Inflation in August reached 6.4 percent topping economists’ expectations that range from 5.8 to 6.2 percent and the Department of Finance’s projection of 5.9 percent immediately before the announcement. More so, inflation in August marks the first time in nine years that it breached 6 percent. So, understandably, policy makers, economists and finance pundits have rushed to find the cause of the recent uptick in inflation. This essay is an attempt to summarily show the causes of extreme inflation in history and to show where the present inflation is from a historical point of view.
The causes of extreme inflation in history can be summarily shown in the attached figure. In the 1970s, inflation peaked at 34.5 percent in 1974 immediately after the 1973 Oil Crisis when the Organization of Petroleum Exporting Countries or OPEC embargoed its supply causing the global price of oil to increase from $3 to $12 (a 300 percent increase). Though less extreme, inflation spiked again at 18.2 percent in 1980 immediately after the 1979 Oil Crisis due to decreased supply of oil in the midst the Iranian Revolution causing the price to increase from roughly $20 to $40 (a 100 percent increase).
Inflation in the 1980s peaked at 50 percent in 1984. During the Martial Law years, multiple economic missteps with the help of two major global oil crises in the 1970s culminated in October 1984 when the government declared to its global lenders that it could no longer pay its debt on time. Of course, it did not help that political instability sparked by the assassination of Benigno Aquino in 1983 was heating. Inflation in the 1990s peaked at 18.7 percent in 1991 immediately after the oil price shock resulting from the first Gulf War and concurrently in the midst of global recession. Inflation yet again spiked to 9.7 percent in 1998 resulting from (1) the Asian Financial Crisis that began in July 1997 in Thailand that spread like a contagious disease and (2) the 1997-98 El Nino which is to this day considered as one of the worst in history.
Inflation in the present century first spiked at 7.8 percent in 2005 due to two outstanding reasons (1) one being the increase in the global price of oil from $56 in August 2004 to $88 in August 2005 (a 57 percent increase) and (2) another being the passing of the Expanded Value Added Tax Law or EVAT first implemented in 2005. Inflation thus far in the present century peaked at 9.3 percent in 2008 due to the Global Financial Crisis. Sometimes referred to as the beginning of the Great Recession, the consensus in the economics profession is that the said crisis is the worst since the Great Depression of the 1930s.
Fast forward to August 2018, inflation has reached 6.4 percent which, as mentioned, breached 6 percent for the first time in 9 years, and from January to August has averaged 4.7 percent. What are the causes of the recent uptick in inflation? The generally cited causes are (1) the increase in the global price of oil from $48 in August 2017 to $70 in August 2018 (a 46 percent increase), (2) the Tax Reform for Acceleration and Inclusion or TRAIN, (3) the depreciation of the peso vis-à-vis the US dollar which is the predominant global currency and (4) the rising price of rice due to the failure to secure buffer stock for the population.
Where is the present inflation from a historical point of view? The present inflation seems to be in the process of repeating 2005. As mentioned, the global price of oil increased by 57 percent in 2005 while the same increased by 46 percent in 2018. In addition, major tax laws were first implemented in 2005 and 2018, one of which is the EVAT law first implemented in 2005 and the other of which is the TRAIN law first implemented in 2018. From the supply side, the EVAT law in 2005 increased the VAT from 10 to 12 percent, while the TRAIN law in 2018 increased the tax on petroleum products, sugar-sweetened beverages and sin products and also reduced the VAT exemptions. From the demand side, in 2005, corporate income taxes were reduced from 35 to 30 percent, while in 2018, personal income taxes are reduced accordingly per income bracket.
Will the present inflation get worse than in 2005? It will mostly depend if the depreciation of the peso vis-à-vis the US dollar and the rising price of rice continue.