THERE’S so much hullabaloo in the social media since Wednesday about the surge of inflation to 6.4 percent. Many are concerned that we might become the next Venezuela, where inflation reached at around one million percent! So are we really moving to hyperinflation? Or should we be concerned at all with our inflation?
Many economists say that this is not permanent. Our country has experienced higher inflation rate in the past, the most recent one is in 2008 where inflation reached at around 9-10 percent. The GMA administration has addressed the concern through massive importation of rice and massive purchasing of domestic rice production. As a result, inflation decreased to 1.5 percent in the next few quarters. In short, with right government policies in curbing inflation, the 6.4 percent is nothing but momentarily.
According to the National Economic Development Authority (Neda), there are several factors that attribute to this quarter’s inflation. These factors include higher world prices on oil and gasoline, limited supplies of rice, meat, and fish, peso-to-dollar depreciation, more government spending, and an increase in the purchasing power of the Filipino consumers.
There is a growing suggestion to relax the quantitative requirement of rice importation in the country. Our country has no comparative advantage in rice production. Comparative advantage means that a country produces a good efficiently. Reasons include the lack of arable land and recurring weather disturbances. Thailand and Vietnam are two leaders of rice production in Southeast Asia, they produce a cheaper and more quality rice in the region. If we import from them, we give the public a choice to which rice produce to consume. Our government should move on from its rice self-sufficiency goal because it is not doable given our expertise in rice production and natural endowment in the country.
Another culprit is the depreciation of peso. As an immensely trading country, the exchange rate value of our peso affects domestic pricing. If more peso is required to purchase a dollar, then importers adjust the price in order to recover their loss of peso from buying in the world market. We should export more to offset the negative effects of a weaker peso.
Government spending is necessary to boost the economy but has inflationary effects. We have a similar experience to this during the term of President Marcos few quarters before the 1985 election. His massive government spending led to one of the highest inflation rate in our history. The Duterte government should strike a balance between stirring the economy and avoiding inflationary consequences. After all, maybe tertiary education or infrastructure projects are not just the concern of our public institutions, but of the private sectors as well. The silver lining of this is a higher government collection from value added taxes.
Lastly, although minimal, the effect of a lower income tax among consumers lead to greater spending. The Bangko Sentral has already increased interest rate to encourage our countrymen to save more. The monetary policy remains to be ineffective because Filipinos are not good in saving money after all. Some Economists even predict that the inflation rate is likely to remain until the end of 2018 since we are already entering the longest Christmas season in the world. Higher spending, due to higher disposable income, leads to higher prices.
Finding a better way to address inflation is complicated and sometimes cumbersome. The Duterte government should find a way to decrease higher production cost. It has to decide between protecting the local rice producers and protecting the greater public. Surely, there are better ways to help our farmers apart from imposing stringent barriers on rice importation.
The general public, on the other hand, must take part in curbing inflation. They should take advantage of a lower income tax. They should put more money in the banks or cooperatives. They have to save more. A higher aggregate savings rate would mean higher investment in the economy.
So, we should not be bothered of becoming the next Venezuela for so long as we maintain our sound economic policies like maintaining the existing money supply and engaging in international trade. This inflationary experience will become a thing of the past, in which, something we can learn about. After all, addressing inflation requires a collective effort, that the government must find the right (but not necessarily popular) approach in addressing inflation and the general public to learn the skill of saving money.
Jhon Louie B Sabal is an instructor of Economics at Xavier University-Ateneo de Cagayan, who teaches International Economics, Managerial Economics, and Microeconomics. Mr. Sabal is a graduate of MA in Economics at Ateneo de Manila University.