Watch out for that inflation spiral

Published by rudy Date posted on May 6, 2011

As inflation is poised to breach original forecasts this year primarily due to the continuing rise in crude oil prices and the possibility of higher-than-estimated salary wage hikes, all indications point to an increase in interest rates to balance out what could turn out to be a disastrous situation.

Earlier inflation forecasts of 4.3 percent had pegged oil prices at $100 per barrel, but recent developments have seen the price of petroleum hovering at the $110 mark as uncertainties in the global supply and demand situation emerge.

And with the recent firm tone set by P-Noy asking regional wage boards to act on petitions by labor groups to raise the minimum rates, more than seeing inflation rates rise is the threat of that seeming unending spiral of higher food prices that we remember in a distant past.

Our government economic experts are all now on edge reviewing data and figures and discussing measures to head off any runaway inflation that seems to even be more threatening with the possible effect of escalating food prices.

In the past, higher crude prices have somehow not affected food prices. But the recent much higher market costs are putting real pressure for another round of food cost increases, and this could be more inflationary if too high wage rates are allowed.

For the first time since August 2008, which marked the global financial crisis, Bangko Sentral ng Pilipinas had only raised overnight borrowing rates once, by a quarter point from four percent, last March. This month, all indications point to another quarter point rise.

Lethal trio

Hopefully, this combined half-point rise in interest rates would be enough to balance out the lethal combination that arises from rising oil, food and wage costs. The last thing that government wants is to see people noticing that their spending budgets are drastically shrinking.

A disgruntled population could adversely change the relatively high, but slowly eroding, popularity and credibility ratings of government, specifically of the President, which in turn could translate to general unrest that could affect the political and economic ratings that investors keenly watch.

So far, the Philippines is not doing too badly compared to its neighboring countries in terms of improved economic productivity. But it still is in a precarious situation since the foundation of growth so far largely rests on remittance inflows by overseas working Filipinos.

Nothing solid

Other engines of growth such as exports and domestic productivity are to date not at such ideal conditions to inspire for a steady and solid future source of income to support for the needs of a growing nation.

Our exports are still primarily based on electronics, which brings in very little real income to the country based in input-output values. The country has given up on manufacturing after China and other Asian countries have set up their mega factories that churn out super low-priced consumer goods.

Our agriculture sector is struggling to ward off imported vegetables, meat and livestock, and other farm products that are far cheaper and plentiful now that import restrictions and barriers are being removed.

True, we have a business process outsourcing sector that is turning out to be a gem in terms of providing income opportunities for our growing unemployed work force. But we all know that the net income of this business for the economy isn’t enough.

The same can be said for our tourism industry, which has been trying to take off for so many years now. Our economic managers are working hard to make this potential big money earner reach its potential, but we all know that this requires huge investments that the government has no money for.

Well, there’s the PPP, short of private-public partnership. But this is so dependent on the package of incentives that we can offer vis-à-vis what other developing nations in the region, also hungry for foreign investments, are offering. Bottom line for the tourism dream: this may take awhile to materialize.

Still remittances

In the end, we’re left with the ever-reliable remittance stream from the income derived by working Filipinos abroad. Luckily so far, the numbers of our countrymen leaving for jobs in other countries continues to be robust despite recent troubles in the Middle East and the latest global financial crisis.

This has meant that money that is sent home by our migrant workers has continued to increase, which is now at about $1.5 billion per month. We have about two million Filipinos working abroad on whose sweat some 10 million other Filipinos others in the country (or about 10 percent of the current population) live on.

Now that Europe and America are seeing better statistics indicating a return to economic growth, we can count on seeing more Filipinos finding jobs abroad – and sending more money home.

Back to inflation

Going back to inflation, when food prices and wage hikes feed on each other in a seeming endless cycle, that’s when things start getting worrisome. If this happens, the central bank and our economic managers will be more preoccupied with a lot of work to keep everything going on a steady path.

Let’s hope that the global rebound will not be severely dampened by the new threat from high oil and food prices so much so that the migrant jobs market will shrink and money flow from remittances will be curbed.

If this happens, it would be more difficult to escape the dreaded inflation spiral. But I guess our bright boys in government are already well aware of this.

But will they do what is right from an economic point of view, or what is politically popular but may be economically unsound? –Rey Gamboa (The Philippine Star)

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