5.1%

The inflation rate is not just a number. A whole constellation of consumer and investor decisions hinge on the rate at which prices escalate.

Yesterday, the Philippine Statistics Authority announced 5.1 percent as the inflation rate for December. That is half-a-point lower than the forecast of 5.5 percent made by bank economists. This is very good news.

The 5.1 percent December rate brings the 2018 annualized rate to 5.2 percent. While that is significantly higher than the upper-range target of 4 percent made a year ago, it is far lower than the horrific scenarios made by those who seem to wish the heavens fall on our economy.

The biggest driver of the de-escalation is, not surprisingly, the retreat in fuel prices. When oil prices spiked, so did the inflation rate. When they softened, the inflation rate slowed.

Inflation is both bad and unavoidable. It penalizes consumers by deflating the value of their disposable incomes. It makes food inaccessible to the poor. It discourages savings, drying the pool of investible funds. When the inflation rate is high, consumers tend to spend their money as quickly as possible.

But when an economy is growing, especially at the fast rate we aspire for, there will be pressure on our supply systems. That will tend to push up prices. It is impossible to achieve both high growth and low inflation.

We can, of course, choose to moderate our growth in order to keep inflation low. But that will penalize the poor more. It will keep both poverty incidence and unemployment high. The poor will be kept in a purgatory of misery.

The elevated inflation we saw in the latter half of 2018 is the outcome of many factors: high oil prices, the strong dollar implying depreciation of the peso, shortages of crucial food items and, yes, tax reforms that pushed up the prices of tobacco and sugary drinks. It is also the outcome of greater disposable income made possible by lowering the personal income tax rate and offering free tertiary public education. This expresses in stronger consumer demand, stretching our supply systems.

Anti-Duterte politicians, unfortunately, decided to politicize the inflation rate by blaming it entirely on the tax reforms. They were trying to carve out a battleground where they could score points by forcing the administration to retreat from the reforms. At the very least, they wanted the elevated inflation rate to blight the President’s job approval ratings, the easier to defeat him.

These politicians created heat but not light. They obscured the complex considerations underpinning our economic strategy and imputed malice on the reform policies. Worse, they sought to undermine our efforts at fiscal consolidation to create the budgetary space for an economic surge.

If we listened to the critics, our credit ratings would have suffered.  We would have become less attractive for investments. Our growth would slow rather than quicken. The poor would have been greatly harmed.

These opportunist politicians are still at it. After the policy decision was taken to continue with the added fuel excise tax, they claimed this was unnecessary. Government, they allege, is already swimming in cash.

This is fake news. From the birth of the Republic, our government has been laboring under a chronic budget deficit. This is the reason we accumulated a debt stock of over P7 trillion.

There is not much clear thinking in the populist noises these politicians make. Those who claim government has too much money should not be entrusted with power. They will sabotage our fiscal stability.

Make a list of these politicians who make bizarre noises in aid of election. Then refuse to vote for them next May. That is what patriotism dictates.

Meanwhile, most regional economists foresee our inflation rate to decelerate to within the BSP target range by the middle of the year. This should neutralize on-going efforts to politicize the inflation rate.

More important, deceleration will improve the investment-attractiveness of our economy. No one will want to put good money into a country whose currency is shrinking and who asset values are diminishing.

Managing inflation is an important factor in managing economic growth. An overheating economy will make a painful correction inevitable. It is clear from the latest numbers that we have managed to tame the inflation threat.

That does not mean the job is done.

We have to continue improving our supply systems. It does not help that our agricultural sector continues to stagnate. It will do no harm if the Department of Agriculture adopts a strategic vision to improve reliability of food supplies while building up rural incomes.

The numbers show that inflation was highest in the ARMM and lowest in the CAR and Central Luzon. The comparative efficiency of distribution systems between the regions explains this. We cannot begin solving our vulnerability to food supply problems unless we dramatically improve our domestic logistics systems.

For years, we have as a matter of policy subsidized inefficient farms systems, hoping to bring down food prices. It is time to focus on modernizing our logistics system. This will simultaneously improve farm incomes and bring down commodity prices.

I recall this truly outrageous photo taken last year of Quezon farmers destroying their tomato produce because they make no money bringing it to market. Such a scandalous thing should never have happened if we had better intermediary food processing capacity and a better cold chain to preserve the crop.

There is much work to be done in this regard.