Elevated

The inflation rate for February crawled up to 4.7 percent and most analysts are saying it will continue on an elevated level over the next few months. This rate is quite close to the 5.1 percent posted in December 2018, when we last swung to a relatively high inflation episode.

The present inflation trend remains low if compared to the double-digit rates our people endured during the eighties and nineties. But it is intolerable in this age when fiscal and monetary tools enable us to keep inflation in the low end of the single digits.

It is the principal mission of the Bangko Sentral ng Pilipinas to keep inflation low. The reasons for this go beyond macroeconomics and touch on social justice. Inflation, like most things that pester national livelihood, impacts the poor more than the rich. The more inflation happens, the more poverty will be endured.

While the national inflation rate for February was 4.7 percent, it was at a faster 5.5 percent for the bottom 30 percent of households. Inflation is a curse for the poor.

The unevenness of inflation distribution is heightened when its main driver is rising food prices. This is because as one goes down the income ladder, the bigger proportion of the household budget goes to food.

As in the elevated inflation episode of 2018, rising meat prices drive the current inflationary surge. The PSA tells us February meat prices rose 20.7 percent year to date. That is higher than the 17.1 increase tracked in January.

Inflation is also uneven geographically. It tends to be higher, across all categories, outside the metropolitan area. Fish prices, for instance, was tracked escalating at 5.1 percent year-on-year due to price spikes outside Metro Manila.

There is little indication the higher prices for meat and fish will abate shortly. We have serious problems with supply, especially the severe pork shortage we are experiencing due the massive culling to combat the spread of ASF.

Massive culling of possibly infected hogs should have raised a supply red flag much earlier. But the authorities began taking action only after sharp rises were reported in the wet markets.

When the authorities did take action, it was in the form of imposing price controls. This led to “pork holidays” which are basically retailer strikes against a policy that will cause them to lose money if they sell at market-dictated levels or be fined if they obey market dynamics. Our retailers have been thrown into a lose-lose position by policy responses driven more by politics than by economics.

Spiking pork prices is a supply-side problem. It requires supply-side solutions.

A politically enforced price cap will simply aggravate the problem by plugging the value chain and eventually ruining the supply chain. The short-term relief it brings is illusory; the long-term damage is incalculable.

Over the next few months, the food price inflation driver will be supplemented by oil price surges. That is not good news.

When lockdowns were enforced last year, oil demand dropped. Oil prices fell to about $30 per barrel. This week, Brent crude is running at just about $70 per barrel on expectation vaccine availability will drive up oil use.

It could rise further than today’s levels. Beyond the supply and demand equation, oil prices are rising at the dictate of the oil cartel. They have a preferred price level – somewhere close to $100 per barrel – and are prepared to squeeze supply to get there.

Two weeks ago, two major producers (Saudi Arabia and Russia) cut back production volumes beyond what was earlier agreed upon.  Understandably, the producers want to make the most dollars per unit of the fossil fuel they supply before renewable sources of energy take a larger bite of the market.

But we know from recent economic history that the closer oil gets to $100 per barrel, the greater the likelihood of oil prices inducing a global recession. The pandemic has already put the global economy on the path of recession. Steep oil price increases will simply drive the recession deeper.

Being nearly entirely dependent on imported oil, we are completely vulnerable to rising oil prices. The past year, two of our three oil refineries shut down. Where small oil retailers derive their business advantages from completely importing refined fuel, we are likely to lose the refining chunk of the value chain.

Against the fleet-footed small players using just-in-time importation of their stock, refineries and large storage facilities have become a drag on profitability. That might not be good for our oil security, but that is what business logic dictates.

Liberalizing rice importation enabled us to beat back the elevated inflation rates of 2018. Rice retail prices, in fact, fell to such levels that pulled down overall inflation.

Liberalizing pork importation should have the same effect in pulling back the inflation rate. It could cause second-generation problems for reviving our hog raising industry. Second-generation solutions will have to be applied here.

Bear in mind that our hog raising industry could take a whole decade to bounce back to the record levels they achieved in 2019. If we wait for this industry to fully recover, keeping protectionist policies in place until then, we court the possibility of a decade-long bout with elevated inflation.

It will be tempting for government to make a play for greater tariff revenues from pork, beef and chicken importation under the guise of protecting our inefficient domestic producers. But that will only keep prices high for a generation of malnourished Filipinos.

Or, we can simply pull out tariffs and let prices drop to cure inflation.