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A Sign of Good Things to Come

One positive news greeting the first week of January 2019 is the Philippine Statistics Authority’s announcement that the headline inflation rate, or the movement in consumer prices, decelerated to a seven-month low of 5.1 percent in December 2018 from 6.0 percent in November and 6.7 percent in October.

 

I believe this figure is a sign of better things to come, as stable prices allow households to spend more and industries to produce more. This will eventually support the expansion of the whole economy.

 

Remember that three months earlier, inflation hit 6.7 percent, the highest in almost nine years. This was driven by a 60-percent increase in oil prices, as well as the significant rise in prices of rice, fish, meat and vegetables. Compounding the problem was the depreciation of the peso, which touched a 12-year low of 54.32 against the greenback on October 4, 2018.

 

As a result, household consumption, which accounts for the bulk of the gross domestic product, expanded just 5.2 percent in the third quarter, the slowest in four years. The GDP, meanwhile, grew 6.1 percent in the July-to-September period, a three-year low.

 

More than the slowdown in household spending and GDP growth, the high inflation rate weighed on the capability of low-income groups to meet their basic needs last year. The prices of commodities have a direct impact on hunger and poverty incidence in the Philippines.

 

Alarmed by the situation, no less than President Duterte asked his Cabinet to intervene in the supply of rice, which is the biggest item in the consumer price basket. The Bangko Sentral ng Pilipinas did its part by raising the benchmark interest rates by a total of 175 basis points, bringing the overnight borrowing rate to 4.75 percent. An excessive interest rate adjustment, though, could curtail economic activities.

 

Coupled with the recent gains of the peso against the US dollar and the drop in crude prices in the world market, inflation followed a downtrend in the fourth quarter until it settled at 5.1 percent in December. Economists expect the trend to continue in 2019 and the inflation level to return to the target range of 2-4 percent.

 

Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Guinigundo said the supply-driven factors that pushed up inflation in 2018 would not persist this year. Capital Economics, a London-based think tank, also believes inflation would return to the target range by the middle of the year, allowing the Central Bank to loosen its monetary policy again.

 

The government’s economic managers attributed the slowdown in the inflation rate in December to swift and decisive measures undertaken to tame price increases as directed by President Duterte.

 

Full-year inflation averaged 5.2 percent in 2018, faster than 2.9 percent in 2017.

 

The economic managers vowed to sustain efforts to bring inflation within the target range in 2019, while remaining vigilant of possible risks, such as the threat of the El Niño dry spell. They said with the expected signing into law of the rice tariffication bill, rice prices were expected to decline by P7 per kilogram.

 

The government, however, needs to put in place mitigating measures as it implements higher taxes this year, such as the new excise tax schedule on oil and the possible enactment of the second package of tax reforms under the proposed Tax Reform for Attracting Better and Higher-Quality Opportunities, or Trabaho bill.

 

After Filipino consumers held back consumption amid the high inflation rate last year, we expect our people to have greater spending power this year as prices begin to normalize. Stable prices will translate into higher demand and consumption, which will mean increased production and faster economic growth in 2019.