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The US economy’s impact on domestic inflation

Dean Dela Paz



At a time when the Philippine Senate was grappling with an internal rodent problem what grim prospects shrouded both the justice system and the local economy was temporarily set aside by what the political opposition thought was a comic pause. On his way back from reassuring our overseas Filipino workers in the Middle East, Rodrigo R. Duterte commented on one of the causes of inflation in our economy.

Reacting to the US-imposed tariffs, Duterte reportedly said, “This inflation under my watch, believe (it) or not, started when America under Trump imposed duties on Chinese goods which prompted retaliation. When America raised (tariff) rates and interest rates, everything went up.”

His critics went to town on what to them was a gross misunderstanding of the global economy and an attempt by the President to parry criticism away from the economic playbook pursued by his administration.

We think Duterte is not only correct in specifically identifying US policies as a potent contributor to domestic inflation but he has also displayed a rather profound understanding of globalization’s linkages among trading economies and warring states.

Duterte specifically pointed to three things: the US vs China trade wars, retaliatory tariffs and interest rates. Let’s analyze each with regard to how these impact on our economy, specifically on inflation and the price of domestic goods.

The trade war between the United States and China is nothing new. Previous battles were focused on disputes regarding China’s deliberate devaluation of the Renminbi so as to make its export products so inexpensive that the Chinese economy attracts American manufacturing and production outsourcing enough to increase Chinese employment.

The devalued Renminbi relative to the higher valued dollar also dampened China’s appetite for American goods where these entered the Chinese economy as higher priced luxuries.

Given these continuing skirmishes between the Americans and the Chinese, a recent variable introduced into an already lopsided equation increases risks on both sides. As the US increased tariffs to prevent Chinese goods from freely entering, the Chinese retaliated with pretty much the same. The trade wars now include a currency arena as well as a tariff arena.

Together these increase risks on total global trade as both economies are not only the Alpha Prime economies of the world but their volume of trade between each other and other economies is the highest. The general increase in tariffs creates friction in international trade restricting the smooth and free flow of goods. Tariffs between major trading economies increase global costs and global prices and the tensions of a trade war increase risks.

The global financial community quantifies those risks through interest rates. The higher the risk, the higher the interest rates.

It is at this point that global risks and the uptick in interest rates enter our porous economy already made vulnerable by our dependence on global products such as oil and global money such as debt capital. Higher interest rates increase the costs of debt capital and compel local manufacturing to either increase prices or reduce production volume. Both ways, prices tend to rise and when these products are integral to the Filipino basket of goods, inflation moves up.

Other recent US policies introduced during the Trump administration impact on domestic inflation. Lowered taxes introduced through Donald Trump’s tax reform program had increased consumer demand and pushed up American manufacturing activity. This naturally led to higher employment.

The higher employment allowed the US Federal Reserve to increase key policy rates which not only attracted capital previously invested in the Philippine capital markets but the resultant outflow compelled the Bangko Sentral ng Pilipinas to increase interest rates to attract back fleeing capital.

The downside of these responses to US policies is an increase in local debt costs that forces both product costs and prices up.

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