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Partly bad luck, mostly mismanagement.

By this time, most are aware by now that September's inflation of 6.7 percent is the highest in almost 10 years. The last time it was higher was 7 percent in February 2009 in the midst of the Global Financial Crisis caused by the US Financial Crisis. With respect to the Bangko Sentral ng Pilipinas's targets, 6.7 percent overshoots the midpoint target of 3 percent by 3.7 percent and breaches the target range of 2 to 4 percent by 2.7 percent. As to the causes of the spike in inflation, many attribute this to The Tax Reform for Acceleration and Inclusion Act or TRAIN, bad luck due to the spike in the global price of oil and operational mismanagement.

The TRAIN is believed to be the first cause, but is a minor contributor. The TRAIN is notorious for taxing sugar sweetened products. However, goods categorized under (1) Non-Alcoholic Beverages and (2) Sugar, Jam, Honey, Chocolate and Confectionery contributed 0.26 and .07 percent, respectively, totaling 0.33. In other words, the tax on sugar-sweetened products caused inflation to hit 3.33 percent, missing the midpoint target of 3 percent by only 0.33 percent. The TRAIN is also notorious for taxing 'sin' products. Indeed, Tobacco has the highest inflation among all categories at close to 30 percent. However, because it is not a 'good,' in fact it is a 'bad,' hence a sin product; it has minimal weight contributing only 0.25 percent on top of target. In other words, the tax on Tobacco caused inflation to hit 3.25 percent, missing the midpoint target of 3 percent by only 0.25 percent. Combining the effects of the TRAIN, inflation would become 3.58 percent, overshooting the midpoint target of 3 percent but not enough the target range of 2 to 4 percent.

The second cause is bad luck due to the spike in the global price of oil. From 2000 to 2018, every 1-percent increase in annual average of the global price of oil (or simply oil) is correlated with approximately 0.05 percent increase in inflation. From September 2017 to September 2018, the price of oil increased by roughly 45 percent. If the correlation holds, an additional 2.25-percent inflation is expected. What actually happened? The goods categorized under (1) Operation of Personal Transport Equipment and (2) Electricity, Gas and Other Fuels contributed 0.56 and 0.45 percent respectively, totaling 1.01. This is just the direct effect. The indirect effect includes some increase in the price of transported goods like food. But counting only the direct effect, the increase in the price of oil caused inflation to hit 4.01 percent, overshooting the midpoint target of 3 percent and just enough to breach the target range of 2 to 4 percent.

The third cause is operational mismanagement. The goods categorized under (1) Rice, (2) Fish, (3) Vegetables and (4) Meat contributed 0.7, 0.6, 0.47 and 0.34 percent respectively, totaling 2.11. The increase in the price of food caused inflation to hit 5.11 percent, overshooting the midpoint target of 3 percent and more than enough to breach the target range of 2 to 4 percent. Adding the minor effect of the TRAIN of 0.58, the big effect of oil of 1.01 and the biggest effect of food of 2.11 makes what would have been a 3-percent inflation become 6.69 percent. That explains the actual 6.7-percent inflation.

It is partly due to bad luck. By November 2017, multilateral institution World Bank, intergovernmental organization Organisation for Economic Co-operation and Development, and the futures market predicted the average oil price in 2018 to hit around $55. By September 2018, the three project the oil price to $65, $70 and $70, respectively. Hence a year ago, nobody was able to predict oil price to spike by about 50 percent.

But it is mostly operational mismanagement. To be clear, it is not an economic mismanagement; rather, it is an operational mismanagement. As far as available data is concerned, the present administration has had eight quarters of evidence to show for. In these eight quarters, the agriculture and fishery sector produced seven growths and one contraction (a negative growth), registering a total growth of 6.5 percent. The previous administrators' last eight quarters produced two growths and six contractions, registering a total of 2-percent contraction (negative growth). Surely, there must have been an improvement in economic management. But the resultant expected stable price in food turned out to be the biggest contributor to inflation. In the case of rice, the National Food Authority was not able to secure enough supply, only to import when prices has already gone up. As for the rest, something went wrong operationally in the supply chain from when fishes, vegetables and meat were harvested to when they go on sale to consumers.
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Publication:Business Mirror (Makati City, Philippines)
Date:Oct 19, 2018
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