OF SUBSTANCE AND SPIRIT

As we observed in our In Brief for GlobalSource Partners last Monday, the Jan. 5 release of the December 2023 inflation report in the Philippines could signal another episode of price downtrend. At 3.9 percent, the December inflation is the fourth month marked by price downtrend, starting last September from a peak of 6.1 percent, down to 4.9 percent and 4.1 percent in the succeeding two months.

Looking back, the initial episode started from a peak of 8.7 percent in January 2023 and concluded in July by settling at 4.7 percent, though still outside the 2 percent-4 percent inflation target.

The Philippine Statistics Authority (PSA) reported that the lower index trend of housing, water, electricity, gas and other fuels helped compress inflation. Food and non-alcoholic beverages also supported the slowdown in prices.

Are we seeing a final resolution to the problem of high consumer prices?

Perhaps, not quite as yet.

For not too long ago, our people had struggled against skyrocketing rice prices even against onions that were so scarce they priced themselves out of the market, beating beef and pork. Inflation slowly gave way to shrinkflation, that situation where goods shrank in size and weight even as their prices remained steady. Fuel, power, water and communication services continue to escalate and some claim, even beyond the margin of adjustment of global fuel prices.

This is the reason why the monetary authorities have consistently argued for the government to quickly execute non-monetary measures to mitigate the supply side. While admittedly structural, the issue of higher production can no longer be deferred by public policy now or in the future. Obviously, one of the reasons why the President decided to appoint a full-time agriculture secretary is the foul-up on the supply side, that the bottlenecks in crop production cannot be addressed by higher importation alone, year after year. Depending on other countries’ productivity simply masks the failure of government to solve the basic issue of food security.

We seemed to mimic what the US recently experienced, from manufacturing shortages to transportation blockages, and we looked helpless, especially during and immediately after the pandemic. Two years of high inflation meant two years of economic disenfranchisement.

But there is an interesting twist to the issue of inflation — and this is the finding of Isabella Weber and her colleagues at the University of Massachusetts Amherst that excessive oil and gas prices and profits are behind the US inflation and unequal distribution of income. The researchers found that the two largest oil companies in the US, ExxonMobil and Chevron realized what is now called profit explosion in 2022, the highest in their corporate history, and these windfalls were also reported by other oil companies.

The reason is two-fold: fuel prices soaring high in the aftermath of the Russian invasion of Ukraine, and these oil companies’ suppression of investments. Weber and her colleagues also showed that undue industry concentration was behind this price spiral. Corporates have the power to set higher prices. Recognizing this, the US democrats have proposed some forms of taxing excess profits. Short of such fiscal measures, supply-side challenges could require substantial sacrifices for many Americans in terms of lost jobs and lower purchasing power.

In July 2023, Weber in The Asset further claimed that the European Central Bank (ECB), Organization for Economic Cooperation and Development (OECD), Bank for International Settlements (BIS) and the European Commission (EC) “have all published studies showing that profits have accounted for a large share of inflation.” She quoted the International Monetary Fund (IMF) tweet: “Rising corporate profits were the largest contributor to Europe’s inflation over the past two years as companies increased prices by more than the spiking costs of imported energy.”

In plain language, while global energy cost has risen massively, the cost of final goods and services to the ordinary consumers is many times higher because manufacturers and big companies with pricing power tuck in higher profits. This is not something that economists normally look into because data may not be as readily available as wages. Economists would always blame higher wage increases as driving inflation especially if they are not supported by higher productivity. Wages have been the whipping boy of employers’ confederation when confronted by labor demand for some wage adjustment.

As Weber commented, this simple truth led Adam Smith to say 250 years ago that profits can drive price pressures.

This actually happened based on the IMF’s own narrative. During the first oil crisis in 1973, labor managed to protect itself from the shock by a corresponding increase in unit labor cost while profits actually fell. In contrast, today, the IMF found that increased profits contributed 40 percent of inflation. Its first deputy managing director Gita Gopinath went as far as declaring that “if inflation is to fall quickly, firms must allow their profit margins…to decline.”

The Fund’s drift demands some innovative strategy that involves what Weber would describe as “disciplining runaway profits, incentivizing investment, increasing productivity, and encouraging firms to make money the old- fashioned way: by selling more products at fair prices.” Spain demonstrated that doing all of these could yield an inflation rate lower than the ECB target. Growth in unit profits was broadly aligned with the growth in unit labor costs.

Short of that, real wages can be expected to fall, and to fall significantly lower than in the past. As ECB President Christine Lagarde was quoted: “Workers have so far lost out from the inflation shock…which is triggering a sustained wage ‘catch-up’ process.”

Similar dynamics in the Philippines must be behind the recent results of Pulse Asia Research’s December 2023 “Ulat ng Bayan Survey” conducted between Dec. 3 and 7, 2023 with a sample of 1,200 representative adults 18 years old and above.

For many surveys in recent years, controlling inflation has consistently topped the list of major urgent national concerns. The latest finding shows 72 percent of all respondents rated inflation control as the most important issue. This response rate was nearly steady a quarter earlier in September 2023. Second, 40 percent of the respondents also expressed the imperative of increasing workers’ pay. These two issues are at the heart of real wages. High inflation eats into wages and unless wages are jacked up, real wages inevitably fall. The third and fourth most urgent national concerns were creating more jobs (28 percent) and reducing the poverty of many Filipinos (25 percent), both of which are complementary measures to keep Filipinos afloat.

The price statistics may say otherwise, but for many among us inflation control has many more miles to go.