Decelerating

The Philippine Statistics Authority reported yesterday a significant deceleration in our domestic inflation rate. From 6.1 percent in May, the rate has come down to 5.4 percent in June.

The deceleration of the headline rate is due largely to the softening of oil prices and good weather conditions. It is consistent with the deceleration experienced in most of the world’s economies. It also reflects the effect of monetary tightening that is now working its way through the economic system.

Analysts expect the deceleration to continue over the coming months. The BSP is bravely predicting inflation will move closer to the target range of 2 to 4 percent in the closing quarter of the year.

The increase in minimum wages in the NCR and higher toll rates could slow the deceleration in the coming period, however. A sudden surge in oil prices could alter the momentum dramatically.

Saudi Arabia is pushing for more cuts in oil production to push up prices. The country needs oil to be priced at about $81 per barrel to avoid a budget deficit.

Fortunately, oil prices held relatively steady despite production cuts of over a million barrels a day. This is due largely to lower growth forecasts in China and the onset of recession in several industrial economies. If Saudi Arabia continues cutting production to raise prices, she could push much of the global economy into recession.

It helps, too, that Russia is selling as much oil as she can to earn hard currency her economy badly needs at this time. Russian oil is sold to China and India. The two most populous countries, also for their self-interest, are defying the economic sanctions imposed on Russia by the West.

We must note as well that the massive investments in renewable energy sources and the wider use of electric vehicles serve to lessen demand for oil. Both trends have significantly surpassed expectation.

The disruptions in the global supply chains continue to provide a cost-push to inflation. The problems our airlines have experienced keeping their fleets flying is a result of supply chain breakages. In the face of what some call “revenge travel,” many of the world’s airlines (including ours) are lacking spare parts to keep all their planes airworthy.

While, in our case, headline inflation has dropped rather dramatically, core inflation is decelerating at a slower pace. Core inflation rates are calculated taking out the commodities with more volatile pricing. This is the tougher nut to crack.

Our core inflation slowed from 7.7 percent in May to 7.6 percent in June. Food prices continue to post price increases. These will have bigger implications on the quality of life of poorer Filipinos.

Businessmen are confident that the lower headline inflation will encourage our monetary authorities to continue with their pause on interest rate increases. These increases, intended as instruments to slow inflation, also choke investments and slow our economic expansion. Continued rate increases could cause more vulnerable companies to fail.

The only viable scenario that could push our monetary authorities to resume raising interest rates is one where the peso depreciates rapidly, adding to inflationary pressure. At the moment, the peso seems to be holding its ground well. Unless the US Fed raises its policy rates, we might expect the peso to climb up to the P54:$1 level.

The good news on the inflation front, it must be emphasized, does not diminish the urgency to radically reform our agriculture logistics system. The inefficiency of our logistics system provides the cost-push for rising food prices.

Last week, we were treated to the sad spectacle of unsold pineapple being dumped in Isabela and Cagayan. This is a replay of last year’s sad spectacle of tomatoes being dumped for want of buyers. If we had enough of even the most elementary food processing capacity in these areas, the dumping should not even be happening. The excess production not immediately absorbable by the market could be processed to prolong their shelf life.

Our agricultural policy is focused on supporting basic subsistence farms and not on intermediary agro-industries such as community-based food processing, building cold chains and improving market responsiveness. There is little support for orchards and other high-value but long gestating agricultural activities. This is the reason we import so much fruit products from China and Thailand as well as processed food from all over.

Our inter-island shipping is costly and inefficient. This hampers agricultural development in the smaller island economies. It provides a cost-push for food products and limits food access. The shipping monopolies are to blame for this.

For decades, we have been obsessed breaking up land ownership against the logic of economies of scale. For this reason, production of staple crops are higher here than in our neighboring economies.

We seem to be content importing what we lack. But this is based on the dangerous assumption that what we need to import will be readily available when we need them. The international market for rice, for instance, has been gradually tightening.

If we find the courage to defy old orthodoxy, we should begin consolidating our farm systems. This will pave the way to capitalization and mechanization of our agriculture, the keys to a lower food price regime.

The last few days, there was much talk about syndicates smuggling and hoarding onions. That is a pathetic discussion.

Smuggling is only a symptom of an agricultural system that has failed the global standards for efficiency. A weak agriculture makes inflation chronic.