Fare increase seen to bump up inflation

MANILA, Philippines —  British banking giant HSBC expects a sizeable increase in inflation after the Land Transportation Franchising and Regulatory Board (LTFRB) granted a P1 fare hike in the National Capital Region (NCR) and several provinces.

Aris Dacanay, economist for ASEAN at HSBC, said in a report the minimum fare was raised to P10 to help the transport sector cope with higher diesel prices.

“Given the fare hike, the headline inflation may increase by 0.2 to 0.3 percentage point, or 0.4 percentage point if other regions follow suit. Indeed, a big and untimely uptick in the high inflationary environment we have today,” Dacanay said.

Inflation quickened to 5.4 percent in May, the highest since the 6.1 percent booked in November 2018, from 4.9 percent in April. The consumer price index (CPI) averaged 4.1 percent between January and May, exceeding the two to four percent target of the Bangko Sentral ng Pilipinas (BSP).

“The hike is a clear indication of second-round effects. With the ubiquity of jeepneys, the hike may raise inflationary expectations further and lead to more types of second-round effects once other parts of the economy begin internalizing the cost,” Dacanay said.

The stronger-than-expected gross domestic product (GDP) growth of 8.3 percent in the first quarter has allowed the Monetary Board to start its interest rate liftoff to curb rising inflationary pressures.

The BSP delivered a 25-basis- point hike last May 19, raising the reverse repurchase rate to 2.25 percent from an all-time low of two percent. This was the first rate hike in more than three years or since November 2018.

Outgoing BSP Governor Benjamin Diokno earlier hinted of a possible follow-up 25-basis-point rate hike on June 23.

Dacanay said that it is in the interest of the government to protect the transport sector that is badly hit by the rise in global oil prices.

“With the risk of jeepney operators stopping their operations due to high costs, inflation is better than no transportation. There are already fuel subsidies in place of P6,500 per driver to help ease the burden,” Dacanay added.

With fuel prices increasing at a high rate, the economist pointed out that policymakers and lobbyists are looking into other policies such as raising fares or suspending fuel excise taxes.

“In our view, a fare hike is a more sustainable and fairer solution than suspending fuel taxes. But let’s dissect the trade-offs further. In the short-term, a fare hike definitely hurts. As mentioned, this may increase the inflation rate that is already way above target,” Dacanay said.

According to Dacanay, a hike in public transportation can also make the general population worse-off and may slightly dampen growth in the very short term.

Transportation, he explained, can be considered as a staple and a rise in the price of a staple means less discretionary spending, dragging growth in the short-run.

“But perhaps it may not hurt as bad given the strong growth we are experiencing today due to the re-opening of the economy,” he said.

The British banking giant said the  economy would be better-off in the long run since cutting excise taxes would be unfair in an intertemporal sense.

“If the government cuts taxes in a fiscal environment that’s already tight, then future generations will be the ones paying the debt the country incurred due to COVID,” Dacanay said.

He said raising fares would also be more efficient if we employ the “users pay principle.”

HSBC said the fare hike has largely been delayed as minimum jeepney fares have not kept up with overall inflation since 2011.