SLOWING inflation may be good news for some but this may also indicate weaker demand, thus, lower economic growth, according to local economists.
On Tuesday, the Philippine Statistics Authority (PSA) reported that inflation slowed to 4.9 percent in October. This is the slowest rate recorded since April 2022 when inflation was at the same rate. (Full story: https://businessmirror.com.ph/2023/11/07/inflation-slows-to-4-9-in-october/)
The inflation rate was also below expectations of most analysts, including the Bangko Sentral ng Pilipinas (BSP) which projected inflation to average 5.1 to 5.9 percent in October. (Full story: https://businessmirror.com.ph/2023/11/02/bsp-now-projects-october-inflation-at-5-1-5-9/)
“It’s possible that inflation may have also been slower due to slowing demand. The interest rate hike could also be a factor,” Ateneo de Manila University (ADMU) economist Leonardo Lanzona told BusinessMirror
on the sidelines of the Philippine Economic Society (PES) Annual Meeting and Conference on Tuesday.
Lanzona said if he were to choose between an economy that had high inflation but fast economic growth and one that has low inflation but slow GDP growth, he would choose the former.
“Essentially you can explain lower inflation because of the slowing down of the economy. But that may not necessarily be a good development because that would mean lesser job opportunities and in general income generation [will be low]. So you might have lower inflation [but] you’re not really better off,” Lanzona explained.
Socioeconomic Planning Secretary Arsenio M. Balisacan also told reporters on the sidelines of the same event on Tuesday that inflation may have also eased due to base effects, but qualified this later.
It may be noted that inflation was at 7.7 percent in October 2022. At that time, rice prices shot up to 17.9 percent, whereas it has since slowed to 13.2 percent in October 2023.
Balisacan said these significant declines in prices cannot be explained by mere base effects alone. He said there was a real reduction in prices that led to slower inflation in October.
“It’s true mayroon din siguro some of the base effects but I think it’s not substantial,” Balisacan said. “It’s [inflation] quite a substantial drop from 6.1 [percent] to 4.9 [percent].”
However, given that prices of rice, the country’s staple, still posted double-digit growth in October 2023, this means the government still needs to closely monitor prices, Balisacan said.
This also means, he said, it is crucial to ensure the country’s trade policy remains sensitive to the availability of supplies, particularly the level of production so that the country does not experience shortages.
Nonetheless, the National Economic and Development Authority (Neda) Secretary remains confident that the 4.9-percent inflation would be sustainable.
Balisacan said the country may be able to attain its 2 to 4 percent inflation target early next year, especially if the Philippines can sustain this momentum in the slowdown of commodity prices.
Food is critical
“I think the food is the critical thing there. And for so long that energy prices, oil prices would not increase further, I think [there’s] a good [chance we will sustain it],” Balisacan said.
“November, December, [and] January, those are good months for the food sector [because there is minimal] risk [of] typhoons, monsoon rain. It’s also replanting second crops for many other areas in the country so it should be okay,” he explained.
On rice prices, Bank of the Philippine Islands Chief Economist Emilio S. Neri Jr. told this newspaper on Tuesday that part of the slowdown in rice prices could be traced to the Rice Tariffication as well as the last quarter harvest.
Neri also said as long as global benchmarks for the commodity continue to slow, there is no reason for concern regarding high rice prices.
Given this, Neri said they may not need to adjust their inflation forecast since the latest number is still within their expectations. This, however, assumes that no further shocks occur.
In terms of oil prices, University of Asia and the Pacific economist Peter Lee U is uncertain how oil futures are going to behave given the continuation of the Russia-Ukraine war and the conflict between Israel and Hamas.
At best, U said the uncertainty caused by the two conflicts as well as the weakness in the global economy would likely keep oil prices at the current levels.
The Neda, however, considers the El Niño to be a threat to inflation. The dry spell is expected to linger until the middle of next year.
The country is experiencing a moderate El Niño, which is expected to strengthen until the second quarter of 2024, according to the Philippine Atmospheric, Geophysical and Astronomical Services Administration (Pagasa).
Neda said this is expected to bring in below-normal rainfall across the country and may adversely impact agriculture production and energy generation.
In line with this, the Department of Social Welfare and Development (DSWD) is currently implementing the pilot run of the Food Stamp Program (FSP), which the agency will scale up in mid-2024.
The Economic Development Group (EDG) also recommended extending the reduced tariff rates for Most Favored Nation under EO No. 10 (s. 2022) until the end of 2024, subject to midyear review.
“It is important to ensure that the most vulnerable sectors of the society are protected and provided assistance, especially while food prices remain high and we expect El Niño to affect local and global food production,” Balisacan said in a statement.
“While we are providing short-term measures to address effects of inflation through subsidies and importation, we also need to address long-standing challenges in agriculture and food supply chain and help our local farmers boost their productivity and resilience through investment in irrigation, flood control, supply chain logistics, and climate change adaptation,” he added.
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