Time to be frank about inflation
BEN KRITZ
THE Philippines’ persistent, higher than expected inflation rate has been a contentious subject for months, pitting the government and its neoliberal supporters against public and consumer advocates, some of whom are wholly opposed to the current administration, and some who are generally supportive, but alarmed by developments.
The members of the Philippine Exporters Confederation (Philexport) mostly fall into the latter category. The alarm they expressed in a recent survey among their group strongly suggests that it’s high time inflation be regarded as the crisis it actually is.
Although the poll was informal, the results showed that a little more than half of exporters have reacted negatively to higher inflation by either putting off plans to expand their businesses, raising prices for customers, or both.
Nearly all of the exporters said packaging and fuel and power costs had increased, while about half said their shipping and transport costs had increased as well.
While it’s uncertain how representative the Philexport members are of Philippine businesses on a broader scale, in the absence of convincing evidence to the contrary, the conclusion that inflation is hurting the export sector in a worrisome way is certainly reasonable.
Exporters should be benefitting, perhaps even to the point of being inflation-proof, from the extended period of a weak peso.
In June, for example, the headline inflation rate was 5.2 percent, or in other words, prices in June 2018 were about 2.7 percent higher than they were in June 2017 (when inflation was 2.5 percent), since both are measured against a base year. Over the same one-year timeframe, the peso depreciated by about 5.6 percent against the US dollar; thus exports of the same dollar value in June 2017 and June 2018 should have gained about three percent in peso terms. A three percent gain in margins without an increase in output is a considerable boost. It’s not something which would be expected to result in “postponing expansion plans” and “raising prices.”
The government line on inflation, which has been repeated by most of the media, present company not excepted, is that the high inflation is largely the result of greater economic activity, in particular higher government spending for infrastructure, the weak peso, and elevated oil prices. Higher taxes, primarily excise taxes on fuel and punitive taxes on tobacco, alcohol, and sweetened beverages do contribute to inflation, the government has admitted, but only a modest 0.4 to 0.5 percent. In addition, lower income taxes and programs such as free tuition in government schools theoretically increased workers’ take-home pay. Thus, higher consumer spending also adds upward pressure to inflation. None of this is considered a real problem, however, because faster GDP growth will be the trade-off for higher inflation.
With the revelation that businesses that should be benefitting the most in the country’s current financial state are instead suffering negative effects, the explanations intended to cast inflation in at least a neutral light no longer stand up to scrutiny. The depreciation of the peso and higher oil prices are largely external factors beyond the government’s control, certainly. Their impact on inflation, however, is being aggravated by internal factors. The tax reform package that took effect in January in hindsight was at best poorly timed, and seems to have contributed more to inflation than government economists claim. Even if the effect is really 0.4 or 0.5 percent, that’s enough to push inflation over the psychological barrier of five percent.
Higher disposable incomes as a result of the tax and subsidized education programs don’t lead to broader consumer spending, but simply deeper spending as inflation soaks up much of the increase. And at least until now, the claim that higher government spending is helping to drive inflation upward is completely fallacious. The government has budgeted and allocated enormous sums for infrastructure development, but has so far only spent one-third to one-half of them due to poor absorptive capacity in agencies like the DPWH. The argument that there’s a positive trade-off between higher inflation and a higher GDP growth rate is likewise difficult to support. First quarter GDP grew by 6.8 percent, just 0.3 percent faster than the first quarter of 2017, and only slightly better than the 6.7 percent GDP growth at the end of the first quarter of 2016.
Complacency on the part of the government, the monetary authorities at the BSP, and to some extent an uncritical media has allowed inflation to go beyond being a side effect of economic growth to being a significant obstacle to growth. Inflation at its current levels is harming consumers and harming businesses, causing activity to slow. In order for policymakers to extricate the economy from the situation, they have to first acknowledge that the problem exists. The reaction to the latest inflation data, which will be released next week, will tell us much about how ready they are to embrace reality.
ben.kritz@manilatimes.net
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