Soaring inflation can be tempered—IBON

November 4, 2022

by IBON Foundation

Research group IBON said that the Marcos administration can address high inflation and help millions of Filipinos cope with rising prices if it wanted to. The group also said that the people may find little relief and may be worse off should the government stick to its weak response of hiking interest rates and limiting subsidies.

The reported October 2022 inflation of 7.7% by the Philippine Statistics Authority (PSA) is the fastest in almost 14 years since December 2008 (7.8%). Inflation in the first 10 months of the year is already at 5.4% or approaching double the midpoint of the government’s latest 2-4% full-year target range.

In reaction, the Bangko Sentral ng Pilipinas said that it will take all further monetary policy actions to tame inflation. Specifically, raising key interest rates is expected to dampen demand and temper the acceleration of prices. The agency plans to raise key interest rates by 75 basis points (bps) on November 17. Key interest rates have so far been raised five times this year starting in July when inflation reached 6.1% in June.

IBON however said that raising interest rates can be double-edged and is a mechanical, conventional and inappropriate approach to current conditions.

Raising interest rates may reduce aggregate demand and inflationary pressures but can also dampen economic activity, depress jobs and reduce household incomes further, said IBON. But the economy has been slowing, so-called job creation is mostly low-paying and informal, and household incomes are already suppressed. Choking the economy and livelihoods is the wrong price to pay to lessen inflation, said the group.

IBON added that while the interest rate hikes may also seek to temper the depreciation of the peso, the government should instead consider more direct measures to reduce the demand for foreign exchange. One is spending less on import-dependent infrastructure projects and on external debt service. Another is possibly coordinating with other Southeast Asian countries and increasing controls on the outflow of foreign capital such as with transaction taxes, volume restrictions, and other regulations.

The group further explained that interest hikes to depress aggregate demand and inflationary pressures are particularly inappropriate since the problem is not abnormally excessive demand but from cost-push factors. Cost-push factors pertain to an increase in production costs that in turn can increase the prices of goods. Demand is not excessive and, for instance, the seasonally-adjusted quarter-to-quarter contraction in household spending shows that families are not spending enough and even suffering lower levels of welfare. Intending to lower aggregate demand also unduly places the burden of inflation adjustment on poor and middle-class families who are already consuming less as it is, IBON said.

IBON identified specific steps by which inflation can be tempered beyond raising interest rates.

On the supply side, IBON said that prices can be immediately lowered by suspending or removing consumption taxes such as value-added tax (VAT) and oil excise taxes.  Revenue losses from this may partially be made up for by any increased economic activity. The group added that revenue losses from scrapping consumption taxes can even be more directly addressed with higher taxes on high-income families, large corporations and billionaire wealth.

Additionally, considering that a large part of inflation is from food, IBON said that the government can also help lower prices with increased production, marketing and logistics support for rural producers.

On the demand side, wage hikes can be a start to support the purchasing power of families which has eroded so much after the excessive pandemic lockdowns and incessant oil and other price hikes, said IBON. Large and medium firms are likely to afford this, said the group, while small and micro enterprises can be assisted by the government with wage subsidies.

Substantial emergency cash or ayuda for the poorest 19-20 million families will also improve household welfare, spur economic activity and help give the supply-side measures more traction, IBON said.

There needs to be much more relief than the stinginess of “targeted subsidies”, IBON said. The Marcos administration also needs to give much more attention to addressing chronic vulnerabilities rooted in underdeveloped agriculture and domestic industry rather than being trapped in old ways of thinking and not doing everything to relieve the Filipino people’s mounting distress, said the group.