Policy incompetence driving economy off the rails
BEN KRITZ
AHEAD of yesterday’s release of the official price inflation data for August, a Department of Finance economic bulletin attempted to preemptively sugar-coat what policymakers had to have known was going to be bad news with this optimistic observation: “The inflationary momentum is easing as shown by the forecast deceleration in the month-on-month price change to 0.38 percent from 0.51 percent last month, even as the year-on-year change is projected to hit 5.9 percent.”
That the DOF was already resigned to a higher August inflation rate was alarming enough, but their choice to make a point of “inflation momentum is slowing” to attempt to ease the blow was even more so, simply because it is completely irrelevant. “Inflation momentum” has already slowed this year. Between March and May, the inflation decelerated from a 0.5-percent month-on-month increase, to 0.2 percent, to just 0.1 percent in May, before jumping again by 0.6 percent in June. That was followed by a 0.5 percent monthly increase in July, and a whopping 0.7 increase in August to bring the current level to a nine-year high of 6.4 percent.
The August headline inflation rate of 6.4 percent took everyone by surprise, and that is a grave cause for concern. Days before the release of the data, the DOF forecast August inflation to hit 5.9 percent. The BSP predicted inflation would fall within a range of 5.5 to 6.1 percent. And the consensus among outside analysts, who largely take their cues from what official sources are saying, was for inflation to reach 5.9 to six percent.
As usual, the overall headline inflation rate actually disguised the seriousness of the current price environment.
Inflation in the National Capital Region hit seven percent. Inflation for the food component of the consumer price basket topped 8.2 percent. There is little likelihood the remaining months of the year will provide any relief, either.
Inflation pressure has always tended to increase in the so-called “-ber” months, due to massive consumer spending ahead of the end of the year holidays.
The only thing the administration’s economic minds got right with respect to their guess about August’s inflation result was to finally acknowledge that it is being driven mainly by supply-side pressures. For months, the administration has stuck to the increasingly unbelievable line that demand pressures – i.e., the result of the healthy economy created by the too much, too soon tax reform agenda and profligate government spending – have been driving inflation. Now the tone has changed. Perhaps the signs of widespread shortages of basic food commodities have finally become too great to ignore, or the August inflation rate simply passed some kind of threshold requiring a change in message.
The BSP has apparently taken the current circumstances and the administration’s acknowledgement of them as a cue to wash its hands of the inflation problem. In comments to the press after the inflation release, BSP Governor Nestor Espenilla tagged food supply shocks, particularly for rice, as the main cause of high inflation, implying that the problem was beyond the central bank’s purview. Monetary policy moves such as successive interest rate hikes and slight reduction in M3 money supply have done absolutely nothing to reverse or even slow the inflation trend, so the BSP is probably right to toss the problem back to the hands of its rightful owners in Malacañang.
Make no mistake, the current inflation crisis is entirely a creation of the Duterte administration. The only debate to be had is about what combination of mechanisms have been used to bring it about. Inflation more than doubled from 1.3 percent to 2.9 percent from the time Duterte took office in June 2016 to December 2017. It has more than doubled again since the implementation of the first package of the administration’s tax reform program in January of this year.
To what extent tax reform, particularly significantly higher excise taxes on fuel, vehicles, and other products, or outside factors such as oil prices each contributes to inflation can be disputed in detail, but it is an inescapable fact that the Philippine inflation rate is the highest, and has risen the fastest, of any of the six largest economies in Asean (Singapore, Malaysia, Thailand, Indonesia, Vietnam, and the Philippines). All of the others are contending with the same elevated oil prices as the Philippines (Singapore and Thailand are major petroleum importers as well), and all except perhaps Singapore are laboring under the pressure of currency depreciation, just as our country is.
The difference between circumstances here and in neighboring countries is one sign that the Philippine economy is not presently in capable hands. Another is the routine failure of concerned offices like the Department of Finance to make reasonably accurate forecasts. The August inflation forecast from the DOF was 0.5 percent too low, the third month in a row that it has significantly underestimated inflation, and its margin of error seems to be increasing. The DOF’s forecast was 0.4 percent below actual in July, and 0.3 percent below in June. Similarly, government economic managers grossly overestimated second quarter GDP growth, predicting a gain of 6.6 percent versus a more humble actual result of six percent.
If, despite having access to the full range of cumulative data at any point during a given month or quarter, economic managers cannot make a reasonably accurate forecast, it is very unlikely they will make effective policy decisions. After all, such decisions are forward-looking and necessarily rely on estimates of conditions at some point in the future. Doing that effectively seems to be beyond the competence of the government’s current economic team. It is a shortcoming that until now has just been inconvenient, but if not corrected, will lead to palpable hardship for many very soon.
ben.kritz@manilatimes.net
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