Stagflation 101

By Herbert Vego

YOU surely know why the word “inflation” scares. Simply put, it refers to the sustained increase in the prices of goods and services across an economy, thus reducing our currency’s purchasing power.

And now we are coming to terms with what used to be an unfamiliar economic condition known as “stagflation” — characterized by the simultaneous occurrence of slow economic growth, high unemployment, and rapidly rising prices (inflation). The Middle East oil price shocks and peso depreciation are blamed as the primary triggers.

The crisis stems from disruptions around the Strait of Hormuz — between the southern coast of Iran and the northern tip of the Arabian Peninsula — through which nearly one-fifth of global oil supply moves. We import more than 95% of our Middle East crude oil requirement along that route.

Based on yesterday’s conversion rate, a US dollar is now equivalent to more or less PHP 62, considering the daily fluctuation of exchange rates. Certified technical analyst Jonathan Ravelas of the PH Resorts Group fears it could hit PHP 65 to a dollar within three years.

According to the Ibon Foundation, we now need a peso to buy what we could buy at 75 centavos in 2018. But then, it’s no longer easy to find merchandise priced at one peso today.

Whatever money we have in the bank loses corresponding value, since it earns very negligible interest.

Philippine economists agree, however, that the country is not yet in a technical recession or full-blown stagflation, but they warn that we are at a “danger zone” with rising prices (inflation) hovering around 7.2%.

Philippine National Bank chief economist Alvin Arogo believes that the Philippines is showing clear “stagflationary” pressure as high inflation and slow growth persist. The combination of rising prices and weak growth shows that stagflation risks are present.

No less than President Ferdinand Marcos Jr. has acknowledged that potential stagflation is an active concern for the administration, though his economic managers maintain that targeted structural reforms will help the country sustain its current momentum.

The Philippine Institute for Development Studies (PIDS) recently raised the warning that middle-income Filipinos, like teachers, clerks, drivers and small-store owners are also suffering “significant welfare losses.” They need to tighten their belts further while receiving little to no direct government support.

We know of neighbors who are just one hospitalization away from falling into poverty, yet they remain invisible in subsidy programs.

They fear malnutrition due to their inability to afford nutritious food.

The only businessmen who are presumed beneficiaries of inflation may be the exporters, since their dollar revenues translate into higher peso income.  Manufactured goods—particularly electronic products and semiconductors—dominate the country’s export revenue, accounting for over 80% of total outbound.

We are also a leading global producer of fresh fruits like bananas and pineapples.

For the information of today’s youth who don’t realize how much our currency has depreciated, records at the Bangko Sentral ng Pilipinas (BSP) show that during the Commonwealth era (1935–1946), the Philippine peso was pegged to the United States dollar at a fixed rate of ₱2 equals US$1.

During my childhood in the 1950s (I am now 76), inflation was very slow. In that entire decade, we could buy a piece of candy for one centavo and a bottle of soft drink for 10 centavos until 1966.

The minimum daily wage of four pesos in that year was good enough.

-oOo-

A FORMER ILECO-1 GM COMMENTS

Engr. Wilfred Billena, a retired general manager, thinks it’s impossible to unify the power rates of electricity distribution utilities.  Here’s what he told me:

“That would be utopian! Congress may legislate it but then it’s unconstitutional because equal rates over all utilities may favor one and prejudice the others. This is so because the utilities may be selling the same product, electricity, but they operate on different and varying parameters: power contracts because of different load curves, personnel compositions, terrain, lengths of line, investment schemes, etc.”