OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
Just when Philippine inflation appeared to have been tamed based on its month-on-month movement in December 2022, inflation shocked the market with the highest annual rate since November 2008.
For last Tuesday, the Philippine Statistics Authority reported that the January 2023 inflation soared to 8.7 percent from 8.1 percent in December 2022. This broadsheet actually reported late last month that the BSP assured the investors in Frankfurt that “we’re already beginning to see signs that month-on-month inflation is normalizing.” Our economic managers were one in saying that there was a greater likelihood that we would achieve the two to four percent inflation target earlier than expected.
Inflation in emerging markets like the Philippines could indeed be very stubborn and volatile, no less stubborn and volatile than Katherine, Shakespeare’s shrew. Now mostly supply driven, Philippine inflation could be as unpredictable as the weather. Like Katherine, domestic price movements cannot just be ordered around or placed in a box. She has this ability to attract denigration by all the characters in Shakespeare’s play; imagine now, even basic commodities as onions, garlic, eggs and salt have become non-essentials because of their steep prices.
We understand BSP’s travails in taming that shrew. While nobody can discount BSP’s suite of econometric models, early warning systems in both the macroeconomy and the financial system, monitoring of business and financial cycles, business and consumer expectations survey and a host of high-frequency indicators, there are just things that cannot fit into some analytics.
Cartels, hoarding, bad governance surrounding commodity production, marketing, importation of substitutes, and exchange rate movements are the dark side of the shrew. If they don’t shape up, inflation sizzles with great outbursts. The January episode is one of such outbursts.
But Katherine had Petruchio to tame her. It was he who tried all the tricks in the book. To his credit, Petruchio demonstrated his ability to match Katherine’s sharp tongue and smart wit. One can argue that it was his extraordinary self-confidence that finally put her in place, declaring Katherine agreed to marry him even when she had not. When we first watched this play at London’s Barbican Center 40 years ago, we were amazed at how the shrew parroted Petruchio’s calling the sun, the moon.
What can we extract from the shrew’s January 2023 outburst?
It was auspicious for the BSP to have announced last weekend that the Feb. 16 Monetary Board meeting “will focus more on ensuring that inflation will continue to decelerate rather than what the US Federal Reserve is doing.”
First, many items in the consumer basket continued to contribute to higher inflation. It was housing, water, electricity, gas and other fuels that caused the biggest pressure, rising from seven percent in December 2022 to 8.5 percent. Food and non-alcoholic beverages remained in double digit, escalating from 10.2 percent to 10.7 percent. On third was restaurants and accommodation services which climbed from seven percent to 7.6 percent. Most of the other commodity groups showed larger adjustments. Inflation clearly continued to be broad-based across items, with sizeable increments.
What is interesting from the numbers is that the individual commodity inflation rates sustained their levels at double digit like flour and other bakery products, milk and other dairy products, corn, oils and fats. And yes, sugar inflation continued to be earth shaking at 38.8 percent.
Second, by location, inflation gathered momentum in both the National Capital Region (NCR) and areas outside NCR (AONCR). Inflation in NCR accelerated by a full percentage point from 7.6 percent in December to 8.6 percent in January 2023. In AONCR, inflation rate swelled from 8.2 percent to 8.7 percent. Inflation became more generalized across the various regions.
Third, month-on-month inflation indicates an enormous acceleration, rather than an expected slowdown. There was some transitory pause of 0.3 percent in December 2022 after two successive month-on-month inflation rates of 0.9 percent or annualized 10.8 percent, but the January 2023 inflation raced by 1.7 percent or annualized 20.4 percent. Net of seasonal factors, the January month-on-month inflation tipped the scale at one percent or annualized 12.0 percent.
Inflation, the shrew, turned more sinister when we drilled down on food and non-alcoholic beverages. With seasonal and without seasonal factors, their month-on-month inflation reached 2.7 percent or 32.4 percent annualized inflation and 1.6 percent or 19.2 percent annualized inflation, respectively. Since poor Filipinos can only afford the basic food commodities and some soda drinks, it’s not even the headline inflation of 8.7 percent that they have to contend with, but the higher inflation rates of the more basic commodities.
Should the shrew tamer be worried?
From both the supply and demand sides, yes.
Demand pressures are building up. Core inflation continued to rise from 6.9 percent in December to 7.4 percent in January 2023. Last year, core inflation was much lower at only 1.8 percent. This measure of underlying demand pressure should firm up BSP’s resolve to continue focusing on inflation.
Supply bottlenecks have never been problematic. While monetary policy is not cut out for dealing with low inventories and weak supply chains, without a demonstration of its firm commitment, the BSP might risk allowing inflation expectations to run out of control like last year when it hesitated to act and act fast.
Significant gains in the headline number could always drive inflation expectations. With such a huge footprint, last month’s inflation rate could start business and households worrying again. Onion prices have started to move down but in a glacial fashion. Oil prices are teasers; there are more ups than downs. Market talk is now focused on rising egg and garlic prices.
Thus, last Monday’s array of inflation forecasts for January 2023 could not have been more graphic as a commentary of how difficult it is to forecast inflation. But BSP’s job is more complicated, and therefore more difficult. It is to anticipate the shrew’s next move and prepare to fence her in.
If this is any consolation, Petruchio actually succeeded in taming the shrew, and there was a happy ending.