Benign

Most of us who depend on fixed wages keep a close watch on the inflation figure. Any uptick in inflation erodes the purchasing power of our salaries and creates political pressure for the state to intervene in wage setting.

We have been unusually keen on the inflation number in the light of external events that will affect our quality of life. Principal among these events are the war in Ukraine because of its double-barreled effect on energy and food prices.

The economic sanctions imposed by western countries against Russian exports brought up global energy prices. Russia and Ukraine combined account for nearly a third of global wheat production. The dislocations caused by war, especially on Ukrainian farms, raised fears of global food shortages.

Well into the medium term, we expect elevated food prices. This is largely due to the fallout from Putin’s war.

Since the start of the year, gasoline prices rose by P18.45. Diesel prices rose by P31.45. Kerosene prices rose by P25.05. We expect global oil prices to remain at the present high range well into the medium term. That will provide a sustained cost-push on the prices of other goods. Production and transport of these goods are influenced by fuel prices.

In our case, the prevailing global energy prices could be slightly magnified by the erosion in the peso’s exchange value. The estimate is that the peso could decline to P54 to a dollar towards the end of this year.

We are not an export superpower like China is. Much of our dollar supply comes from remittances by our expatriate workers. Additional dollars come in from investments in our economy.

The good news is that both sources of hard currency will likely increase, but only marginally in the case of remittances. The introduction of liberalization reforms enhances the entry of direct foreign investments.

But our currency will continue to be under pressure. We have a higher oil importation bill due to the elevated pricing regime. Any increase in policy rates by the US will strengthen the dollar as investors seek sanctuary in the US market amidst all the volatility.

The BSP has maintained a “dovish” position in the matter of policy rates, preferring to hold on to a lower interest rate regime to stimulate our domestic economy. Any forthcoming adjustments in the interest rate will be marginal and reluctantly undertaken.

Much of the industrialized economies are using higher interest rates as a means to douse inflationary pressures. The period of cheap money that fueled economic expansion over the past decade or so is ending. Higher interest rates lead to lower investment appetites.

Considering all of the above, it is remarkable that we have managed to moderate inflation in our economy. One business paper conducted a poll of analysts. That poll had a median inflation expectation of 4.6 percent for the month of April. The BSP projects an inflationary range of between 4.2 percent and 5 percent.

We will know in a few days, when the PSA releases its official inflation figure, what the actual number is. If that official number approximates the expectation of our analysts, we can say domestic inflation remains benign, all things considered.

Several things help explain why we have managed to rein in inflation.

One important factor is the liberalization of rice trading. This has kept the price of this staple commodity relatively steady. Our consumers benefit most from this.

It used to be that rice prices drove up inflation pressure. That is no longer the case. Rice is now inflation-neutral.

It used to be that only the government-controlled NFA imported rice. That created market uncertainty, encouraged price speculation and harbored numerous corrupt practices.

Huge subsidies were paid out to the rice-producing sector in the form of free fertilizers, free irrigation, free milling and warehousing. These subsidies did not solve the basic problem: the continuation of subsistence production methods. This pushed up our cost of production beyond average international prices for the commodity.

Like sugar production, our rice sector became a poverty trap. Because of this, the average age of our rice farmers increased consistently. Still we maintained protectionist polices in the rice sector. Any modernization of this sector was inhibited by the prevalence of the social justice orthodoxy that prevailed where we chose the inefficiency of breaking up landholding into small plots.

The cost of producing rice could be reduced by extensive mechanization. But this required consolidating farms. The orthodox political left frowned on this option. Thus we continued to cultivate this crop by the most primitive means.

The Rice Tariffication Law was passed only recently. It was kept on the legislative shelves by protectionist opposition to it, mainly from the leftist party-list congressmen. The same ideological community kept delayed the establishment of the national ID system by 25 years, the Mining Act by a decade, the other liberalization measures by so many years.

It was only the Duterte administration, with its legendary political will, that broke the Gordian Knot that kept our economy in the backwaters. The importance of the reform measures cannot be overstated. They are indispensable to the strong post-pandemic recovery we look forward to.

The leftist groups are constantly referred to as “progressives” in the mainstream media. That is a form of disinformation. All the policy options they espoused are regressive.

If the leftist ideological cults got their way, we would have been unprepared for digitalization. Our protectionist policies would have continued to discourage investments and forced us to high inflation rates – keeping us the Sick Man of Asia.