Inflationary screw-up

• Published date: 09 February 2023
• Publication title: Business Mirror

Everything was normal until July 2022. For 25 years, Philippine inflation followed-lagging sometimes, leading occasionally-the price of Brent crude oil. A price chart of the two together is understandable to an eight-year-old child, let alone super educated economists. 'Gee Papa, the lines go in the same direction'.

After a spike in March 2022 following the Russian invasion, Brent hit another high in June and has been in a downtrend since then from $121 to $82. July saw Philippine inflation year-on-year at 6.4 percent. August came in at 6.3 percent even as Brent went to $96.

But September inflation went up to 6.9 percent (Brent at $85) and October inflation went to 7.7 percent.

In my column on August 8, 2022, titled 'Inflationary psychology,' I wrote: 'Production costs for agricultural products in the Philippines are primarily fertilizer and transportation. And both of these prices reflect the global price of crude oil. But inflation is not only an economic event. It is also a psychological event. Because there is a genuine 'inflation psychology,' once prices start going higher, people believe that the trend will continue.'

'Even if oil and other input prices go down, end-user prices may not follow. Inflationary psychology is why when prices go higher, they do not go back down as fast if at all.'

Brent is still in a downtrend and Philippine inflation is in an uptrend maybe even stronger than before. Why?

To combat 'inflationary psychology,' we need to believe that we have seen the inflationary peak. I thought that was going to happen when Brent started a strong decline in early November. But November inflation came in at 8 percent with the uptick in the food inflation primarily influenced by the higher annual price increases in vegetables, tubers, and cooking bananas at 25.8 percent. The rice index only increased by 3.1 percent.

One condition is needed to stop inflation psychology: 'The only factor that will bring consumer prices down is 'price competition' between suppliers and that may take a year or so to kick in.' Food costs have both local and imported supplier competition.

Vegetable prices spiking, as exemplified by onions (not to mention salt to sugar), is the example. We import a lot of produce. However, there are...