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Monday, August 11, 2008

Cielito F. Habito's Inflation Comparisons (No Free Lunch Article)

Here is an interesting read from Cielito F. Habito about the current inflation in the country entitled Inflation comparisons (No Free Lunch Column for the Inquirer on August 11, 2008).

Here is the column for the benefit of our readers...

Inflation comparisons

Consumer prices in July climbed the fastest in the last 17 years, rising 12.2 percent over the general price level in the same month last year. This is more than four times faster than the average yearly price increase in 2007, which averaged 2.8 percent for the year. Such double-digit inflation can no longer be taken in stride, and indeed, there are clear signs that most Filipinos regardless of income level have been moved to make real and significant changes in their consumption behavior and lifestyles. A question often asked of me as an economist is: how can we best respond to such rapidly rising prices, both as a country and as individual households or consumers? Answering this requires closer understanding of the nature of the current inflation we’re experiencing.

Poor: bigger victims

Which commodities have experienced the steepest price increases? Everyone knows that the recent surge in oil and food prices worldwide is largely behind all this. The data show that prices in the commodity group of food, beverages and tobacco (FBT) rose the steepest (17.8 percent), with prices of food alone going up 18.6 percent. Drilling down even further, rice went up a whopping 50 percent over last year’s price. Other food items that rose by double digits were corn (40.6 percent), other cereals (17.6 percent), fruits and vegetables (13.8 percent), dairy products (13.1 percent), and meat (11 percent). Eggs were actually cheaper in Metro Manila compared to last year.

Fuel prices were up by 27.5 percent, but because price of electric power was actually lower than year-ago levels, the overall category of fuel, light and water only rose 5.5 percent. The only other expenditure category whose prices rose by double digit rates was services, at 12.4 percent. This is dominated by transport and communication services (18.1 percent), whereas all other specific services (e.g. educational, medical, personal, recreational services) saw only single-digit increases.

What all this suggests is that inflation has taken a heavier toll on the poor than on the rich, with food and transportation costs figuring much more prominently in the budgets of the former.

Metro Manila bias?

Where in the country were price increases more serious? The CARAGA region in Mindanao (Region 13) had the highest overall inflation rate in July, with prices rising by 22.2 percent over last year’s level. Following closely were the Zamboanga Peninsula (Region 9) with 20.3 percent and Eastern Visayas (Region 8) with 20 percent. On the other hand, two regions still managed to maintain single-digit inflation rates: Metro Manila (National Capital Region or NCR) with 8.6 percent, and Calabarzon (Region 4-a) with 9.3 percent – the slowest inflation rates within the country. Next slowest, but within double digits nonetheless, was Ilocos (Region 1). The only other region with inflation below the national average was the Cordillera Administrative Region (CAR), with 11.9 percent.

In general, the overall price increase in Metro Manila was much slower than in the rest of the country, suggesting that government responses to the rising inflation may have been biased for Metro Manila. The two strongest factors leading to this outcome were food prices and electric power prices, in which Metro Manilans had a very distinct advantage. Food inflation in NCR was only 13.1 percent compared to 19.2 percent elsewhere, suggesting that subsidized rice distribution may have favored Metro Manila over the countryside. Even more notable is the way fuel, light and water prices actually fell in Metro Manila (-4.5 percent), while rising by 11.3 percent elsewhere. One smells politics in all this: the squeaky wheel, as they say, gets the grease. The rural folk who keep flooding into Metro Manila may be right after all: they may not necessarily be successful in finding stable jobs, but they are at least able to avoid worse deterioration in their cost of living by moving.

Highest among neighbors

How does our inflation compare with that in our neighbors? I checked the June-July inflation rates in our neighboring countries, and found that our closest neighbors have still managed to stay within single digits, ranging from Taiwan’s 5 percent to Indonesia’s 8.9 percent. Among nearby neighbors, only Vietnam exceeds our inflation rate, with its abnormal 21.4 percent inflation fueled by an overheating economy.

The question that naturally arises is why our price increases have been steeper than those in our neighbors, when all of us have been subject to the same global oil and food price surges. My own analysis suggests that as an archipelagic country that must transport food and other basic commodities across numerous islands from production centers, the much higher food and fuel costs have combined together more seriously than in our neighbors with more contiguous land areas. Not surprisingly, Indonesia – also an archipelago – has the next highest inflation rate to ours. But our own problem is compounded by the long-lamented high cost of shipping, due to age-old inefficiencies and monopolistic elements in the industry, including in port handling services. Many are familiar with the lament that it is cheaper to ship commodities from Bangkok to Manila than from Mindanao to Manila. Maybe it’s about time the government did something decisive about the problem, long attributed to “regulatory capture.”

At a time of rapid inflation, we owe such decisive reforms to our people, especially the Filipino poor.

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