FIRST and foremost, allow me to greet our readers a memorable Christmas and bountiful New Year. It’s this time of the year again that we celebrate the birth of the Prince of Peace, who has been giving the world hope and inspiration against darkness and terror.
This holiday season, Filipino families are spending in different ways, maybe lavish or simple. But one thing is for sure, they have been spending above their normal expenditure pattern during Christmas period. Let’s blame it to the 13th and 14th month pay and bonuses, we all have more purchasing power to keep ourselves at pace with several exchange gift parties and reunions.
If we recall the classic law of demand in economics, a higher price discourages consumers to purchase more –a higher price reduces their ability to consume. In other order words, at a higher market price, you purchase less item for a good.
Although price is a necessary determinant of demand, it is not sufficient enough to curb consumption pattern as there are several other factors that influence our purchasing power. There are income, preferences or taste, relative increase in the number of buyers, prices of related goods (whether substitutes or complements), and expectations, among others.
Christmas prices are relatively higher compared to prices in other seasons of the year. That is why many economists have assumed that inflation won’t be arrested until the end of 2018 as we approach to the yuletide season. Consumption spending are also relatively higher compared to the rest of the year. Despite relatively higher prices in December, consumers have not reduced their consumption pattern. Maybe because there are quite inelastic to price changes because they have more disposable income at their pockets.
This makes us wonder if the classic law of demand is true in reality, say in the Philippines. I remember, the BPI’s Lead Economist, Jun Neri’s presentation showing the comparison between household consumption growth and inflation rate in the country from 2011 to the first quarter of 2018. Household consumption grew at around 6 percent at an inflation rate of around 3 percent, during the eleven year period. Interestingly, household consumption remains high at 5.6 percent in the years where inflation reached at 4.6 percent (2011) and 4.1 percent (2014).
Inspired by his presentation, I replicated it using Philippine data on inflation rate and household consumption growth from 1961 to 2017. Let us remember that the 1970s and 1980s experience soaring inflation reaching to 50 percent in 1984. Average inflation in 1960s is around 4 percent compared to around 5 percent household consumption growth. However in the succeeding two decades, inflation grew at 15 percent (1970s) and 16 percent (1980s) shrinking household consumption to 5 percent (1970s) and 2 percent (1980s). Household consumption started to recover in the 2000s at 4 percent with also 4 percent inflation rate. From 2010 to 2017, household consumption is now at 6 percent versus inflation at 3 percent.
The above data tell us that our consumption pattern is still affected by surging prices. But, consumers like us, maintain a certain level of “tolerance” in price increases. In short, we have reservation prices or the range of prices that we are willing to purchase a good. Beyond our reservation prices, we substitute away from consuming that item.
Therefore if prices are high “momentarily” but partnered with a relatively higher income, the public’s consumption pattern remains high, especially to keep abreast to the festivities of a yuletide season. But if prices remain high after December or within a decade, then it is another story that requires immediate and sustained government interventions.
Jhon Louie B Sabal is the OIC-Chairperson of the Department of Economics of Xavier University-Ateneo de Cagayan. Mr Sabal is a graduate of MA in Economics at Ateneo de Manila University.