Of substance and spirit
Diwa C. Guinigundo
Make no mistake about it, but the relatively softer inflation reading for August 2022 of 6.3 percent should not lead one to celebrate that inflation is now over the hump. Inflation is yet to be tamed.
Unlike in the early part of 2022, inflation today is no longer limited to the supply side because second-round effects like increases in labor wages and transport costs have been triggered. Core inflation has become more entrenched, accelerating from 3.9 percent to 4.6 percent last month. Like the US Fed, we now realize how it is to be proven wrong in our notion that those inflationary pressures were transitory.
While inflation for oil-related transport decelerated from 18.1 percent in July 2022 to 14.6 percent last month, the pace remained rapid. Inflation for alcoholic beverages and tobacco as well as housing, water, electricity, gas, and other fuels were higher than the August overall average.
Oil is definitely the wild card here, and it has not ceased raging.
For Albay Rep. Joey Salceda, “the supply deficit of global oil is narrowing, and supply is increasing at a faster rate than demand.” Therefore, he anticipates “a rollback or net reduction in prices every month for the rest of the year for oil prices.” The Philippine government should start focusing its efforts on agriculture.
To some extent, this must be related to what Bloomberg reported last Monday from some internal Russian documents saying “Russia may face a longer and deeper recession as the impact of US and European sanctions spread, handicapping sectors that the country has relied on for years to power the economy.” This could force Putin’s foot to go soft on the gas on Ukraine. But with Putin at the helm, anything is possible.
As proof, crude oil prices rose in Europe after OPEC + announced its plan to reduce daily output by 100 thousand barrels led by Saudi Arabia and yes, Russia. Reported last Monday, this decision reversed last month’s output expansion by a similar volume that was good only for September. Immediately, Brent prices rose by $2.55/bbl over last Friday’s close. This will guide production and pricing for October and perhaps even beyond.
Overall, the unfolding global developments could only point to sustained inflationary environment. The IMF confirmed last August that the war in Ukraine could lead to a sudden stop of European gas imports from Russia. Uncertainty could be heightened when labor markets become tighter or inflation expectations are de-anchored. Inflation control has become more challenging.
This external scenario is bad for the Philippines.
Not only that. Policy-wise, the US Fed is expected to sustain its extraordinarily aggressive monetary stance. Recently at Jackson Hole, US Fed Chairman Jim Powell reiterated that inflation remained high, that interest rates should be expected to rise further, and tight monetary policy will stay far longer than normal. Such forward guidance could not be interpreted differently.
This will no doubt up the ante for the BSP to match those tightening moves. Otherwise, capital outflows are likely to continue, the peso is likely to weaken and inflation is likely to further perk up given the pass through from the exchange rate.
As we are still in the firefighting mode, two lessons should be clear from the US experience. One, never underestimate the role of inflation expectations. “Inflation feeds on itself, so part of the job of returning to a more productive economy is to break the grip of inflation expectations.” Volcker declared this in 1979 and Powell reiterated it more than 40 years later.
Two, acting fast and hard is a better strategy for the long term. Not doing it is to go unorthodox in both the frequency and the size of monetary adjustment. Enough of benign market analysts giving the central bank more time to digest the business news. We have smart economists at the BSP who can quickly process those market intelligence and macroeconomic statistics.
The US is also managing inflation via legislation. Last month, former US Treasury Secretary Larry Summers explained how the Inflation Reduction Act would do it. One, by reducing the budget deficits, demand would decline. Two, by providing subsidies and other forms of support, the supply of commodities would increase. And three, by using the government’s purchasing power more effectively to procure at low cost, prices could be brought down particularly for pharmaceutical goods.
For the Philippines, it should be incumbent upon the government to demonstrate its adherence to its fiscal consolidation plan, not too fast or too slow in achieving a decline in both the deficit and public debt relative to GDP. Focused and time-bound subsidies to small business and cash transfers to the very poor and vulnerable in society should sustain business and consumption activities. Consolidated government procurement could only be meaningful in inflation control if the budget department’s Procurement Service is purged of corruption and impunity.
Why else are we not bullish that inflation is already over the hump?
Aside from the unfriendly external sector, we have a pathetic situation in which we continue to grapple with ever-recurring supply shortages of key commodities like, this time, sugar, onion, and even salt. It is as if we don’t know that an immediate solution could simply be to deregulate those industries rather than debate the reality of shortages. La Niña is also a big threat to agriculture this month up to the next quarter given its 86 percent probability. Finally, the peso is expected to continue weakening given the strength of the US dollar and the impact of capital outflows and current account shortfall.
Yes, inflation should be the national issue today. Just like we are also in bad need of competent and honest leadership, inflation, to quote Warren Buffet, swindles almost everybody. And it is not over the hump yet.