Eased

The inflation rate for May turned out a bit more merciful.

From the 7.2 percent rate for April, prices rose last month by 6.8 percent. This is still well above the 4.0 to 4.5 percent range government targeted.

The main driver for the elevated inflation rate are energy prices. The price of fuel fluctuates according to the developments in the Middle East. Over the last few days, as hostilities increased, oil prices climbed.

People have wondered why fuel prices did not hit the roof when US-Israeli attacks against Iran were at its most intense. Countries, principally the US, released unprecedented volumes of oil stocks from their strategic petroleum reserves to blunt the commodity’s price spike. But those strategic reserves are not infinite.

Several international financial institutions warned that the strategic reserves are being quickly drained. They could no longer provide price shock absorbers for the critical commodity. Towards the end of June or sometime in July, analysts warn that crude oil prices could jump up to over $150 per barrel.

At some point, the industrial economies should begin refilling their strategic petroleum reserves. This will keep demand pressure, and hence prices, up. It will take months, perhaps years, for the strategic reserves to be refilled to satisfactory levels. Till then, oil prices will remain elevated – enough to push the global economy into prolonged recession.

The nightmare scenario remains: the war in the Middle East could not only be reignited, it could be widened.

The delicate balance in the turbulent Middle East has been upset. Over the past weeks, for instance, Turkey has been rattling its sabers. With its rising economic and military prowess, Ankara has seized several islands in the Mediterranean contested by Greece. The Turks have also occupied military bases in Syria abandoned by the US military.

Turkey has been trying to consolidate the Sunni Muslim countries under its leadership. The country has also brought together some sort of pan-Turkic alliance among countries in Central Asia. There are more Turks living outside Turkey than are in it, including the Turkic people of Xinjiang.

Turkey’s leader, Erdogan, thinks the Turks deserve a greater voice in global affairs that they currently have. A pan-Turkic coalition should win them a more decisive role. All these will be at the expense of Israel, an artificial country that has become diplomatically isolated.

The Sunni Arabs also feel marginalized. A stronger alliance between Saudi Arabia and Egypt is in the works. Pakistan, with its nuclear arsenal and large standing army, has also been trying to emerge as a regional power.

All these developments signal the Middle East – along with Central Asia – will continue to be volatile. The war in Iran convinced many medium-sized powers that the US can no longer be relied upon for security and stability in this part of the world. They are readier than ever to take command of their own destinies.

Unfortunately for the rest of the world, the Middle East, along with Central Asia countries like Kazakhstan, control an inordinate share of oil deposits. Political volatility in this part of the world translates into increased risks for the reliability of the world’s oil supply.

For us, in this forsaken country ruled by funny politicians, elevated oil prices into the foreseeable future means an intolerable inflation rate. Transport costs explained the high April and May inflation rates. They will continue the cost-push on prices for a long time to come.

The rainy months starting from June have also been the period when food prices spike. When the typhoons come, with their almost predictable levels of devastation, food prices will feed the inflation rate. The certainty for this is increased by the decision of our policymakers to rely even more on food importation to cover the structural failures of our agriculture.

Because of our increased dependence on imported food, any depreciation of the peso results in spikes in food inflation. So far, our policymakers have relied on setting price ceilings on the price of imported rice. Price controls are never a solution. All they can produce are supply problems.

What we need to contain food inflation is a comprehensive program to raise our agricultural productivity. We do not have such a program – not even on the drawing boards.

High inflation constrains our domestic economy’s ability to expand. We see that in the falling GDP growth rate. If the domestic economy does not expand, the poverty rate rises. That opens up another set of imponderable problems.

So far, our official response has been to tighten monetary policy. Interest rates will likely be increased as a means to defend the peso’s exchange value.

There may be some space for monetary intervention. But there is certainly a larger space for fiscal intervention. Our miserable first quarter GDP growth rate is due, to a large extent, on government’s failure to maintain fiscal spending levels.

The rest of the ASEAN are suffering from the current oil price regime and supply uncertainties. But they are nurturing faster growing economies. Vietnam, for instance, is poised to grow at over seven percent this year. That puts us to shame.

External factors do play a role in the economic difficulties we are experiencing. But a large role is also played by the utter failure of governance we endure. We have lost so much credibility as an investment and tourism destination.