To mitigate inflation, suspend TRAIN law

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The Philippine Statistics Authority reported that the headline inflation rate accelerated to 6.7 percent year-on-year in September 2018, higher than the 6.4 percent in August. This is also more than double the 3.0 percent in the same period last year and over five times the 1.3 percent in June 2016 at the start of the Duterte administration.

There are three main factors at play causing the spike in inflation — the impact of the Tax Reform for Acceleration and Inclusion (TRAIN) law, the weakening peso due to political influences and the global oil price increase. We can also probably look at allegations of monopoly manipulation of prices of basic commodities like rice and fish — assuming the concerned agencies can do something about monopoly traders.

Inflation can be moderated but the government refuses to suspend implementation of the TRAIN law or to implement price ceilings on basic necessities and prime commodities. Doing these would have sent a strong signal of the administration’s sincerity in addressing rising prices and would bring immediate relief for tens of millions of Filipinos. The effective inflation rate for the poorest 30 percent of families is some 8.5 percent or more.

Various appeals have been sent to the President to suspend the effects of the oil excise taxes which have been incorporated to the TRAIN law. Such suspension is actually provided by the TRAIN law where the $80 trigger price of the benchmark Dubai crude will automatically result in the suspension of the excise tax on oil to mitigated inflationary pressures.

Why do not the Department of Finance (DoF) and Department of Energy (DoE) announce that the trigger price has been breached? The bigger concern in the runaway oil prices is the weak peso — it is still hovering above P53 to the dollar this week. The trigger price was equivalent to P4,032 when the TRAIN law was passed in December. By September IBON estimates that the peso price has already been breached at P4,037 and by October at P4,258. The DoF and DoE should announce anytime soon to suspend the next tranche of oil taxes, according to TRAIN’s limited suspension mechanism.

What if oil prices go down? But chances are they will go up. Political uncertainties in Venezuela and Iran, as well as other tensions involving Saudi Arabia and Turkey and others will add to uncertainties in production volumes while seasonal demand in the coming winter months normally drives prices up.

Inflation has already eaten up thousands of pesos in the purchasing power of the incomes of the poorest households who are already underconsuming and suffer even more lower standards of living as a result. Each of the country’s poorest 30 percent of households has lost at least P1,800 to P2,916 already from the start of the year until September due to inflation. These are households assumed to be earning some P12,835 or less monthly.

Middle income households have also seen their purchasing power eroded. The next 30 percent of households have lost P3,418 to P4,725 since the start of the year. These are the households earning up to around P21,119 monthly. IBON estimates the erosion of purchasing power by deflating household incomes with reported monthly inflation rates. The impact on the poorest households is also underestimated by the unavailability of inflation rates for low income groups.

Government measures to address inflation are tepid because the administration’s economic managers only see the numbers as cold statistics and callously insist that the situation is manageable. Truth is that the DoF Secretary is afraid of the financial implications of reduced government income from oil specific taxes. What other measures if any from DoF or Department of Trade and Industry (DTI) are weak, slow to take effect and oblivious to the worsening conditions of tens of millions of the poorest Filipinos.

The lower inflation in the National Capital Region (NCR) may be an indication of how the government is just managing the political impact of inflation. Reported NCR inflation of just 6.3 percent could be because the administration diverted food supplies from the regions to NCR, lowering food prices there but at the expense of the regions.

Food inflation in non-food producing NCR is conspicuously moderated. There was just 0.6 percentage point increase in NCR versus 1.5 percentage point increase outside NCR and 1.2 nationwide. This may reflect the DA’s TienDA Malasakit and DTI’s Suking Tindahan initiatives. This can also be due to the Suggested Retail Price (SRP) initiative which responds to immediate retail prices but must be followed up to control actions of middle-men and consumer commodities importers.

As Christmas season starts, inflationary pressures will become even more inflamed — not only from TRAIN’s consumption taxes, peso depreciation and global oil prices but possibly also continued inflationary expectations if the public is not convinced that inflation will indeed moderate. Or the public temper itself becomes inflamed.

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