Dean de la Paz

Catching runaway inflation

“Unfortunately the increased taxes on such multiplier products as petroleum contributed immensely across the value chain. Coupled with the exponential and untimely price increase in global oil products, this created the runaway inflation we have today.” Many of our trade and finance officials are tripping over each other trying to explain to an increasingly distressed public why skyrocketing aggregate prices should not be blamed on the Tax Reform for Acceleration and Inclusion (TRAIN) Law. Their explanations divert from the effect of taxes and instead focus on global events on one end, and unscrupulous profiteers and opportunists on the other. Meanwhile, the public is hurting. Reform had come by way of an effective increase in the net pay of minimum wage earners when the tax exemption bracket was expanded. Unfortunately the increased taxes on such multiplier products as petroleum contributed immensely across the value chain. Coupled with the exponential and untimely price increase in global oil products, this created the runaway inflation we have today. It did not matter that the domestic percentage increase attributable to TRAIN is arithmetically minimal. That it is inflicted across every link in the value chain helps it snowball, impacting quite painfully at the consumer end. Rather than simply comparing TRAIN’s add-on to fuel prices as against increments slapped on by global price increases, we should compute instead for the econometric impact of fuel price increases on every conceivable product that uses fuel as a cost input. The phenomenon is called “cost-push” inflation. The term alone reveals that rising costs caused by higher expenses from fuel and energy transportation electricity generation and distribution rates, even food as shortages occur, are part of the cost-push catalyst that result in inflation. Not all are attributable to TRAIN, however. Since rice is a basic staple and part of every Filipino meal, the recent shortage fiasco pushed prices up. The importation solution to the shortage, while alleviating domestic shortage pressures, was aggravated by high costs. Not only are importations more expensive, but when purchased with a weaker peso, the toxic chemistry of low supplies and weaker currencies tend to contribute to high inflation. The same is likely to occur as the Sugar Regulatory Commission has likewise decided to import sugar due to a shortage. Sugar is a multiplier across various food, beverage and medicinal products. Imported sugar will be paid with our weak peso, which will effectively raise its price. Since sugar demand is basically constant, here we have another example of cost-push inflation. There is, however, another kind of inflation spawned from the opposite side of the law of supply and demand. Demand-pull inflation occurs when the demand for a commodity raises its price and thereby fuels inflation. The simplest examples are the astronomical prices of red roses on St. Valentine’s Day and the price of Majestic Ham during the Yuletide season. With opposite of cost-push inflation – when too much money chases too few goods, as in the example of red roses and ham – prices tend to rise and inflation results. Demand-pull inflation indicates economic overheating and becomes a matter of increasing concern among bankers and financial intermediaries, as well as capitalists seeking better returns on their peso investments. This is alarming because it is caused by monetary policies. The 4.6 percent rise in headline inflation and the higher five percent plus in urban centers show both supply and demand side inflationary factors. Demand-pull inflation is caused by our monetary authorities’ aversion to raising key policy rates and their maintenance of low reserve levels that keep large sums of pesos in circulation. In effect, there’s too much money in the system. Loose reins on money have a tendency to keep money supply up and this invariably forces peso values south as aggregate prices rise. While key policy rates rose slightly last May, reserve levels remain inordinately low and, thus, are contradictory. These conflicting policies sow confusion and are indicative of sluggish policy responses to run-away inflation, making us wonder if our monetary authorities are on the ball.

Sereno’s motion for reconsideration

The question before the SC was whether an official without requisite and complete documentation holds office legally Ousted Supreme Court (SC) Chief Justice Maria Lourdes Sereno and the Integrated Bar of the Philippines (IBP) are seeking a reversal of the eight to six vote quo warranto decision of the High Court effectively declaring her office vacant. There are others who’ve lent their voices to a chorus that should have been refraining long before the SC decision was made and are now desperately relying on a slim chance of an upheaval. Two things give her and her supporters hope where there might be none. One is the slim lead of one vote between the majority and the dissenting justices. The other is that since Sereno had filed a motion for consideration, there is yet no finality. All others, from the persuasive pressures applied by international personages and agencies, to interest groups who’ve drawn partisan lines do not matter. More so where these charge the SC of having lost its independence, because, ironically, where they charge the latter of such, by their own prayer they raise a contradiction. On both of the aspects that seem to offer hope of a reversal, well, tough luck. In the case of the IBP, the principal contention is that the SC is not a trier of facts and is limited to only judge on legal and constitutional issues. While true, the quo warranto charge brought before it by the Office of the Solicitor General (OSG) had already established the fact of incomplete and missing documentation. Complete documentation either exists or it doesn’t. The OSG had simply wanted to determine if such either warrants a legal right to the office held or not. If not, then the office is considered vacant. Proving whether the ousted Chief Justice did or did not submit her requisite Statements of Assets, Liabilities and Net Worth (SALN) was not a dispute the SC had to resolve. The question before the SC was whether an official without requisite and complete documentation holds office legally. For the SC to consider the IBP contention, the SC would have to admit first it erred collectively by even considering a quo warranto charge regardless of its substance or merit. On the matter of Sereno’s motion, it’s doomed to fail ab initio. And it isn’t because of what most might suspect, or what rabid critics of the government would, in their dreams and fantasies, have us think. It’s impending failure has nothing to do with partisanship as those who lament the demise of justice they all-too readily see into the impeachment charges arrayed against the former Chief Justice at the Lower House. It isn’t about politics as the IBP charge likewise implies. Neither partisan politics nor the incompleteness of SALN’s required to be a justice underlies and dooms Maria Lourdes Sereno’s motion for reconsideration (MR). Arraying the majority decision against the most popularly cited dissenting opinions, we see where the probability of crossovers would be unlikely. Both sides are valid and do not allow for a rethink. Analyzing the majority decision, it anticipated all possible dissent by addressing the quo warranto debate, the justifications for non-inhibition, the critical question of an ab initio voidance of appointment, to even questions of unpaid tax liabilities, and criminal folly regarding inaccuracies in Sereno’s SALN. All bases were covered prohibiting an unexpected leap over the fence that does not first admit to erroneous thinking. Discern the decision. Nothing on both sides were patently erroneous. The decision’s dissent focused more on the inapplicability of quo warranto charges as an impeachment option rather than Sereno’s innocence. Sereno’s own defense focused largely on the question of optional inhibitions.The best argued dissenting opinion even admitted to two impeachable charges where SALN inaccuracies invariably lead to eventual prosecution either in the tax courts or the Sandiganbayan. None of these allows for cataclysmic reconsiderations. If there are to be any upheavals, it would be where one dissenting justice sides with the majority and not the other way around.

Know the misery index

First the upside. Mostly viewed only from the unique perspective of the middle to lower income wage earners officially within the system, recorded among the formal labor sector assuming they are compensated correctly, the benefits of a P320 wage hike as demanded by the Trade Union Congress of the Philippines (TUCP) brings current compensation levels to a comfortable level. The latter is defined as that where net incomes allow wage earners to equalize recent increases in prices and current costs of living. It is important to note that under the P320 wage increase, disposable incomes will not grow, so there will be no improvements in the already pathetic national savings rate. Spending might increase, but only in so far as these are needed to equalize former subsistence levels. As there will be no increase in savings, there will be much less in investments. When the economic misery index (adjusted inflation rate plus unemployment rate) is computed, it will be zero sum for the increment demanded. Or even worse since the effects of what appears as run- away inflation and the fall of peso values are continuing, unmitigated with the latter not yet bottoming out. Reckoned from 2017 as the benchmark year, the projected misery index for this year was 8.9, not counting the inflationary impact of the recently passed Tax Reform for Acceleration and Inclusion (TRAIN). With urban inflation in Metropolitan Manila currently at 5.6% and unemployment at 5.3%, we’ve well broached the barrier of our worst projections and historical ceilings. If we apply the reported 4.6% inflation rate based on government data, we would still be beyond the projected maximum 8.9 for the misery index. It worsens when we add the more relevant albeit higher underemployment rate as an addend given the number of single-job individuals among most minimum wage earners. The foregoing shows that the upsides of a wage increase are sorely limited. Unfortunately, the downsides can worsen whatever psychic upsides might be produced. Let’s see why. One, already strained by high utility and power costs, businesses will be compelled to pay the P320 increment which they can only do so by forcing employees to multi-task. Those with limited skills might be retrenched, or replaced by cost efficiency systems compelled by the higher costs of doing business. After all, inefficient high cost labor is naturally addressed with cost efficient systems and technologies - acceptable retrenchment rationale under the Labor Code. The run-away prices we are experiencing is due to cost-push inflation where cost multipliers like petroleum products found in nearly every link in the value chain were applied an excise tax that tends to cascade down the chain. Likewise, oil products are vulnerable to uncontrollable geopolitical sneezes of extremely volatile oil producing states. Fortunately it is this very same volatility that says the global oil price shocks are temporary. Installing a permanent solution to a temporary situation always leads to imbalances induced both by the different reaction times as one factor adjusts to others, and the unequal capacities to survive these imbalances. When high oil prices normalize as the uncertainties that caused them to rise disappear, labor cost increases remain thus transforming our labor sector uncompetitive. As encompassing as the incremental excise on fuel was under TRAIN, so would the P320 increase as another value chain cost multiplier. In an economy with a political bias towards labor given our high unemployment and underemployment rates and a deep fear of labor-replacing technologies and industrial mechanization, labor inputs are integral to just about every link in any value chain. Given such throwback to over a century ago, any inordinate increase in labor costs tend to increase aggregate costs across and thus catalyze price increases all around. Do the maths. While it might alleviate the psychic effects of inflation much like a placebo, a wage hike fuels unemployment, catalyzes the misery index and inflates costs of living even more than TRAIN has done.
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