Inflation and the Filipinos

Among the many conditions/consequences caused by the pandemic, inflation in the economy is now a major concern of the government. In spite of the weakened Philippine economic growth in 2020 and 2021, inflation has gone up to 4.5% in 2020 and another 4.5% in 2021. The Bangko Sentral ng Pilipinas (BSP) and the National Economic Development Authority, have made announcements explaining these developments and what they are doing to contain the rate of inflation in the coming years. Given that the pandemic is not over, that the government is overspending, that the BSP is infusing more liquidity into the financial system, that production is constrained, and the supply chain disrupted, this will not be an easy task and will be difficult to achieve.

Inflation is the general increase in the prices of goods and services, and the decrease in the purchasing power of money over a time period. This is usually measured annually and stated in percentage increase over the previous year. Since the end of World War II after the establishment of the World Bank and the International Monetary Fund (IMF), inflation rates in most countries have been reliably measured with a standard formula in terms of the component of goods and the adjustments of the base years. But even without the official government statistics on inflation, consumers are always aware of the price increases of the basic necessities, or how much less their food budgets can buy. Individual items price increases vary but over the past 35 years, ?1,000 pesos has bought less rice, vegetables, meat, gasoline, and cooking fuel. Transportation fares, medical services, haircuts, and others have also increased 500% over the same years.

Data on Philippine inflation for 35 years from 1986 to 2021, shows an inflation rate range of less than 1% in 1986 to a high of 19.33% in 1991. In 1986, the year of the People Power Revolution, the economy was on its knees after shrinking in the martial law years. People had no livelihood and no money so there was no demand, therefore prices were not increasing. As the economy under a democratic rule normalized, inflation or price increases range from 3% to 11% until 2008. Then this decelerated to the 1% to 4% range from 2009 to 2016. It shot up to 5.21% in 2018 but settled back to 2.49% in 2019 until the pandemic staggered our economy. Although it would not be exactly accurate to make a mathematical average of the 35 years inflation rate due to the changes in the base year and the component in the consumer basket, it looks like the average annual inflation rates in the Philippines is 7% in the last 35 years. Except for the Japanese occupation years of hyper-inflation with Japanese-printed money, the Philippines did not experience excessive inflation like some other developing countries in this time period.

Price inflation is caused by the increase in demand which cannot be met by the available supply and/or the increase in the cost of producing the product or service, a demand-pull and/or a cost-push. Too much money supply or excess liquidity in the market creates the increased demand and the producers may take time or may not be able to increase the supply. This is why the BSP controls money supply by limiting government borrowings, and other monetary policies that limits bank lending. Government spending also increases money supply, so governments have to also control budget deficits too. The recent spike in Philippine inflation was caused more by higher production cost of products and services as the pandemic restricted raw material availability and delivery expenses ballooned.

While everybody is affected by inflation, the lower economic classes are more impacted as they have limited capacity to improve their earnings to cope with the rising prices. The middle class may weather a 3% to 5% annual inflation but they will grumble and vote out the government in the next election. In the latest Nomura Securities Inc. analysis of who among the presidential candidates will be better at attracting investments, controlling inflation, and managing the Philippine economy, guess who came up at the top?