IT seems that the favorite topic nowadays is the August inflation rate of 6.4 percent which is at a nine-year high, and to the common masses, the impact of such a high inflation rate on their daily lives. The government is citing international events, such as the increasing global prices of petroleum products, as the primary cause of our high inflation rate. If that was indeed the case, our other Asean neighbors should be similarly affected and see a spike in their inflation rates, as well. Alas, this is not so, the Philippines now has the highest inflation rate, overtaking the inflation rates of our other Asean neighbors that used to be higher than ours.
So what happened that caused this inflationary trend? If you were to look at the inflation chart, the upward movement started at the beginning of this year when the first phase of the tax-reform package went into effect. Naturally, when you tax basic commodities, such as fuel, coal, sugar and so on, the effect is inflationary. This is because they directly impact the price of basic commodities. Supposedly, the additional tax revenues that will be raised will be used for the “Build, Build, Build” program of the government. However, when consumers are faced with higher prices, there is a tendency for a decline in consumption because they could either no longer afford the product or consciously cut down on the demand to stay within their budgetary constraints. This means that the projected tax collections may also not be achieved by the government.
The Philippine peso exchange rate has also devalued by about 8 percent from the start of this year and is adding to the inflationary pressures, causing a further increase in the price of commodities. There is an argument that the peso devaluation is a good thing since it promotes exports and gives our OFW beneficiaries more bang for the foreign currency they receive. No doubt exporters and OFW beneficiaries will receive more pesos for the foreign exchange they receive, but the question is, will they actually be getting more? After all, prices of domestic goods, both local and imported, have also gone up, thereby eroding at least some, if not completely negating the foreign-exchange gains. If the peso devalued by 8 percent against the US dollar since the start of the year, this benefit is offset against the inflation rate, which is now at 6.4 percent.
It should be noted that in 2017 total OFW remittances only reached $28.1 billion while our total GDP was at $313.6 billion, indicating that a far greater number of Filipinos suffer every time that the peso devalues. Since the Philippines is also a net importing country, meaning we have a balance of trade deficit, having a weaker peso definitely contributes to the rising prices of consumer goods.
Inflation also slows down economic growth since interest rates are directly correlated to inflation rates. Think about it, as interest rates moves up, the consumer lending rates moves up also, making it more difficult for borrowers to meet their monthly amortizations for their auto loans, housing loans and other consumer loans. This would result in a slowdown in demand since people will hold off on their major purchases. Similarly, companies that have a higher borrowing cost, will have to pass this on to the prices of their products and services, resulting in additional price increases which, in turn, add to inflation.
Understanding the causes of inflation is one thing but knowing how to stop it is another matter altogether. Sometimes, inflation is like opening Pandora’s Box: once the bad things get out, there is no putting them back in.
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