Why we should understand (and be concerned) with inflation

By Francis Allan L. Angelo

Dado Mallorca is having a hard time with his budget nowadays.

Earning a net of P20,000 a month, Mallorca said he used to spend around 60 percent of their budget for food or around P12,000. The rest he allocates to their utility bills and his daily allowance that includes his transportation.

But with inflation brought about by domestic and international factors, Mallorca said he is spending more on food and utilities.

What is inflation anyway?

Inflation refers to the rate of change or increase in the average prices of goods and services typically purchased by consumers. Inflation is better understood in the context of the consumer price index (CPI).

So, what’s CPI? Instead of checking the movement of price per item, economic analysts consolidate a list of often-purchased goods and lumped them into one figure called the CPI which represents the general cost of goods that consumers usually buy.

The CPI is usually thought of as a fixed basket of goods that a consumer purchases every market day.

Inflation, therefore, reflects an increase in the CPI. It shows us how the CPI has increased from last year, or from last month.

For example, if the price of an item increased from P100 in 2021 to P102 in 2022, the inflation rate is 2%.

According to the Philippine government definition, if the year-on-year inflation rate is high within a particular period, it means that the average price of a fixed basket of goods and services is higher compared to the average price of the same basket in the same period a year ago.

The same analogy goes for month-on-month inflation.

The headline inflation rate that is usually announced in the news is the year-on-year inflation rate.

Inflation dictates the value of our money over time. If inflation is high, it means the prices of goods we usually buy went up. If inflation is low or stays the same, it means the prices of goods we usually buy remained stable.

When the price of goods and services rises, the value of the money you earn diminishes. This means the P100 you have today would be able to buy less in the next three years because of inflation. (https://www.officialgazette.gov.ph/featured/what-is-inflation/)

WESTERN VISAYAS INFLATION

Mallorca’s budget quandary can be explained by the sudden increase in inflation in Western Visayas.

The Philippine Statistics Authority (PSA) reported last week that the inflation rate in Western Visayas increased further from 4.9 percent in April to 5.9 percent in May 2022. This is the highest inflation since January 2019.

Inflation in May 2019 was lower at 4.1 percent while the average inflation rate for the first five months of 2022 is recorded at 4.7 percent.

What caused the surge in the regional inflation rate?

This was mainly due to higher annual increase in the index for food and non-alcoholic beverages (6.6 percent), transport (14.2 percent), and housing, water, electricity, gas and other fuels (4.0 percent).

Also contributing to the uptrend in the overall inflation between April and May 2022 were the higher growth in the price indices of the following commodity groups compared with their inflation rates in the previous month:

8. alcoholic beverages and tobacco, 8.8 percent;
9. personal care and miscellaneous goods and services, 3.2 percent;
10. restaurants and accommodation services, 4.4 percent;
11. clothing and footwear, 2.0 percent;
12. information and communication, 1.2 percent;
13. recreation sport and culture, 3.3 percent;

As reflected in Mallorca’s problem with higher food expenses, food inflation in Western Visayas accelerated to 6.9 percent in May 2022, from 5.6 percent in April.

In May 2021, food inflation was lower at 1.2 percent.

The PSA noted that the rise in the inflation rate of food commodity group was mainly due to fish and other seafood commodity group with 6.5 percent rate in May 2022 from 4.5 percent in April 2022; vegetables, tubers, plantains, cooking bananas and pulses registered 16.1 percent inflation during the period, from 12.1 percent inflation in the previous month; and cereals and cereal products which went up to 3.9 percent growth during the period from 3.2 percent in the previous month.

The following food groups exhibited higher annual increases in May 2022:

-Meat and other parts of slaughtered land animals, 11.1 percent;

-Sugar, confectionery and desserts, 10.5 percent;

-Fruits and nuts, 8.1 percent;

-Milk, other dairy products and eggs, 1.8 percent;

-Oils and fats, 7.8 percent; and

-Ready-made food and other food products not elsewhere classified, 3.5 percent

CAUSES

In general, inflation can occur when prices rise due to increases in production costs, such as raw materials and wages.

A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.

Some companies reap the rewards of inflation if they can charge more for their products as a result of the high demand for their goods.

According to the Bangko Sentral ng Pilipinas, CPI inflation in many countries is often influenced by factors beyond the control of economic policy and has tended to be historically volatile.

Shocks or disturbances in certain areas of the economy may cause inflation to temporarily move away from its long‐term trend.

In the Philippines, the volatility of inflation has been caused by factors such as disturbances in agricultural food supply or movements in international oil prices. As a result, the headline inflation rate may reach double‐digit levels, even though the prices of other CPI components show only mild increases.

TRANSPORTATION AND ENERGY

With the Philippine energy sector reliant on conventional fuel (oil and coal), sudden rises in international oil prices will have very telling or even shocking effects on inflation.

A very simple example is transportation of goods. In April 2022, a vegetable vendor paid P50 for a sack of camote or sweet potatoes transported to the public market. By May 2022, the same vendor pays an extra P10 for the same quantity of camote. Expect the vendor to recoup the extra expenses by charging more from buyers.

Because of the sudden surge in demand for goods and services as the world emerges from COVID-19 and with the Ukraine-Russia war, oil prices continue to rise. Note that Russia is one of the biggest producers of oil in the world, accounting for 10 percent of global petroleum production at 10 million barrels per day.

With the sanctions imposed by the US and European Union on Russia, supply is now tighter even as demand for fuel surges what with travel and production picking up once more around the world.

In the Philippines, latest data available from the Department of Energy show that gasoline has a net increase (year-to-date) of P26.55 per liter, P36.85 per liter for diesel, and P33.10 per liter for kerosene as of June 7, 2022.

The rise in fuel prices is felt not just in the transportation but in the power sector as well.

Take for example Manila Electric Company or Meralco which serves Metro Manila and parts of Luzon.

On Friday, it announced a P0.3982 per kilowatt-hour (kWh) adjustment in its June rate, citing increases in charges from Independent Power Producers (IPP) and Power Supply Agreements (PSA) by P0.6083 and P0.0859 per kWh, respectively, mainly due to higher fuel costs.

For a residential customer consuming 200 kWh, the overall rate will be P10.4612 from P10.0630 per kWh last month, equivalent to an increase of nearly P80 in the total bill.

In a statement, Meralco said, “fuel charges from the First Gas power plants went up 8 percent with the increased usage of more expensive liquid fuel amid the ongoing Malampaya gas supply restriction.”

Coal prices also went up by an average of 23 percent, contributing to the higher IPP and PSA charges.

Meralco also said that prices in the Wholesale Electricity Spot Market (WESM) remained high, with the secondary price cap imposed twice on April 29 and 30.

GOVERNMENT HAND

Government may also have a hand in inflation to varying degrees, depending on the product. The following government actions and policies can affect inflation:

1. Circulation of money. Since there is a complex relationship between the supply of money and the prices of goods and services, Banko Sentral ng Pilipinas (BSP) can control the supply of money circulating the economy through its policies.
2. Taxes Higher or additional taxes imposed by the government also tend to increase the prices of goods that are being taxed. Taxes are important to keep government services flowing. They are usually imposed after much study, and for a good reason.
3. Regulatory bodies Although market forces are what determine prices, the government, through regulatory bodies, may impose limits on price increases or impose limits on importation, to offer protection from unreasonable price surges during extreme cases.

For example, after natural calamities, the Department of Trade and Industry may impose price limitations in affected areas.

To most of us, inflation sounds bad, but it also has its advantages if managed effectively. For one, it encourages traders and manufacturers to invest and produce more.

When they see prices rising, they take it as a good sign. They’ll be encouraged to invest more and, in the case of big firms, expand their businesses and generate more jobs.

If the prices of goods and services are increasing in a manageable, steady rate, we say inflation is stable. It allows households and businesses to plan according to what they need and how much they have.

But when there is a sudden change in prices, it’s called price shock. This is bad for those who do not have enough resources to deal with the sudden pace of growth in the prices of goods and services. It’s generally what we’re all trying to avoid. (https://www.officialgazette.gov.ph/featured/what-is-inflation/)