Curing stronger than expected inflation pressures

A track of the global index of food costs by the UN Food and Agriculture Organization (FAO) over the last 12 months shows steadily increasing prices of the five commodity food prices being measured, i.e., meat, dairy, cereals, vegetable oils, and sugar.

Without exception, all the tracked foods were higher by double digits from the same month last year, with today’s expected report likely not to show any kind of easing, cementing the way for another global food crisis reminiscent to what happened more than a decade ago.

While food is only one of the many variables that affect inflation, it is an indicator resonating most for the peoples of the world, whether from a developed or developing economy. Because of this, many governments are now worried trying to understand what is happening, and to come up with measures that will tame it.

It does not help that what is happening today – disrupted and broken global supply chains, extreme weather disturbances, the quick rise in energy prices, and the uneven ending of a pandemic, with countries attempting to reopen their economies – are an unlikely combination not found in history books.

For the young economist Karl Chua, who today heads the National Economic and Development Authority (NEDA), putting a lid on price increases to assuage inflation indices like food, electricity, and transportation has definitely kept him busy.

Triggers

Elevated food prices in the Philippines since January have led to a relaxation of import tariffs on affected commodities. NEDA was instrumental in bringing in imported – but cheaper priced – pork, fish, and vegetables this year with the intention of keeping consumers happy, even if local producers were up in arms over what they deemed was a death blow to their livelihoods.

Unfortunately, inflation has remained elevated beyond the high end of the tolerable level set by the economic team for this year, and while it is still tolerable enough not to be regarded as runaway inflation, the recent surge in oil prices has added stronger than expected pressure.

To the clamor of the transportation sector for relief from higher pump prices of petroleum products, which is now about 50 percent higher than a year ago, the government has released fuel subsidies to mitigate a fare hike clamor by the public utility vehicle sector, mainly jeepney drivers.

Another trigger to inflation that will likely compound the current situation would be the effect of a disjointed global supply chain in which almost every commodity manufactured in the world is facing delivery cost overruns resulting from higher port demurrages, worker shortages, and now, even currency adjustments.

Shortages of just about every traded commodity will only get worse before getting better. Those chips used in almost all electronic devices are still in short supply, and while existing foundries are ramping up production, supply is seen to be tight going through 2022.

Unclogging major ports across the globe has gotten to a point where retailers have lost hope for orders to arrive in time to take advantage of the holiday spending spree. The worse part, though, will be shortages in manufactured and packaged goods integral in our daily lives that depend on imports, which can be as innocuous as those catsup sachets that come with food deliveries.

Wage hikes

Central banks all over the world are insisting that this percolating inflation is temporary and transient, although they are keeping ready for disposal just about anything in their arsenal of interventions. Our central bank has adopted the same posture.

The US, which is the world’s biggest economy to date, is seeing inflation at levels seen only some 30 years ago. It is worrisome to a point where the topic of wage increases is already popping up to enable workers’ salaries to cope with rising prices of goods and food.

Wage increases as an answer to inflation, though, are least favored, mainly because they feed on a cycle that could dangerously lead to things spiraling out of control. To keep inflation in check, most economists agree that mopping up  liquidity is a better solution, thus any upward major movement in wages will only problematically add more money in circulation.

For the Philippines, the prospect of an overwhelming clamor for wage hikes to keep pace with prolonged elevated food price levels is a big problem that will take years to correct. The last time this was factored in by employers was in the 1980s after the big oil shock.

It took awhile for conscientious employers to continue factoring in inflation as a determinant of annual wage hikes to keep employees happy. Other workers, though, had to fight for wage increases through petitions that ultimately spawned a charged political environment of protests.

Post-pandemic

With the government now pivoting on prioritizing economic health over COVID afflictions, the spotlight will now be more on NEDA and the economic team rather than on the task force formed to get the country through this pandemic.

Despite the complexity of a post-pandemic economic recovery, it is somehow reassuring to have the current team rowing the boat. The next months will not necessarily be smooth sailing, but anxieties should be lower than during the past months going through changing severities of lockdowns.

Even while curing inflation continues, picking up the pieces that had been disrupted during the quarantines must also be given priority. The country’s infrastructure push must be put back on high mode, improved agricultural production must gain more support to help alleviate poverty levels, and better governance on the local and national levels must be pursued.

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