Surprise inflation data spells trouble for PH economy
THE inflation rate for January, which was reported by the Philippine Statistics Authority on Tuesday, came as a nasty surprise to government policymakers and outside analysts, all of whom expected inflation to have cooled from December’s 14-year high of 8.1 percent. That did not happen, of course; in fact, January’s 8.7-percent inflation print established a new high, surpassed only by November 2008’s 9.1 percent, which at the time was largely attributable to the global financial crisis.
Just prior to the release of the inflation data, analysts polled by The Manila Times offered a consensus forecast of 7.6 percent, while the Bangko Sentral ng Pilipinas forecast inflation would fall in a range between 7.5 percent and 8.3 percent.
That the government was caught off-guard by the inflation report was evident in the noticeable delay between the publication of the data and a statement on the subject from Malacañang. In previous releases that offered more positive news, or were at least much closer to the government’s own predictions, encouraging and sometimes self-congratulatory statements from the government quickly followed. In this case, it was not until late afternoon that President Ferdinand “Bongbong” Marcos Jr. addressed the topic in a video statement. While inflation is high, he said, moderation of fuel prices and the government’s efforts to restore order in food prices should result in a reduction of inflation going forward, although it may take some time.
With all due respect to the President, it is difficult to share his optimism. The inflation report for January was troubling on a couple of counts that might not be immediately obvious to the casual observer, and do not bode well for the economy in the near term.
First, the fact that the government was so far off the mark in its forecast indicates that it does not have a good read on the overall economic situation. It is true that private-sector analysts’ forecasts were also hopelessly inaccurate, but they draw their conclusions from what the government signals, and it is rare for outside forecasts to disagree significantly with the government’s.
A second worrisome factor is that core inflation, which omits volatile components such as food and fuel, and therefore is considered a somewhat more consistent indicator, is also skyrocketing. That shouldn’t happen if inflation is just being driven by volatile food and fuel prices, as the President and others in his economic team have suggested. Core inflation in January reached 7.4 percent, up from 6.9 percent in December and just 1.8 percent in January 2022. While January’s 8.7-percent headline inflation rate was the highest since November 2008, one has to go all the way back to December 2000 to find a higher historical core inflation rate at 8.2 percent.
If high inflation persists, the economy is put at risk in a number of ways. As the Philippine economy is consumption-driven, the reduction in purchasing power can reduce growth. High inflation also disproportionately affects lower-income families because they must spend a higher percentage of their overall income on basic needs. High inflation can also lead to a dangerous condition called the wage-price spiral, where expectations of continuing inflation lead to demands for higher wages, and consequently higher prices for goods and services to cover the increased costs.
President Marcos was right to say that it will take some time to get inflation under control, but the real concern is that the standard approaches to managing inflation are clearly not working. Interest rates can only be raised by so much, and as things now stand, the aggressive adjustments made so far have had little effect. Nor has focusing on means to moderate food and energy prices without addressing their underlying productivity deficiencies.
Under benign economic circumstances, conventional policy-driven inflation targeting is a useful and effective tool; under current conditions, however, it is a futile, band-aid solution. The only real solution to the inflation problem is to prioritize improving productivity and supply fundamentals, particularly energy, food, trade and manufacturing output. Doing that will still consign the country to an extended period of higher inflation and economic stress, but it will at least progress toward some real stability.
