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Opinion

Peaked

FIRST PERSON - Alex Magno - The Philippine Star

The US Consumer Price Index for July showed inflation decelerated to 8.5 percent year-on-year. In June, inflation registered at 9.1 percent.

This might be a slight decrease. It is nevertheless significant. It gives us hope the inflationary surge that swept all the world’s economies might have peaked.

The lower inflation number reflects the declining price of oil. In the US, fuel prices saw sustained declines for over 58 days. The forecast is for oil prices to continue declining over the next few weeks. All over the world, fuel prices have been the main drivers of the inflationary surge we have been experiencing the past weeks.

It is a challenge to predict oil price movements in the longer term. There are many factors influencing the price movements of this commodity. In the immediate term, however, there appears to be consensus oil prices will be soft.

The most important thing causing the spike in oil prices earlier was the outbreak of war in Ukraine. The Russian invasion invited economic sanctions. Since the country is a major oil exporter, the sanctions affected supply and forced up prices.

It helped that the US decided to draw from its strategic petroleum reserves to flood the market with the vital commodity. Those reserves are finite, however. Sometime soon, the US will have to replenish its reserves. In turn, replenishment will put pressure on available supply.

It also helped that China’s stubborn pursuit of a Zero-COVID strategy slowed down her economic growth. The world’s second largest economy is almost totally reliant on imported oil. China’s slowdown receives some of the pressure on global oil supply.

Oil exporting countries such as Saudi Arabia, under American diplomatic pressure, agreed to ramp up production. The increased production, although limited, adds to available supply. Hopefully, the oil exporters could divert some of their humungous revenues to building new refining capacity in the future.

In addition, there are on-going initiatives to lift economic sanctions on Iran. These initiatives hope to get Iranian oil flowing to the global market.

Over the past few months, all diplomatic efforts have been exerted to bring up oil supply to capacity. It remains, however, that investments in new capacity have not been enough to meet rising global demand. It will take years to significantly add the existing refining capacity.

Meanwhile, it appears that the war in Ukraine will persist for many more months. The Russians expected to roll over Ukraine in a matter of days or weeks. Stiff Ukrainian resistance and the delivery of modern weaponry from the Western powers guarantee a long war. Putin is not about to lose face and walk away from this insane adventure.

This might not exactly be a consolation. Historically, spikes in oil prices ended in recession. Should the feared recession in the industrial economies happen, that will dampen demand for oil and force down prices. The cure might be more painful than the disease.

Finally, we have to recognize that oil prices are not the only things causing the current elevated inflation. Disruptions in the supply chains due to the pandemic as well as the war in Ukraine play a role here as well. It will take a while to rebuild the supply chains, especially for food.

It is too early to say that the inflationary surge has peaked for the Philippine economy as well. Like most other countries, the elevated inflation we are dealing with is due principally to the spike in oil prices. The increased price for crude oil is magnified by the significant decline in the peso’s exchange value.

In addition to oil, the higher prices for wheat in the international market fuels domestic inflation. We are totally dependent on imported wheat.

A whole range of agricultural products, from sugar to onions, is now being imported. Blame this on the weakness of our agricultural sector.

As agricultural imports add to the oil bill, our trade deficit worsens. The worsening trade deficit takes a toll on our international reserves. As our international reserves are depleted, there will be additional pressure on the peso to depreciate. This is an unhealthy cycle.

The solution is not agricultural protectionism. If we ban food imports, there will be food shortages domestically. If there are food shortages, there will be profiteering and speculation. Rising food prices will fuel inflation. It will induce food poverty.

For all these reasons, we do not expect our own inflationary episode to peak as soon as it appears to be going in the US — even as we expect another oil price rollback next week and maybe the week after that. Food prices will continue to linger on as an inflation driver.

Our growth numbers for the second quarter show that economic expansion is reined in by diminishing consumer demand. In conditions of elevated inflation, consumers apportion spending very carefully. Expensive fuel and food corner disposable incomes.

Our growth is consumer-led and the services sector is the largest contributor. This is the reason analysts are now telling us that growth in the second half of the year will probably be even more challenged than in the first half.

Still, the possibility of oil prices softening further in the coming period is good news. It could unhinge the dynamic of expensive fuel and expensive food pushing up our inflation and pushing down our currency.

Our economy remains embattled. But so are most other economies.

We simply have to be more adept in our policy responses to the challenges of this time.

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