Learning inflation’s lessons

The government on Tuesday announced that prices of basic goods and services in the country rose by 8 percent in November from a year ago—the fastest pace of inflation in 14 years—due mainly to higher food prices.

This is a sobering development coming less than three weeks before Christmas, when Filipino families traditionally gather to celebrate the holiday season over dinner with whatever feast they can afford.

Chances are, dining tables across the country for this year’s “noche buena” meals will have a little less food for Filipinos to enjoy. About 8 percent less, to be exact, if the latest statistics hold.

But hidden in the middle of this adverse development is some very good news that should not be overlooked during this festive season.

In particular, the Bangko Sentral ng Pilipinas (BSP) believes that the country’s inflation rate may have already hit its peak in November or, at worst, this month. As such, it will most likely start coming down by the first quarter of 2023, meaning that Filipinos can look forward to a new year of greater purchasing power for the pesos in their wallets.

No less than BSP governor Felipe Medalla pointed out that the current epidemic of high prices officially began in April of this year when headline inflation began to exceed the government’s target range of 2-4 percent. By the end of this year, Filipinos would have experienced—and survived—nine months of price surges.

The good news is that the current inflationary spike will not likely break the record of 15 consecutive months of above-target price increases which the country experienced from February 2008 to April 2009 due to the after effects of a nationwide rice supply crunch.

At present, Filipinos are suffering the effects of expensive basic commodities like food and fuel for the most part through no fault of their own.

All over the world, people’s spending power have been curtailed by the havoc that the coronavirus pandemic has caused on global supply chains, and suddenly aggravated early this year by Russia’s invasion of Ukraine, which pushed energy prices to historic highs.

The response of local policymakers to this crisis has been admirable and must be acknowledged, especially since it entailed administering to the patient that is the Philippine economy the proverbial bitter pill—decisions that were difficult and unpopular.

The central bank under its new governor embarked on an aggressive cycle of interest rate hikes to kill off any inflationary effects that excess liquidity might have on prices. Doing so meant making the cost of borrowing more expensive for everyone at a time when more and more have come to rely on credit, including the Philippine government, to fund their daily needs.

Interest rate hikes were unpopular and painful. It was painful for the national government, too, which suddenly saw its debt obligations to creditors increase. But absolutely necessary to the sake of solving the longer term problem. And for this, the leadership of the central bank deserves praise for the resolve and independence it has shown during one of the worst inflation crises experienced by Filipinos since the early 1980s.

Thus, if all goes according to plan, Filipinos should start feeling the benefits of these difficult policy decisions by early 2023.

It is now imperative that the administration of President Marcos Jr. takes to heart the lessons offered by the current crisis.

The first is that the Philippines is inextricably linked to the global economy. Government leaders should stop trying to mislead their citizens into believing that local populist policies can protect them from the bad effects of economic tsunamis happening half a world away, like the conflict between Russia and Ukraine.

The second lesson is that the ill effects of these crises can be mitigated by local preparedness. That means improving local infrastructure to help smoothen out logistical bottlenecks that aggravate local prices. That means improving airports, seaports, and highways, especially farm-to-market roads that help move goods from producers to consumers faster and more efficiently.

Finally, the Marcos Jr. administration should make good on the promise of diversified energy sources that previous administrations before it have promised but failed to deliver in a meaningful manner. Having alternative domestic sources of energy, especially in the renewables sector, will protect Filipinos’ wallets when the next inflation crisis comes around.

And the best time to take these lessons to heart is now, when inflation is expected to wane, and not at the beginning of the next crisis.