FIRST PERSON - Alex Magno - The Philippine Star

The latest Pulse Asia survey reports that inflation is our people’s foremost concern.

There is nothing surprising nor extraordinary about that. Our inflation rate for September was reported at 6.9 percent, led by a spike in food prices. High food prices are brought about by higher transport costs, shortages and the chronic inefficiency of our agriculture. Expensive food has the most immediate impact on our poverty profile.

Concern about inflation is not unique to our citizens. All over the world, rising cost of living is the foremost concern. It is the main source of political stresses.

Monetary authorities everywhere have been trying to push back inflationary surges by raising interest rates. Monetary policy is the easiest method for intervention, of course. But it also a blunt instrument. Raising interest rates chokes economic growth.

This week, prospects for pushing back inflation just got bleaker.

The oil exporting economies (OPEC+) decided to cut back production by 2 million barrels a day. This is double the market expectation for a cut of 1 million barrels a day.

OPEC+ is not cutting oil production because of concerns over global warming. The cartel is cutting production to keep prices high.

Energy experts are trying to talk down the significance of the announced production cuts. They are telling us that actual production has been below quota anyway and the latest cartel decision will only effectively result in trimming available supply by 600,000 barrels per day. That explanation, however, does not assure us that the oil producers will discontinue producing below their respective quotas in order to pressure prices upwards.

Over the next weeks and months, we should expect oil prices to resume their climb after only a hundred days of decline. The world again faces prospects of oil priced at over $100 per barrel.

At that price level, inflation trends are not about to abate. We can expect inflation to remain elevated deep into the next year. Recession in the largest industrial economies is nearly certain.

Countries importing nearly all their oil requirements will be most badly hit. This includes the Philippines. The rising price of crude oil is exacerbated by the depreciation of most currencies against the dollar. Oil is priced in dollars.

The production cuts ordered by the oil cartel will benefit only Russia. It effectively neutralizes the European Community’s efforts to impose a price cap on energy imported from Russia. It makes prospects for a very cold winter in Europe all the more imminent.

At the moment, the possibility of energy rationing in the wealthy European countries is rising.

In the US, the political fallout from the OPEC+ decision will be more immediate. A few weeks ago, US President Joe Biden traveled to Saudi Arabia and backtracked from its sanctions on that country in order to win diplomatic leverage against possible production cuts. The effort has evidently failed.

Inflation is at the top of mind of American voters. The principal measure of that is the price of gas at the pumps. When gas prices softened, Biden’s political approval ratings rose. Now that gas prices are likely to rise, we can expect Biden and the Democrats to lose support on the eve of crucial midterm elections.

In Italy, a coalition of far-right parties won the elections held just over a week ago. That election, it is widely conceded, was shaped by consumer discontent over rising prices.

As inflation keeps its hold on nearly all economies, and as governments rely on raising interest rates to fight back, the global economy will be under sever stress. Under conditions of stress breakages can happen in the most unexpected places.

I recall in 2007, the bank I worked for asked our economic staff to closely observe the credit card companies. Since consumer defaults were rising, we thought these companies were the weakest link in the financial chain. It turned out, US subprime mortgages were the most vulnerable point. That was where the dam broke, leading to the terrible global financial crisis of 2007-2008.

As monetary authorities everywhere rely on raising the cost of money to slow inflation, it is certain that we will see an investment slowdown. The cost of money simply raises that barrier for profitability. The higher cost of money may also take their toll on existing businesses that are either heavily leveraged or are reliant on sustained financing.

In this inhospitable financial environment, even large companies could prove vulnerable. One rapidly expanding conglomerate is already having difficulty servicing its debt.

Like their counterparts everywhere else, our Monetary Board has been aggressive in raising interest rates. The aggressiveness is driven by a desire to curb inflation and prevent the peso from further depreciating. In a way, this is a forced move, considering that a falling peso will contribute to driving up domestic prices.

Citizens everywhere imagine that inflation is something well within government’s power to control. While fiscal and monetary management is indeed among government’s primary responsibilities, it is wrong to fully expect government can decree prices to stand still.

In our case, we cannot command lower oil prices. This is the principal driver of the current price surge. Although we are entirely dependent on oil imports, we cannot bargain oil prices on our own – not even with Russia.

We cannot, hard as we try, decree the exchange rate of our currency. It is a function of interest rate decisions made in other capitals as well as the nuances of our trading position.


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