Dissecting inflation data

THE ANNUAL INFLATION RATE of 1.5 percent posted in June was the lowest the country has seen in 22 years. This implies that consumer prices as a whole have shown remarkable stability over the past year. For the year so far, the average over the first half was 5 percent, which is lower than the full-year average for 2008 of 9.3 percent, but higher than the 2007 figure of 2.8 percent.

Detailed highlights

The record low year-on-year inflation rate should be generally good news for consumers. But as is true with economic data of this sort, there is more than meets the eye by just looking at the aggregate numbers. The following are some noteworthy highlights regarding the latest inflation data:

It was mainly the price drop (negative inflation) in the commodity group of fuel, light and water (FLW) that led to the very low overall inflation rate for the month.

On a year-on-year basis, food prices have risen the fastest among the commodity groups, implying that inflation still hits the poor more than the non-poor.

The inflation pattern continues to be lopsided in favor of Metro Manila, where overall prices had actually gone down while rising elsewhere in the country.

Prices actually rose faster in June, if measured on a month-on-month basis.

Fuel and food

One only needs to recall that the world price of crude oil reached its record high of $147.27 per barrel exactly one year ago—and which has since gone down to less than half that level—to understand the negative inflation in FLW of -5.4 percent. The price of gasoline shot over P60 per liter then, but is now back down to about P36. What may be puzzling is why the decline in the price index was only that much, when the price of oil, which is the dominant component in energy cost, had dropped by so much more, by as much as 50 percent.

Other commodity groups (food, beverages and tobacco; clothing; housing and repairs; and miscellaneous) actually posted significant year-on-year price increases ranging from 2.5 to 3.1 percent.

Like FLW, services also posted a negative inflation of -1.1 percent. What concerns me is that the food, beverages and tobacco category—the most prominent item in the budgets of poor families—still had the fastest price hikes (3.1 percent). We can tell from this that inflation, while slowing down as a whole, continues to take a heavier toll on those among us with the least purchasing power.

In fact, considering that those most likely to benefit from the fuel price deflation are the higher-income car-owning families, then one might say that inflation has been lopsided against the poor and in favor of the rich.

Metro Manila bias

The other lopsidedness coming out of the more detailed numbers is how Metro Manila has emerged better off (with lower overall prices) while the rest of the country was worse off (with higher prices).

The June inflation rate of 1.5 percent was actually the average of a -0.1 percent rate for Metro Manila and a 2.2 percent rate for areas outside Metro Manila.

Taking it down to commodity level, a similar Metro Manila bias emerges. Price of services actually fell 6.1 percent in Metro Manila, but rose 2 percent in the provinces. Food prices went up faster in the countryside (3.3 percent) than in Metro Manila (2.4 percent). Clothing prices went up more than twice as fast in the countryside (3 percent) compared to Metro Manila (1.3 percent). Housing and repairs went up 3 percent in the countryside, but only 2.5 percent in Metro Manila; and miscellaneous commodities went up 2.9 percent in the countryside, against 2.3 in the capital.

The pattern suggests a need for more affirmative action in favor of the countryside as government undertakes anti-inflation measures such as targeted subsidies. We have argued before that there may be an underlying political reason why politically noisy Metro Manila gets disproportionate attention even in anti-inflation measures—not to mention infrastructure spending and other public investments.

Twice as fast

Finally, it may be pointed out that the record low year-on-year inflation rate was simply the result of a “base effect;” that is, last year’s price level, pushed up by record oil prices, was an unusually higher base on which to compute the percentage change in prices. But if one reckons the inflation rate from the previous month (May to June), prices actually rose more than twice as fast (0.6 percent) as the average monthly rise over the past year (0.27 percent).

This would explain why the Bangko Sentral is getting increasingly cautious about further easing up on money supply by further lowering interest rates, done to coax the private sector to borrow and invest more and thereby boost the flagging economy. The BSP is again beginning to face that delicate balancing act between inducing growth and taming inflation, and given its mandate provided by law, it is the latter that must take primacy.–Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu