Higher prices on the horizon

By The Manila Times, 14 Dec 2019

THE very low inflation we have enjoyed for the past several months appears to be a thing of the past and higher prices will persist through the coming year, according to local analysts. Because inflation is a sensitive issue that affects everyone, understanding how it works and what we can expect will help in easing its negative effects.

Inflation in November was a low 1.3 percent, but that was more than double the 0.6-percent inflation rate in the previous month. Analysts have forecast that inflation for most of 2020 will be between 2 and 3 percent, and monetary authorities at the Bangko Sentral ng Pilipinas (BSP) also believe inflation will face “upside risks” in the coming year, before easing again in 2021.

The inflation rate for the month of December will be announced by the Philippine Statistics Authority (PSA) in early January.

Inflation, properly called the Consumer Price Index (CPI), is a common indicator of the state of the economy, but the rather technical manner in which it is usually discussed by analysts and policymakers disguises its practical meaning for most people. When it is said that the inflation rate for November, for example, was 1.3 percent, that means that on average, prices in November 2019 were that much higher than they were in November 2018. In other words, an item that cost P100 a year ago now costs P101.30.

The change in prices does not affect all goods and services uniformly and usually occurs gradually enough that most people do not notice it, but steadily erodes our buying power. That is why policymakers manage inflation very carefully. Some degree of inflation is inevitable as the economy grows, but must be kept below the average rate of income growth to prevent hardship for ordinary families and businesses.

There are three main reasons we can expect prices to rise in the coming year, according to the experts. The first is simple mathematics that became relevant in November. Because the inflation rate is a year-on-year indicator — the figure describes how much higher (or in rare instances, lower) prices are in a given month than in the same month a year earlier – it is partly determined by the “base effect,” the level of inflation a year ago. Prices were elevated in September and October last year, when the inflation rate was 6.7 percent, so the inflation rate in those two months this year was low, as it was being compared to a high “base.” Beginning in November 2018 the inflation rate began to drop, so the inflation rate from November 2019 on will be correspondingly higher.

The second reason is the impact of oil prices, which have a very strong effect on the inflation rate. Oil prices are expected to be higher in the coming year because of ongoing tensions in the Middle East and in Venezuela, a major oil producer, as well as production cuts by the Organization of the Petroleum Exporting Countries.

The third reason is the African swine fever epidemic. Although the dreaded pig disease has not spread as far or as fast as first feared, it has reduced the supply of pork, and caused increases in food prices. These might increase further as food manufacturers replenish their inventories depleted during the holiday season.

The Monetary Board of the BSP monitors inflation very closely, and can adjust its benchmark interest rates to help control inflation. Even though it anticipates inflation will accelerate, for now it has not changed its interest rates, leaving them at their current level of 3.5 percent to 4.5 percent at the Monetary Board’s last meeting for the year on Thursday.

But monetary policy can only do so much to cushion against the effects of inflation. A bit of foresight on the part of consumers and businesses will do much more to prevent higher inflation from having a negative impact on their own well-being and the health of the economy in general. Thus discussing the outlook for the coming year is not intended to alarm, but rather to inform prudent choices in budgeting and spending when higher prices become a reality.