Everything was normal until July 2022. For 25 years, Philippine inflation followed—lagging sometimes, leading occasionally—the price of Brent crude oil. A price chart of the two together is understandable to an eight-year-old child, let alone super educated economists. “Gee Papa, the lines go in the same direction”.
After a spike in March 2022 following the Russian invasion, Brent hit another high in June and has been in a downtrend since then from $121 to $82. July saw Philippine inflation year-on-year at 6.4 percent. August came in at 6.3 percent even as Brent went to $96.
But September inflation went up to 6.9 percent (Brent at $85) and October inflation went to 7.7 percent.
In my column on August 8, 2022, titled “Inflationary psychology,” I wrote: “Production costs for agricultural products in the Philippines are primarily fertilizer and transportation. And both of these prices reflect the global price of crude oil. But inflation is not only an economic event. It is also a psychological event. Because there is a genuine “inflation psychology,” once prices start going higher, people believe that the trend will continue.”
“Even if oil and other input prices go down, end-user prices may not follow. Inflationary psychology is why when prices go higher, they do not go back down as fast if at all.”
Brent is still in a downtrend and Philippine inflation is in an uptrend maybe even stronger than before. Why?
To combat “inflationary psychology,” we need to believe that we have seen the inflationary peak. I thought that was going to happen when Brent started a strong decline in early November. But November inflation came in at 8 percent with the uptick in the food inflation primarily influenced by the higher annual price increases in vegetables, tubers, and cooking bananas at 25.8 percent. The rice index only increased by 3.1 percent.
One condition is needed to stop inflation psychology: “The only factor that will bring consumer prices down is “price competition” between suppliers and that may take a year or so to kick in.” Food costs have both local and imported supplier competition.
Vegetable prices spiking, as exemplified by onions (not to mention salt to sugar), is the example. We import a lot of produce. However, there are imported onions through the front door and through the back door. Those suppliers are in competition. The legit importers must pay duty, which cuts into profit margins. The underground importers have to risk confiscation and fines. But the majority of end user prices are fairly much the same.
March 29, 2022: “Senators grilled officials for their supposed failure to stop the influx of imported agricultural products. Local vegetable farmers were losing an average of P2.5 million a day due to the influx of smuggled vegetables.”
September 28, 2022: “President Ferdinand Marcos Jr. has strict orders to stop agricultural smuggling.” Cutting off the supply of smuggled goods should be beneficial for honest importers. Except the number of “honest” import permits was reduced. But apparently, high prices are the fault of the “hoarders.”
Every grower of produce or livestock will hold products from the market if feasible to get a higher price. Joseph and Pharaoh stored grain at “normal” prices for seven years to sell when famine had people selling their land to buy that grain.
October 4, 2021: “Farmers blame trade liberalization, urge government for stronger protection against agricultural imports both smuggled and legally imported.” Yet, January 28, 2023: “Philippines Posts Record Onion Harvest in 2022.”
Now the government intends to import onions. “We can’t sit idly because one of the drivers of inflation is the price of onions,” says the Department of Agriculture. However, “The purchase would be a “temporary solution” and there are no further plans to import for now.”
That’s great to know. So, the 50-kilo bag of local onions I have been hoarding will still stay in the closet until all the imported onions are gone and then, like Joseph and the Pharaoh, I will make a financial killing. But the real question is, why is government so often on the wrong side of the trade?
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.