Inflation: the real story

Last month, Filipinos saw prices increase seemingly faster than usual for many everyday items, and social media was replete with anecdotal observations by netizens. The official figure reported by the Philippine Statistics Authority (PSA) was 4 percent (more precisely, 3.95 percent), a three-year high. The common refrain, whether from the casual woman on the street or trained financial analysts, was that TRAIN (the recently passed Tax Reform for Acceleration and Inclusion law) is to blame.

But is it, really? Closer scrutiny of the inflation data actually suggest otherwise. One important indication is the distinction between the commonly reported year-on-year (Y-O-Y) inflation rate and the month-on-month (M-O-M) figure. The former measures how prices have risen compared to a year ago; the latter measures it in comparison to the previous month. The PSA reports both figures for each major commodity group, permitting analysis of rising prices more closely than meets the eye. If TRAIN is truly to blame, the tax increases should be reflected in the M-O-M figures.

The most widely feared tax increase from TRAIN, because it is expected to permeate the economy, is the hike in excise taxes on petroleum products. Based on actual tax hikes, price increases should range from 2.2 percent for liquefied petroleum gas to 7.7 percent for diesel and kerosene. PSA tracked the actual Y-O-Y price inflation for oil products at 7.2 percent. But the M-O-M rate, or the change since December, when the old rates still prevailed, was actually slightly negative (-0.8 percent), which means prices even went down slightly!

Incredible? Not quite. Oil product prices in the country are driven by three factors, given that our oil is almost entirely imported: international crude oil prices, the foreign exchange rate, and petroleum taxes. Even if the last goes up, prices of oil products could go down if either crude oil price or the peso-dollar exchange rate goes down. Over the past year, the crude oil price rose 19.6 percent (from $53.37 per barrel of Dubai crude in January 2017 to $63.83 last month). Meanwhile, the peso depreciated by 1.5 percent (from P49.74 to P50.51 per dollar). These were the real reason for the Y-O-Y oil price increase. Given that gas stations were still selling old stocks for at least the first half of January, TRAIN couldn’t have pushed average pump prices by much.

The other common fear was on food prices, as affected by oil price increases via hiked transport costs. PSA reported overall food inflation at 4.5 percent, including a 1.4-percent rise for rice and a 12-percent rise for fish—all of which happened in the face of an actual monthly decline in oil prices. For fish, observed price increases are likely due to the usual fishing off-season from November to February, hence lower market supplies. To show the seeming disconnect between oil prices and food price inflation, government analysts point to the period between January 2016 and January 2017. That year saw a P14/liter hike in the price of diesel, a drastic 76-percent increase. But as tracked by PSA, overall inflation in that period was only 2.7 percent, with food prices rising by 3.4 percent, transport costs by 2.4 percent, and housing and utilities (electricity, gas and water) by 1.8 percent.

I’ve said it before, and I’ll say it again: Merchants raising their prices by much more than the 1-percent maximum projected by government analysts are probably just riding on TRAIN as stowaways, to widen profit margins while deflecting blame to the government. Those acting in good faith may have raised their prices by more than is warranted, and well before any actual cost increases have actually hit, to recover anticipated but exaggerated cost increases. Either way, the exaggerated inflation scare hype being foisted by TRAIN critics is fueling undue expectations that are getting to be self-fulfilling. Unfortunately, it’s hard to fight that, except by ensuring adequate market competition so that inordinate price hikes will eventually moderate to warranted levels. That’s why a strong and effective Philippine Competition Commission is very important to all of us.

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