OF SUBSTANCE AND SPIRIT

No one managed to hit the right inflation rate for February 2023. Yes, not one among the 17 economists in another broadsheet’s regular monthly poll published a couple of days before the Philippine Statistics Authority (PSA) announced the actual inflation the other day. Ranging from 8 percent-9.3 percent, the median emerged at 8.9 percent which was the midpoint of the BSP’s forecast of 8.5 percent-9.3 percent. Higher inflation expectations are quite entrenched, and perhaps now more backward-looking. This might aggravate the high inflation period down the road. The actual February inflation rate came out at 8.6 percent. Not departing materially from the January footprint, it reminds us of the August 2022 slowdown from July’s 6.4 percent to 6.3 percent that market players declared to be an early victory against inflation. But it only led us to see five consecutive months of price run-ups. What should also worry the monetary authorities is the bigger increase in core inflation from 7.4 percent to 7.8 percent. February 2022’s core inflation was a measly 1.9 percent which led many to dismiss creeping inflation then as supply-driven, and therefore transitory. Thus, despite the petitions for higher wages, utilities and transport charges, and oil price surges in early 2022, monetary accommodation was somewhat prolonged. The reasoning was that tightening monetary policy more decisively could affect economic recovery. We are wiser today. The economy proved to be more robust to have accommodated an earlier and more assertive monetary tightening than the paltry 25 basis points each in May and June. But the latest and higher core inflation means demand pressure is gaining more momentum. This lends credence to the BSP’s higher inflation forecast for this year at 6.1 percent. There are other disturbing aspects of the PSA’s inflation report. For one, the very slight deceleration in inflation was inspired by only one out of 13 commodity groups — the transport sector — which balked at 9 percent from 11.1 percent in January 2022. While housing and utilities as well as education and financial services maintained their previous months’ price movement, nine commodity groups sustained higher inflation including food. This means inflation remained broad-based in February. Oil price resurgence due to any strong economic activity in key parts of the global economy is enough to jack up transport cost again, perhaps motivating several second-round effects on the other commodities, too. What is urgent is for government to secure food supply through intensive assistance to farmers on logistical issues, break-up of food cartels, and intentional import liberalization because farmers and their families are consumers, too. In the long run, economy of scale should be pursued in agriculture, a turnaround from a ludicrous situation of having land-owning farmers who starve and remain impoverished. Achieving productivity gains should be the goal of any public policy on agrarian reform and agricultural development. We need a full-time, competent head of the agriculture department. For another, while month-on-month inflation in February was zero, those of its components were high. Food commodities such as milk and other dairy products showed high monthly momentum. We see the same story in the other commodity groups. More important, net of seasonal factors, month-on-month inflation in February actually amounted to 0.3 percent, about a third of the previous month’s reading. As long as there are embers, all that is needed is just a single spark. What could be that single spark could actually be many. The IMF research of February 2023 argued that wage price spiral risks remain contained (‘Wage-Price Spiral Risks Still Contained, Latest Data Suggests’) based on its update of the October 2022 World Economic Outlook for many advanced economies. This is a situation where nominal wages are able to catch up while inflation appears to moderate for a few quarters. This allows inflation-adjusted wages to gradually recover. The fund observed that “a sustained acceleration of wages and prices was rare.” This may not be true in the Philippines. When headline inflation remains high, and inflation for the bottom 30 percent of the population is inching toward double digit, cash ayuda would be limited. Those affected could only invoke wage adjustment as necessary to fight off further erosion of their purchasing power. A labor group had already initiated the move for a tripartite dialogue to discuss its pending petition for a wage increase. Kapatiran ng mga Unyon at Samahang Manggagawa earlier filed a ₱100 pay hike “to enable workers to recover their eroded purchasing power.” Labor has a point, and the labor department should engage them in a meaningful tripartite consultation with employers to ensure wage adjustments are consistent with labor productivity which has shown some respectable gains. The last thing we wish to happen is a stalemate that could erupt into a nationwide labor strike, or a lockout, both of which could upset economic recovery. In addition, government planners should not be too quick to downgrade their oil price projections for 2023. For instance, Forbes reported last month that Goldman Sachs projected oil prices at $92/bbl, definitely more robust than the OPEC + target Brent price of $80/bbl. Reuters also cited three OPEC+ member nations with a view of $100/bbl for some parts of 2023. The wild card remains the anticipated Russian oil cut which could offset any production increase especially from the US shale oil industry. America’s shale drillers are taking it easy despite the strong prices. We would also not risk using a strong peso as a macroeconomic assumption. The economy remains challenged by difficult external payments position. It would be interesting to see how, for instance, the shrinking of the fiscal space would translate into higher foreign borrowings which could over time weaken our balance of payments and the peso. Finally, as long as inflation continues to be outside the official target, inflation dynamics would remain precarious. There is no basis yet for the monetary authorities to pause. Monetary policy cannot ignore the still-high inflation momentum and expectations. Globalization can make imports more accessible but it might also require us to respond in synch with the US Fed. The weakening of the link between inflation and economic activity is something monetary authorities should be attentive to. More monetary actions are needed either to bring down inflation in terms of output loss, or to stimulate economic activity when inflation becomes too low. This development could only make forecasting and controlling inflation more costly or even more difficult. The 17 forecasters should take this to heart.