Price inflation, the pandemic, and economic dislocations

by Gerardo P. Sicat – The Philippine Star, 20 Oct 2021

Inflation rates this year have been higher than expected by monetary authorities.

The target band rate of two to four percent has been met only once so far. The actual rates of inflation have been above the target range.

BSP raises inflation expectations. As a result, the Bangko Sentral decided to raise inflation expectation for the rest of the year. It has raised the upper guidance rate to 4.4 from 4.1 percent for 2021.

It, likewise, raised the comparative figures for 2022 and 2023 to 3.3 and 3.2 percent from 3.1 percent. Although these adjustments appear tiny, they indicate inflationary expectation on the part of the monetary authorities.

Inflation is often a phenomenon that is linked with growth pressures – either a pressure arising from high demand or from supply shortages. This phenomenon has placed central bankers in many countries on tenterhooks.

If the major central banks, led by the US Federal Reserve, were to reverse long-held low interest rate policies to combat inflationary pressures, then the weaker economies have to fortify their policies, or else they could lose control of their macro-economic situations.

Where lack of demand and price declines happen. In the Philippines these days, because of the pandemic and its impact on the reduction of economic activity, one would expect that price declines would be a more common experience.

In fact, that might be a phenomenon that is less observed in the informal sectors of the economy, where lack of demand had led to people eking out a living on even lower levels of prices. People who are facing much reduced means of economic livelihood still thrive economically in trading activities, but they earn even lower levels of incomes than before the pandemic.

This could be observed more in the trade in food products, especially those in perishables and non-durable goods. Much agricultural food supply is wasted because the demand for them has fallen, and a large part of those in these industries have suffered reduced incomes. Some non-durables also suffer in price declines because the traditional markets that had a demand for them were wiped out or reduced by the pandemic.

Inflation in the formal economy. In the more organized part of the economy, however, the phenomenon of supply scarcities dominate as a living phenomenon because of the pandemic. This is what the market data bring out.

Here, the pandemic itself induces supply disruptions because traditional logistics have gotten disrupted at the local level. Bigger reasons are external factors, especially caused by the country’s exposure to international trade.

The domestic or internal influences that cause price changes could simply be due to internal supply and demand disruptions that take place as a result of current conditions or those induced by pandemic conditions.

Seasonal and weather factors account for some of the happenings. For instance, over the last week, typhoon “Maring” – part of the southwest monsoon season – brought in a lot of rain as it passed through the southern end of the country – the Visayas and northern Mindanao — before it changed direction and circled back northwest ward to drop in more rains over the mountains and plains of northern Luzon. This naturally caused some damage to agriculture and other road transport disruptions. The damage could affect food and agricultural supplies of the next period.

Also, there are “structural” components in the weather phenomena. Weather disturbances have been more extreme between droughts and floods. The evidences of extremes come from structural factors that scientists associate with global warming, or climate change.

Separating the various inflationary influences is tricky, but not impossible to pin down accurately in this respect.

Imported energy. Although the economy is not as fully exposed to total energy dependence on imports as we were during the 1970s, the country is still highly dependent on imports. Energy prices are an important component of the inflationary forces in the economy when there are supply issues,

The sudden spike in demand for the forthcoming winter of 2021 and the world economic recovery being signaled from the pandemic are components of the new inflationary expectations this year.

My Crossroads column of Oct. 6 (of two weeks ago) cited imported energy as a major factor that helps to complicate the economic recovery.

We should include with that a reference to the economic dislocations that have been experienced as a result of the pandemic, the trade war between the US and China, and other tensions that have led to logistical nightmares in supply chains among major world industries.

Supply-chain disruptions. The removal of licenses of critical electronic manufacturers in China by the United States as an outcome of the US-China trade war created supply gaps in the manufacture of critical electronic parts. A domino effect of the shortages of such critical items has affected the manufacturing supply-chain of state-of-the-art cellphones, machinery and automobiles, and hence inflation in such items.

The shortage cannot be relieved in the short term. New manufacturing facilities have to be set up either in China or in countries that are considered “safe” by the United States for their manufacture.

The pandemic has disrupted the world’s labor market in different countries. Unbeknownst to most of us who live normal lives within country communities are the major disruptions that have occurred in the world’s major shipping ports, where traded goods are either off-loaded to their destinations and the ports receiving them for their entry into the markets to which they are destined.

For this, it is most descriptive to quote New York Times correspondent Peter S. Goodman in his description of the great supply chain disruption that currently engulfs the world economy: “The turmoil in the shipping industry and the broader crisis in supply chains … stands as a gnawing source of worry throughout the global economy….It is not merely that goods are scarce…. [P]roducts are stuck in the wrong places, and separated from where they are supposed to be by stubborn and constantly shifting barriers.”