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.