No Free Lunch

Is slower inflation coming?

/ 05:06 AM November 27, 2018

Guess what — world oil prices have been sliding drastically in the last few weeks. Just early last month, it peaked at over $86 per barrel, leading some to predict prices reaching up to $100. Instead, it has since plunged down by 30 percent below $60, and last week, US crude oil prices fell nearly 8 percent in just one day, down to just above $50 last Friday — and could fall some more before it starts to rebound.

Our nine-year record-high inflation this year, which appears to have peaked at 6.7 percent these past two months, was due mostly to oil prices being much higher than last year’s levels, having averaged at $70 to $80 per barrel against last year’s $40 to $50. On top of that, the peso has lost value (having recently breached P54 per dollar, compared to last year’s P50 average), owing to a growing trade deficit and a stronger US dollar. This has pushed up the cost of our imported inputs, hence production costs for many goods and services.


Part of the inflation story were sellers of goods and services who, in good faith, had overprovided for anticipated cost increases as they adjusted their selling prices upward, based on exaggerated price expectations. Doomsayers and critics of the Tax Reform for Acceleration and Inclusion (TRAIN) Law, predicting unduly large price increases from higher excise taxes on petroleum products and sugary drinks, fueled those exaggerated expectations, and made them self-fulfilling. And then there were those that I’ve described as stowaways on TRAIN—the opportunist profiteers who saw the chance to boost their margins with undue price hikes, and put the blame on the government.

Unfortunately, and unfairly, TRAIN has become the popular but wrong whipping boy to blame for our elevated inflation rate. Technical calculations on how the higher excise taxes on petroleum and sugary drinks would permeate the economy on a cost pass-through basis have consistently shown that the actual impact from TRAIN alone would be around 0.5 percent. This means that of the 6.7-percent inflation rate we’ve seen in the last two months, 6.2 percent cannot be blamed on TRAIN, but mostly on the oil price increases that happened in the past year, and more recently, on government’s mishandling of rice imports, which led to a spike in rice prices.


Oil prices have now gone down near where they were a year ago. Why is it happening, with some oil industry analysts even admitting surprise at these price movements? It appears to be a combination of several things. For one, US President Donald Trump’s sanctions on Iran turned out not to be as harsh as he made it sound—by allowing major exemptions on the Iran oil embargo, including for the biggest buyers of Iran’s oil like China, India, Italy, Japan and South Korea. Part of it was miscalculation on projected supply and demand by major oil producing countries, especially Saudi Arabia. Still another contributory factor is growing US exports of oil, especially from shale oil fields that have become a major new source of US petroleum.

With dropping oil prices, one can reasonably expect the rise in the inflation rate to be arrested, and that the rate has finally peaked. In fact, real time or month to month price increases had mostly been on a slowing trend since the start of the year. The month-on-month (M-O-M) inflation rate, as against the year-on-year (Y-O-Y) rate widely reported in the news, had actually been consistently on a downtrend since January, except when it ticked up in June and in August. The latter was due to jacked-up rice and food prices, a combined effect of government mismanagement and adverse weather. If the recent low oil prices hold, even the Y-O-Y inflation rates would soon reflect that.

Will they in fact hold? Members of the Organization of the Petroleum Exporting Countries (Opec) are widely expected to decide on production cutbacks when they meet on Dec. 6. But individual members’ self-interest plus wider non-Opec oil supplies are leading analysts to rule out a return of recent oil price highs. All told, it looks like the government’s move to suspend TRAIN’s oil excise tax hikes was not only premature, but also an unwarranted blow on public finances.

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TAGS: Cielito F. Habito, inflation, No Free Lunch, oil prices
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