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Inflation, enemy of the poor

/ 12:08 AM August 09, 2014

“Inflation rate rises to 4.9 percent in July 2014, still within government target,” announced the National Economic and Development Authority (Neda) last Tuesday. This critical statistic was duly reported by the media the next day, but by Thursday was already forgotten.

How different from each new report on rapid growth in gross domestic product (GDP), which immediately elicits stacks of commentary from government and business, as though its acceleration is vital to the Filipino masses! Yet the empirical truth is that mere growth in the GDP, unless extended for at least a decade, does not significantly reduce poverty.

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What really matters is inflation. On the other hand, the most important empirical determinant of both poverty and hunger is inflation in the cost of living.  Even short-term spikes in inflation are extremely painful for the poor.

The most thorough Filipino econometrician on the subject, Dr. Dennis Mapa, professor of both statistics and economics at the University of the Philippines, now expects the impact on poverty to come mainly in the next quarter, with additional effects two and even three quarters afterward. His econometric modelling is based, of course, on the Social Weather Stations data on self-rated poverty (quarterly since 1992) and hunger (quarterly since 1998), both up-to-date until the second quarter of 2014, since the official data are hopelessly insufficient.

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The government is lackadaisical about inflation. What Neda meant by “still within target” is its target range of 3 to 5 percent for 2014. But a 5-percent target is too easy; it’s like using a football goal for scoring in basketball. We should emulate Singapore’s 2.5-percent inflation rate instead.

The 4.9 percent in the Neda report is the inflation from July 2013 to July 2014. It is from a general consumer price index (CPI) for all items consumed by all income groups, not just the poor. The inflation of prices that specifically face the poor is even worse; more on this below.

The CPI as of July 2014 is 140.4, with the CPI at 100.0 in its base year of 2006—i.e., the cost of living rose by 40 percent over 2006-2014. From historical data on prices, the government figures that the CPI in 1994 was 50.7—i.e., the cost of living then was only half that of 2006. This implies total inflation of 177 percent from 1994 to 2014.

The CPI of July 2014 consists of 131.1 in the National Capital Region and an average of 143.3 elsewhere. Note that it is an index for comparing prices at different points in time, not for comparing areas. The cost of living is actually higher in the NCR than anywhere else. What the CPI implies is that the present difference in cost of living between the NCR and elsewhere is smaller than it originally was in 2006.

Inflation facing the poor is worse. The government keeps a different index specifically for consumer prices facing the bottom 30 percent of households in terms of income. This index, which I shall call the B30, is available both monthly and quarterly. From June 2013 to June 2014 (its latest month), the national B30 shows that inflation facing the poor was 6.9 percent, fully two points above the 4.9-percent inflation suffered by households in general from July 2013 to July 2014 (www.census.gov.ph/content/consumer-price-index-bottom-30-income-households-2000100-second-quarter-2014, 8/1/2014).

Using its quarterly data, the B30 shows that prices of items bought by the poor inflated by 6.5 percent in 2014Q2 from what they were in 2013Q1. This is called year-on-year (yoy) inflation. For the poor, yoy inflation rapidly accelerated in the last four quarters, having been 3.1 percent (2013Q2), 3.5 percent (2013Q3), 4.8 percent (2013Q4), and 5.7 percent (2014Q1).

In 2014Q2, the regions with relatively high B30 inflation percentages are Eastern Visayas (10.3), Soccsksargen (7.8) and Northern Mindanao (7.2).  Those with relatively low B30 rates are the ARMM (4.1), Davao region (4.7), and Cagayan Valley (5.8). The B30 rate is 6.1 in the NCR.

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The commodity group with the highest B30 yoy inflation in 2014Q2 is food, beverages and and tobacco (7.8 percent), led specifically by rice (14.1 percent). By region, the B30 rice price inflation of 2014Q2 is highest in the NCR (21.1), followed by Bicol (19.5) and Calabarzon (17.3).  It is relatively low in the ARMM (5.9) and the Davao region (9.5).

The base year of the B30 is 2000; I don’t know why it’s different from the base year of the CPI.  By June 2014, for the country as a whole, the B30 was 206.4 for all items—i.e., what had cost the poor P1,000 in 2000 already cost them P2,064 by June 2014.  Thus, the poor needed to double their money income, during 2000-2014, just to stay in place in terms of real consumption.

The poor need rapid adjustments in income. Inflation can be fought by finding ways not only to suppress prices but also to float along with the rising tide.

Preliminary analysis of SWS data show that households with heads employed in the private sector or the government have higher self-rated poverty rates than those whose heads are self-employed.  I think this is because the latter are not subject to rigid compensation rates.

Inflation in consumer prices, without compensating inflation in their incomes, is what keeps the poor from sharing in the benefits of economic growth.

I strongly recommend that the government recompute its official poverty line every month, since it already has all the requisite price data, simply as a matter of public information.

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TAGS: Consumer issues, economy, inflation, Mahar Mangahas, NEDA, opinion, Poverty, Social Climate
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