs, or raise prices.
This is an especially acute problem for most countryside businesses that do not sell outside their localities, as demand is not as robust as it is in urban areas where markets are wider. For example, in smaller towns, stores and restaurants close earlier, as customer demand tends to abate in the early evening. That is unlike in larger cities where store hours may extend until after dinner. Lowered purchases form an already small set of customers exacerbates this problem.
The third outcome is, as inflation persists, the common response is for central banks to tighten money supply by raising interest rates, as the BSP has been doing for the past several months. This is to contain inflation by lowering money in circulation that in turn, reduces money to buy things, thereby lowering demand, and affecting sales of businesses.
Higher borrowing rates, however, further limit business capacity to borrow for things like operating capital to keep businesses running despite already lower demand and higher input costs. As higher costs eat into profit, capital accumulation potential is depleted, hindering savings that could propel the growth of business.
When combined with higher borrowing costs due to higher interest rates, the fourth outcome is that business expansion plans are not pursued as strongly as designed, with the reduced demand threatening to eat into expected returns from investments. Investor sentiment, which we hear often, is “softened.” Remember, that investors invest in a country not because of its politics, but because its business encourages business growth, that helps their investments grow.
Thus, for both producers and consumers, inflation that exceeds the band set by the BSP is not a very good situation, especially if, like it is at the moment, it is persistent beyond forecasts. Thus, inflation needs to be tamed as soon as possible.
We have learned enough to know that this inflation is not temporary as some thought at the start of 2022, and the war in Europe has exacerbated the already tough economic conditions brought about by the global pandemic and high logistics costs.
Thus, a tough balancing act will be needed to lower inflation by monetary means while keeping some liquidity for small businesses to keep their heads above water.
Both government and the private sector will need to work closely to put measures in place to lower inflation. This includes local governments and local business groups looking into ways to bolster local economic growth while keeping costs low. Our regional development councils need to be at the forefront of these ideas and efforts, since all participate in it. New ideas, both short and long term, will be needed, and measures to execute these measures crafted to maximize their positive effects and reduce the negative impact on local economies.