November inflation

The Philippine Statistics Authority (PSA) reported this week that the year-on-year increase in prices rose more slowly during the month of November to an inflation rate of 6 percent. The headlines were quick to point out that this was the first drop in 2018.

Since everything must have a political spin, pro-administration folks were wondering why if President Duterte were to blame for increased inflation, then he should be credited with a decrease in the rate of increasing prices.

Trying to keep both sides of the political agenda narrative in context is difficult.

Presidential Spokesman Salvador S. Panelo “attributed the lower inflation to the President’s ‘empathy to public clamor’ and his ‘decisive action’ to stabilize the prices of agriculture and fishery products at reasonable levels, as well as keep their sufficient supply in the markets.” To a certain extent, he is correct as this helped break the inflation psychology that has developed over the last months.

The Nikkei Asian Review had this to say: “Slowing food and oil prices were the main contributors to the inflation slowdown. This stems from Duterte’s measures, which range from the easing of restrictions on food imports to the lifting of non-tariff barriers to boost supply. The fall in oil prices also contributed to the drop.” How nice of them to mention that falling oil prices contributed to the inflation rate decline.

Consider this. On October 15th, the average price of gasoline in the Philippines—as calculated by—was P60.87. As of November 26th, the average price was P52.90 or 13 percent lower. According to the Department of Energy, the common price of “unleaded gas” in Metro Manila fell from P59.15 to P49.15 or by 17 percent.

Looking at the details of the internal data of the inflation report reveals both the impact of the increase in taxes earlier this year and the impact of changes in oil prices. The conclusion is that—as has been said repeatedly—oil prices are a critical inflation driver both higher and lower. Further, the inflation number has been “distorted” by the tax increase and while prices are significantly higher because of higher taxes, the inflation rate hopefully will return to “normal” by the end of the first quarter 2019.

Of the 11 “commodity groups” that are measured to chart inflation: education, communication, clothing, recreation, furnishings, housing and utilities, health care, and restaurants all recorded a 4.5-percent increase or less. These purchases were affected only slightly by the tax increase. “Transport”—up 8.9 percent—felt price pressure from both taxes and oil prices. Food and nonalcoholic beverages—up 8 percent—was also hit by taxes, oil prices, and, in some cases, supply problems. But alcoholic beverages and tobacco prices again skyrocketed by 21.8 percent over the same period in 2017 due to the excise tax increase.

The “inflation basket weighting” of the various categories is not equal, and while beer and cigarettes are not as large a purchase as food and soft drinks, the increase in excise taxes will be smoothed out in a few months. We will not see that 21.8 percent inflation next March. However, the government decision to raise fuel taxes is not going to help keep prices steady and certainly not lower.

If the administration is adamant on increasing these fuel taxes then inflation is going to be a continuing problem regardless of President Duterte’s “empathy to public clamor” and his “decisive action”. We all better hope that global crude oil prices continue to fall or at least stay at current levels.



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