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‘BECAUSE WE DID LITTLE OR NOTHING’: August inflation at 6.4% already self-inflicted

By JOEY SARTE SALCEDA Congressman, 2nd District, Albay August inflation spikes to 6.4% which was higher than market expectations. But what is more worrisome is that it would reverse gains in poverty reduction and hunger mitigation since the main culprit is food inflation which surged by 8.5%. Thus the inflation of the poor (lowest 30%) is estimated at 7.4%. Ultimately, the 6.4% was really due to the fact that we did little or nothing. We can no longer blame market opportunists profiteers and rice hoarders. The only notable measure we implemented in response was the 50bps increase in policy rates of the BSP but it would take a lag of 6-18 months for monetary action to gain traction in containing aggregate demand. ‘ The usual gang of suspects continues to be: 1. supply difficulties due to two weeks of continuous rains especially in the Luzon food basket principally impacting vegetables 2. unabated increases in rice prices with weak NFA intervention 3. meat prices esp chicken are more elevated 4. fish prices are still going higher 5. slight increases in pump prices due to peso weakness and higher global oil prices 6. peso weakness from 53 in July to 53.40 in Aug (now 53.55) OUTLOOK We expect September inflation to be lower at 6.1% due to base effect in September 2017 which experienced increases due to electricity FIT Unless we do nothing and do more silly things, 6.4% should already be the peak in this inflation cycle. But a return to 4% within 2018 is no longer possible especially we are now into the world’s longest Christmas season characterized by higher consumer spending. Returning to 4% is more likely to be achieved by August next year. WAGE INFLATION looms The main risk to this outlook which is already unfolding is that it would transform into a more permanent inflation given the rising demand for wage adjustments eg Davao approving P56/day, P26 in 2018 and another P30 in Feb. 2019 (all within 5 months). This poses a more problematic context to policy makers. Thus, we would be quite loud in slaying the inflation monster with draconian measures so they would not show up as widespread demand for higher wages given the sympathy from public sector wage adjustments at P154bn for military and uniformed personnel and P54bn for civil servants for the last tranche of SSL (SSL4). IMMEDIATE MEASURES 1. Higher NFA rice importation and targeted distribution to rice-deficit areas (esp Metro Manila, ayayay) and food-deficit populations 2.. Reduce food tariffs on meat products 3. Continuous trade coordination by DTI with domestic manufacturing and trade associations for self-restraint via SRP system 5. Departments supervising tariff-setting bodies like water, electricity and tools should suspend approval or if approved to defend implementation 4. BSP needs to be abreast of the cycle to contain price expectations. After the 100bps (25bps in May, 25bps in June and 50bps in August). another 50bps policy rate adjustments may be needed since 2018 average likely to be 5.2% versus the recent adjusted target of 3.5% or a differential of 160bps. MEDIUM TERM MEASURES 1. Rice tarrification should ease rice prices by 2019. 2. Increase public investments in agriculture. With the ongoing cash-based budgeting deliberations, Increase DA budget from 1.6% of total budget to 2.2%. From current P56bn in 2019 NEP, an incremental budget of P25bn well-targetted to the following: a. increased mechanization b. technology adoption eg hybrid rice c. irrigation esp. SWIPs d. technology extension esp to local agricultural technologists e. diversification into HVCs The national imperatve and the logic behind our national strategy 1. Stop inflation momentum esp given the traditional pickup in consumer spending in the world’s longest Christmas season (Sep-Dec) 2. Provide immediate relief to consumers through lower prices and higher supply of basic commodities 3. Arrest inflationary expectations and preempt market opportunism 4. Bring inflation back down to 4% level by April 2019 (instead of end-2018).

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