By Cai Ordinario, July 8, 2020; Business Mirror

https://businessmirror.com.ph/2020/07/08/amid-inflation-uptick-rebound-still-unclear/

Local economists said the recent increase in inflation is not yet a clear indication that domestic demand has indeed recovered or is recovering from the lockdowns imposed in March.

Based on the latest data released by the Philippine Statistics Authority (PSA) on Tuesday, inflation averaged 2.5 percent in June, higher than the 2.1 percent posted in May but still slower than the 2.7 percent posted in June 2019. Inflation averaged 2.5 percent in the first semester of the year.

Core inflation, which is an indicator of long-term inflation trend and future inflation, averaged 3 percent in June, higher than the 2.9 percent posted in May but slower than the 3.3 percent in June last year.

“Gradual opening up of the economy correlates with consumption spending, which then puts pressure on prices to rise. But this does not mean that we are on the verge of recovery, particularly in light of the recent surge in Covid-19 cases. This will force people to limit mobility and reduce spending,” Action for Economic Reforms (AER) Coordinator Filomeno Sta. Ana III told the BusinessMirror via SMS.

Former University of the Philippines Dean Ramon Clarete said that while demand may have improved “a bit” given the latest inflation data, it will have little influence over the country’s growth prospects.

It may be noted that inflation is an indicator of demand, which is crucial in boosting economic growth. In the Philippines’ case, Clarete said, the economy is still in a recession with GDP growth forecasted to contract this year.

‘Temporary’ reaction

Unionbank Chief Economist Ruben Carlo V. Asuncion told the BusinessMirror that the recent increase in inflation may have been a “temporary or knee-jerk” reaction to the lifting of lockdowns in some areas and easing of restrictions on others.

Asuncion said the economy has yet to take stock of the real damage of the pandemic on micro, small and medium enterprises (MSMEs). Some firms are operating at reduced capacity while others have folded entirely.

“I have observed that some have gone back to as much as 70 percent capacity [compared to pre-Covid level]. Some may be lower but are still hoping they can jumpstart and keep people employed,” Asuncion said. “Incomes have been shocked and it’s an important part of whether demand is actually beginning to recover.”

ING Bank Manila Senior Economist Nicholas T. Mapa told this newspaper in an e-mail that domestic demand will “remain crippled in the medium term with record high unemployment and depressed economic conditions.”

Mapa said this trend will likely continue even with the easing of lockdowns. Household consumption will take some time before it retains its “pre-pandemic form” and that average 2020 inflation rate would likely settle at 2.4 percent this year.

“Even with lockdowns gradually being relaxed, household consumption will not likely return to its pre-pandemic form with social distancing and general fear of the virus keeping most of the even hardiest mallgoers indoors,” Mapa said.

Oil factor

University of Asia and the Pacific (UA&P) School of Economics professor Victor A. Abola is of the same view. The recent increase in inflation may have been caused by the increase in oil prices abroad, he told this newspaper in an e-mail.

This directly affected the Transport sub-index which, Abola said, accounted for 96 percent of the climb in Consumer Price Index (CPI) from May to June. He said the decline in food prices was just insufficient to offset the increase of prices in the transport index.

Abola expects, however, that the increase in crude oil prices will remain muted given the amount of inventory there is and the overall weakness in local growth. He said inflation may “hover close to 2.5 percent” in the next few months.

Philippine Economic Society (PES) President Emilio S. Neri Jr. said GDP growth will only return in 2021. The third quarter or the July to September period will be better than the second quarter.

Neri said if the national government spending will not be “forceful enough” or would only be below 20 percent, recovering from this crisis will take even more time.

“Demand has probably increased but maybe part of the increase in inflation could be due to added costs [because of] protocols under the new normal,” former UA&P Dean Peter Lee U told the BusinessMirror via SMS. “Oil prices could increase but may not really kick up until the world economy recovers.”

Foundation for Economic Freedom President Calixto V. Chikiamco told the BusinessMirror that minimum health standards led to the modest increase in inflation in June. As the demand increased for modes of transportation that allow Filipinos to maintain social distancing, inflation also increased.

Chikiamco said the further easing of restrictions would likely increase inflation but this will still be within check and will remain within the Bangko Sentral ng Pilipinas’ targets this year.

Ultimately, former Socioeconomic Planning Secretary Romulo L. Neri said it is difficult to say whether demand has indeed recovered given the current situation of the country.

Fear stymies demand

Demand remains weak due to joblessness and fear, prompting Filipinos to conserve their cash. The April Labor Force Survey data showed that the number of jobless Filipinos shot up to 7.3 million and unemployment rate to 17.7 percent.

Neri added that on the supply side, local and international supply chains continue to experience problems. He also noted that the government is deficit-spending to support unemployed Filipinos.

“It’s so difficult to make projections. The safest is to project more of the same until things normalize, but we don’t know when,” Neri told this newspaper.

Tricycles boost inflation

National Statistician Dennis S. Mapa said the primary reason for the uptick in inflation in June was the transportation index; Alcoholic Beverages and Tobacco index or “sin products;” and the Housing, Water, Electricity, Gas and Other Fuels index.

Mapa said the partial opening led to the 2.3-percent increase in the transport index from a contraction of 5.3 percent in May and 1.6 percent in June 2019.

He said tricycle fares were the main culprit in the increase, with a 26.04-percent increase from 6.6 percent in May. Mapa said this is only the average nationwide.

In Metro Manila, tricycle prices surged 43.7 percent on a month-on-month basis. This means that if the minimum fare was P12 in May, this reached P17 in June.

The increase in tricycle prices was even more staggering when compared year on year. Mapa said on annual basis, tricycle prices skyrocketed 129.3 percent in June, meaning prices this year were more than double last year.

The rapid increase in tricycle prices was also observed in Bicol, which had the highest increase in inflation in June at 4.3 percent in June 2020.

“It is possible that [because of] the social distancing guidelines, they may accommodate only a single passenger that’s why they are adjusting the price. But that is what we have observed with the data,” Mapa said.

“This is true not only in the NCR but also in key cities in the regions like, for example, Bicol. So you’ve seen the Bicol region with the highest inflation for this month across different regions and partly that is also due to transport index, primarily the tricycle fare,” he explained.

Mapa also said the increase in the index of bicycle and tricycles was faster in June at 7.5 percent from may 2020 at 5.3 percent.

The index of petroleum and fuels for personal transport equipment declined at a slower rate of 15.1 percent in June 2020, from an annual drop of 28.8 percent in May 2020.

The PSA said annual increases in the indices of alcoholic beverages and tobacco at 18.5 percent; and in housing, water, electricity, gas, and other fuels; and communication, both at 0.4 percent, also pushed up the June 2020 inflation.

Mapa said cigarette prices rose 22.7 percent in June 2020 from 22.2 percent in May 2020; beer, 7.2 percent from 6.5 percent; and brandy, 6.7 percent from 6.3 percent.

He said LPG prices grew 1.7 percent in June 2020, from -6.3 percent in May 2020; kerosene, 19. percent, from -31.7 percent; and fuelwood, 7.4 percent, from 6.9 percent.

Inflation in NCR climbed 2 percent in June 2020. In the previous month, inflation in the area was posted at 1.4 percent and in June 2019, 3 percent.

Similar to the trend at the national level, inflation in AONCR accelerated to 2.7 percent in June 2020, after four successive months of deceleration. Inflation in the area in May 2020 was observed at 2.2 percent, while in the same month of the previous year, it was noted at 2.6 percent.

Digital technologies

The National Economic and Development Authority (Neda) said Filipinos can make better use of technology to keep commodity prices stable.

In a statement, Acting Socioeconomic Planning Secretary Karl Kendrick Chua said the use of technology and supporting the agriculture value chain will help build consumer confidence and support gradual economic recovery.

Chua said that as the Covid-19 pandemic continues to affect the daily lives of Filipinos, the government needs to ensure that commodity prices remain low and stable to preserve the purchasing power of Filipino consumers, especially those in the bottom 30 percent income households. This will help build up consumer confidence and support the gradual opening and recovery of the domestic economy.

With the onset of the rainy season and continued implementation of community quarantine measures, the government and the private sector need to use existing digital technologies to better address supply bottlenecks and ensure stable prices, he added.

“Digital technologies, such as eKadiwa, a digital marketing platform, the Supply Chain Analytics [SCAn] Dashboard and the SCAn Reporter, are important government platforms to address potential supply bottlenecks and ensure ample and unhampered supply of commodities while many regions are still on various forms of community quarantine,” Chua added.

This is crucial as inflation could increase in the coming months. Chua said the government is closely monitoring the possible upside risks in inflation as more of the economy starts reopening.

He said this is despite the slowdown in food inflation to 2.7 percent—a matter attributed to the stable supply of agricultural commodities with the implementation of the food resiliency protocol and related guidelines which ensured the unhampered delivery of essential items.