ANALYSIS: No fun coping with Asia’s fastest-rising consumer prices

Jose Galang -- Your Business

Posted at Apr 05 2018 01:52 PM

Not only has the Philippines lost its claim to being the fastest-growing economy in Asia, it is also now home to the region’s fastest-rising prices of basic consumer goods.

Government statistics announced today showed that the annual rate of increase in the prices of basic goods and services moved up to 4.3 percent in March, compared to 3.1 percent in the same period last year.

For the first three months of the year, consumer prices have risen by an average 3.8 percent, based on the Philippine Statistics Authority’s revised price index formula. This first-quarter average was a sharp climb from the 2.9 percent posted in the same period last year, and from 0.6 percent the year before.

A much higher year-to-date increase of 4.4 percent, pushed up by a 4.8 percent rate in March alone, comes out using the old formula that was set aside two months ago.

This trend follows estimates by government and independent economists of an annual inflation rate of up to 4.5 percent this year. That projected rate will represent a big acceleration from 2.9 percent in 2017 and 1.3 percent in 2016, the start of the Duterte administration.

Inflation in the Philippines is now fastest among Asian economies. In Indonesia, the rate was 3.4 percent in March, with the nation’s central bank setting a full-year 2018 target of 3.5 percent. Vietnam consumer prices rose 2.7 percent in March, and are forecast to increase by around 3.7 percent by yearend.

Slower inflation rates have been reported by authorities in Malaysia, at 1.4 percent in February; Thailand, 0.3 percent in March, with the full 2018 rate seen at 1.1 percent; Singapore, 0.6 percent in March, projected to reach 1.0 percent for the entire 2018; Japan, 1.5 percent in February, with the 2018 target set at 2.0 percent; South Korea, 1.3 percent in March, and China, 2.9 percent in March, with the 2018 annual rate forecast at 2.4 percent.

Pessimism on the rise

All this is not lost on the Filipino consumers. Already struggling with income levels and employment rates that fall below needs, Filipinos now feel a lot less optimistic about prices and the economy in general, according to results of a Bangko Sentral ng Pilipinas survey of consumer confidence in the first quarter of 2018.

The survey showed that the margin between optimists against pessimists among the respondents across the nation plunged to just 1.7 percent, compared to 8.7 percent in the same period last year. Negative sentiment grew during the period to almost exceed the level of optimists. The drop was even sharper compared to the 4th-quarter 2017 level of 9.5 percent.

Conducted over the period January 24 to February 3, the survey showed that the surge in negative sentiments arose from accelerating increases in prices of consumer goods, low incomes, and a rise in household expenses. Additionally, the survey respondents also aired worries about increases in household debt, the impact of typhoons and other natural calamities, and poor harvest in the farming sector.

Households expressed concerns too that this pattern of increasing prices and low incomes leading to greater pressure on household spending, could continue until the end of this year and into the early part of next year, according to the survey.

As expected, the crunch is felt more severely by families in the low-income group than those in the middle- and high-income groups. But the rise in gloomy expectations, particularly in overall economic and family conditions, was marked across all income sectors.

Price hike leaders

In March, according to the newly released government statistics, price increases were fastest in the food, alcoholic and non-alcoholic beverages and transport sectors. In the revised basket of goods and services used by the statistics agency as basis for computing inflation, food takes up a nearly 35.46 percent shares while transport has nearly 8.06 percent.

Prices of food and non-alcoholic beverages rose 5.9 percent in March while transport costs moved ahead by 4.6 percent. Alcoholic beverages and tobacco, with heavier taxes imposed on them, became more expensive by 18.6 percent in March.

Costs related to housing, water, electricity, gas and other fuels comprised 22.04 percent, the largest expense item in the family budget. Price increases in this group hit 2.9 percent in March, slower compared to 3.4 percent a year ago.

Price increases were at a faster clip in Metro Manila, which experienced an overall inflation rate of 5.2 percent in March, with food prices rising by 7 percent, transport costs by 5.2 percent, housing, water, electricity, gas and other fuels by 4.6 percent. Prices of alcoholic beverages and tobacco products surged ahead by 21.7 percent in March in the national capital.

In areas outside Metro Manila, the inflation rate was 4.1 percent in March, fueled by higher price increases in all commodity groups. The highest inflation rate was noted in the Autonomous Region of Muslim Mindanao while the lowest was in Central Luzon and the Caraga region.

Government and independent economists now expect the inflation rate for the whole of 2018 to hover at 4 percent or higher. This is because manufacturers are expected to continue to pass on to consumers the added costs resulting from the wave of excise taxes imposed this year under the so-called TRAIN tax scheme.

Policymakers unmoved

But the economic managers of the Duterte administration are quick to attribute the higher inflation to costlier crude oil and even accusations of “profiteering” among traders (even though no charges have been filed against anyone). They have constantly assured Filipino consumers that inflation was “manageable” and that prices would “stabilize” eventually.

Unfortunately, those words are hardly comforting. What the economic managers have avoided saying is the inevitable inflationary impact of the extravagant cocktail of large projects under their “build, build, build” scheme. Beneath these projects are large expenditure amounts that require, aside from the repressive tax impositions, increasing levels of debt.

The National Government’s debt burden has grown to P6.82 trillion as of the end of February 2018. That’s an increase of nearly P613 billion or 10 percent from February last year. And since the end of 2017, new debts have now reached P168.23 billion.

In 2017, total expenditures of the National Government P2.82 trillion while total revenues were at P2.47 trillion, or a deficit of P350.6 billion. While that shortfall was slightly below the 2016 level, it represented a big jump from the 2015 deficit of P121.69 billion.

For the current year, the government budget program projects a deficit of P532.5 billion for 2018, rising to some P582.9 billion in 2019 and to P641.8 billion in 2020 on expenditures of P3.45 trillion, P3.84 trillion, and P4.24 trillion, respectively. 

These trends are not lost on the financial sector. The Duterte government’s growing need for funds to support the Build Build, Build projects is already pushing up the pressure on interest rates and pulling down the peso’s exchange rate.

Gathering pressure

An indicator of rising pressure on interest rates is the conduct of the Bureau of the Treasury’s latest treasury bill auction. While offers for 91-day bills exceeded the offering size of P5 billion by more than P2 billion, only a total of P2.24 billion was accepted. The rest of the bids were rejected owing to the high interest rates the bidders sought for the money they would lend to the government. All bids for 182-day and 364-day papers were rejected.

At this year’s first T-bill auctions, rates sought on bids for 91-day maturities ranged from 2.2 percent to 2.4 percent, with a weighted average of 2.321 percent. The corresponding rates at the latest auction on April 2 ranged from 3.0 percent to 3.25 percent, with the weighted average reaching 3.191 percent. It’s becoming more expensive for the government to borrow from local sources.

As the financing requirements for the infrastructure projects increase in the coming months, there will be need for bigger tax collections and similarly higher borrowings. Banks willing to lend money to the government will continue to ask for higher rates, particularly if alternative placements in other assets offer more attractive, though riskier, opportunities.

The Bangko Sentral, whose principal mission is to maintain price stability, continues to balk at using its policy interest rate tool to cool down the accelerating price increases. It argues that current trends do not merit immediate increases in its policy rates.

In this rare alignment of aggressive Keynesian spend, spend, spend forces that have no fear of emaciating deficits and reluctant monetarist regulators who prefer natural processes to intervention, only the rich and powerful can thrive.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.