Inflation fears
Prices of consumer products have been expected to increase this year because of the recently passed Tax Reform for Acceleration and Inclusion (TRAIN) Act and the Sin Tax Reform Act of 2012, which imposed new taxes or raised existing ones on a number of products.
Starting in January, the TRAIN Law either increased or imposed new taxes on sugar-sweetened products such as soft drinks, and on petroleum products and automobiles. Cigarettes and alcoholic drinks also had a scheduled tax increase at the start of the year under the Sin Tax Law.
The Philippine Statistics Authority reported last week that consumer prices rose on average by 4.3 percent in March — the fastest since August 2014 and above the government’s target range for 2018.
It was partly due to the double-digit jump in prices of “sin” products and the 5.8-percent increase in food prices.
This higher inflation will be replicated in the remaining months of the year. Compared to a year ago, this year’s prices will naturally be higher because of the additional taxes.
This is the low-base effect as prices last year did not carry the additional or new taxes that prices of consumer products do this year.
Some economists have predicted that consumer price increases will hit seven-year highs and prompt the Bangko Sentral ng Pilipinas to raise interest rates to keep inflation in check.
When interest rates are low (as they were for the past couple of years), consumers are able to borrow more money to spend, causing higher economic growth and increasing inflation.
The opposite happens when interest rates are increased.
What is worrisome in the next few months, however, is the additional pressure on inflation that is expected to come from rice.
The National Food Authority has run out of supply of cheap rice for the low-income segment of the population. Rice imports of 250,000 metric tons from Vietnam and Thailand will be arriving only in end-May.
The poor will be most affected by the absence of NFA rice. Without the cheap NFA rice sold for P27 a kilo, they now have to shell out at least P12 more a kilo because the lowest priced commercial rice goes for P39 a kilo.
Then there are the crooked traders who might take advantage of the seeming rice shortage (there is actually enough supply, but of the expensive commercial rice) by hoarding the stocks to push prices higher and bring them more profits.
The Duterte administration is appealing to rice traders to further lower the prices of their cheapest commercial rice to help those who get by on NFA rice.
But it is doubtful that traders will heed such a call. Traders have reportedly offered to sell at P39 a kilo, the lowest that they can go, claiming that the cheapest regular milled rice now costs more than P40 a kilo.
We can therefore expect the food component of the basket of goods and services monitored to determine inflation to increase in this month and in May.
Last March, rice prices increased by 3.6 percent, higher than the 2.8 percent in February, as farm gate prices of palay have been on an upward trend since the second week of January, according to the National Economic and Development Authority.
Monetary authorities had projected inflation correctly when doing their calculations based on the impact of the TRAIN Law, a weaker peso that makes imported raw materials more expensive, and rising crude oil prices abroad.
However, it is the unexpected inflation pressure from rice that could be more problematic particularly in the next two months, or until the rice imports arrive in end-May.
Analysts are starting to anticipate the Bangko Sentral’s raising of interest rates to keep inflation within its target range of 2-4 percent for 2018.
But this early, monetary authorities expect inflation to breach this target and average 4.3 percent for the year.
How high interest rates should go will therefore be a delicate balancing act for the Bangko Sentral, a major test for the new governor, Nestor Espenilla.
