6.6%

The Philippine Statistics Authority (PSA) tracked inflation for the month of April at 6.6 percent. That is a significant drop from the 7.6 percent rate for March. This is the third straight month that inflation decelerates. It is significantly lower than the 7 percent the market projected.

Our inflation rate is definitely easing. One could say it is cooling.

Nevertheless, the inflation rate for the first four months of the year still stands at 7.9 percent. That is much too high for comfort. We have to bring down May and June inflation closer to about 5 percent to be assured the trend is taking hold.

A number of benign factors contributes to the cooling.

Fuel prices have softened despite the substantial OPEC production cut. The oil cartel, however, is threatening to enforce another production cut this month to improve prices. The specter of a recession hitting the industrial economies later this year and the minimal rise in fuel demand in China despite its reopening cause the softening fuel prices. While crude oil prices spiked to about $84 per barrel after OPEC announced production cuts last month, it receded to about $73 per barrel this week.

Food prices also softened in the first trimester. We did not experience severe weather during this period. However, we will feel the El Niño phenomenon over the next few months. Although this weather pattern normally produces less rain than usual, the past few years have also seen major flooding events due to aberrations in weather patterns. Ondoy, Milenyo and Yolanda are severe weather events that occurred during El Niño years.

The usual El Niño pattern is hardly assuring, however. The usual pattern spells drought in some of our most productive agricultural areas.

The apparent slowing of the inflation rate is due to policy intervention. The series of interest rate increases imposed by the BSP chokes market demand. This restrains growth, although it also cools the inflation rate.

Much of the global growth after the 2008 financial crisis was due to the concerted “quantitative easing” of the world’s central banks. The sharp reduction in interest rates to nearly zero in some cases (negative in the case of Japan) produced a regime of cheap money that encouraged economic expansion. Eventually, it also established the conditions for the high inflation regime we are now fighting.

In place of “quantitative easing,” the world’s monetary authorities have shifted to the opposite: “quantitative tightening.” High policy interest rates mop up liquidity in the market and compress stock prices.

The drop in stock prices hobbles corporations from growing their businesses. In the case of banks, the drop in market capitalization could lead to operational stresses. Last week, the second biggest bank collapse in the US happened. Investors selling down banking stocks produces a lingering panic in financial markets, with some expecting something big to break soon.

Our slowing inflation rate is also due to conscious government action to counter the rise in commodity prices by allowing importation of vital food items. The propensity to import is compelled by political necessity. Although highly popular, this administration suffers its lowest approval ratings on inflation management.

Importation is an easy way to avert sharply rising food prices that feed into the aggregate inflation rate. It also removes the urgency of undertaking the dramatic steps to improve the efficiency of domestic agriculture. In the first quarter, it is estimated that our agricultural output was flat.

Anxious to cool inflation, government has also “encouraged” some utilities to postpone raising their charges – despite contracts allowing them to do so to recover their costs. While this may be helpful to our struggling consumers, it is still political intervention overriding market forces. This will not help in encouraging investors to come into our market to create quality jobs.

The point is: While we may see signs of inflation slowing down, the road forward will not be easy. A lower inflation regime is not a certainty this year.

Our propensity to import commodities that a more efficient domestic agriculture should have produced contributes to the yawning trade deficit we have been posting. We are not growing our exports to overcome this. A yawning trade deficit saps the peso’s strength. A currency depreciation will add to inflationary pressures down the road.

Our inability to quickly industrialize our agriculture will retain inefficiencies down the road. These inefficiencies due to failure in capitalizing farm production push up food prices over a protracted period. Inflation will become structural and therefore chronic.

Meanwhile, all eyes are on the Monetary Board and the probability it could pause its interest rate hikes. The US Fed decelerated its “quantitative tightening,” raising policy rates by only a quarter of a percent last Thursday. The BSP tends to be guided by the US Fed’s decisions and its principal concern appears to be defending the peso’s exchange rate by mimicking the bigger central banks.

There are limits to what monetary policy alone can achieve to curb inflation. There is no substitute for making the domestic economy more efficient.

Erratum

Sometimes it is the biggest things that escapes the proofreading eye.

In last Thursday’s column, I failed to catch a vital typo. The US debt stands at $31.4 trillion (not billion).

That is a staggering sum. If I write out that amount, it will consume an entire paragraph in this space-starved column.

It is my responsibility to proofread what I write even as I tend to be very poor at that. The error is entirely mine.