The inflation rate has become one of the most anticipated economic data these days, amid surging prices of crude oil in the world market and the prohibitive cost of rice in the Philippines. It is one economic indicator that government policy-makers and company executives take seriously in planning ahead.
The Philippine Statistics Authority (PSA) is expected to announce today (June 5) the May 2018 inflation rate, which would likely influence future decisions by the Bangko Sentral ng Pilipinas and the government. The latest BSP assessment puts the inflation rate in May within a range of 4.6 percent to 5.4 percent, faster than April’s 4.5 percent, on the back of higher petroleum and rice prices.
The inflation rate, or the movement of prices of goods and services in a given period, impacts on household income and spending. An inflation that falls within expectation is normally a result of stable economy and proper monetary policy. Businesses want inflation to be steady, so that they can appropriately chart their expansion strategies.
An inflation rate above the target range, meanwhile, could lead the BSP to tighten its monetary policy in the form of higher benchmark interest rates. At the same time, a higher-than-expected inflation could force the government to raise the minimum wage, approve higher transport fares or adjust the suggested retail prices of basic commodities.
Over the past five years, inflation rate fell within the Bangko Sentral’s target range of 2 percent to 4 percent. The annual inflation averaged 2.6 percent in 2013, 3.6 percent in 2014, 0.7 percent in 2015, 1.3 percent in 2016 and 2.9 percent in 2017 using the 2012-based consumer price index series, data from the PSA show.
The low-inflation regime has allowed the central bank to reduce interest rates to record-low levels in recent years, which enabled businesses and households to get cheaper loans from banks, boosting investments and spending in the process.
Two factors behind the low inflation rates in recent years were abundant food supply and low petroleum prices in the world market. When crude prices began to surge this year and rice prices also climbed amid perception of tight domestic supply, inflation began to trend up. This was complicated by the weakening of the peso against the US dollar, which pushed the domestic value of imported commodities higher.
Driven by these factors, inflation rate hit a five-year high of 4.5 percent in April 2018, faster than 4.3 percent in March, which were both slightly higher than the target range. Inflation averaged 4 percent in the first four months of 2018.
The BSP expects inflation to remain high in 2018 and decelerate toward the midpoint of the target range in 2019. To help ease the price increase, the central bank raised the overnight borrowing rate by 25 basis points to 3.25 percent on May 10.
Amid rising consumer prices, there were talks about suspending the fuel excise tax provision in the Tax Reform for Acceleration and Inclusion law, once the three-month average Dubai crude price breached the $80-per-barrel level. This could well provide a temporary relief to consumers, although this may also affect the government’s revenue collection.
Another significant driver of inflation is the price of rice, because it is the biggest item in the so-called CPI market basket. Unfortunately, there were too much speculations over supply shortage in the market, which eventually led to higher prices.
This situation can be easily resolved by flooding the market with rice from local farms and foreign suppliers. Informed of the situation, President Duterte abolished the quota system in rice importation, allowing everybody to buy the staple from abroad. Hopefully, more rice would be available in the market this month.
Despite the upward trend in inflation, I think the situation remains manageable. The government’s economic managers and Bangko Sentral’s monetary experts would not allow the situation to go beyond their control. I still remember when the inflation rate was in double digits (50.3 percent in 1984 and 23.1 percent in 1985), which affected the growth trajectory of the Philippine economy.
But inflation has eased to single-digit level over the past decade, which speaks of our current level of macroeconomic stability. We should continue to watch inflation rate, along with all the factors driving consumer prices higher, in order to sustain the economic gains we have achieved as a nation.
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