Inflation remains at a comfortable level as its average of 3.13 percent in the first 10 months of 2017 is actually lower than the annual average of 3.16 percent for the last seven years, Department of Finance (DOF) Undersecretary Gil Beltran said.
Beltran, who is also the DOF’s chief economist, has reported to Finance Secretary Carlos Dominguez III that even if the government continues with its massive spending on infrastructure projects under the P8.44-trillion “Build, Build, Build” program, inflation would continue to be at a favorable level owing to the country’s good macroeconomic fundamentals.
“The consumer price index or CPI is the most watched indicator for price movements. From 2010 to 2016, during the period when the economy grew by 6.3 percent annually, CPI inflation averaged 3.16 percent. During the first 10 months of 2017 when the economy grew by 6.7 percent, CPI inflation averaged 3.13 percent, slightly lower than the 7-year average,” said Beltran.
Beltran further said in his report to Dominguez that inflation could be tamed successfully should the country’s production continue to grow to keep up with rising population and growing incomes.
“This implies maintaining good macroeconomic fundamentals. This means that government should continue to spend for infrastructure and social services and that the Bangko Sentral ng Pilipinas should maintain a level of money supply appropriate for the goods and services produced by the economy,” he said.
To counter the high and immediate impact of low agricultural production to inflation, Beltran said the government must continue putting up the needed infrastructure for the sector such as farm-to-market roads and irrigation, and appropriate extension services by the Department of Agriculture.
The financial sector should also provide credit and guarantee services to farmers so that replanting can be done immediately after typhoons, he said.
Citing a 2014 study on the determinants of inflation conducted by the DOF, Beltran pointed to growth, money supply and inflation expectations as among the key factors affecting inflation.
For example, he said, a percentage point rise in real GDP reduces CPI inflation by 0.77 percentage point. He said monetary policy also affects inflation.
Likewise, a percentage point in M3 or domestic liquidity growth raises inflation by 1.8 percentage point.
Beltran said that using CPI lagged by one month as proxy for inflationary expectations, a percentage point rise in the previous month’s CPI raises inflation by 0.8 percentage point.
“This implies that there is a need to sustain economic growth and maintain appropriate monetary policy. There are alternative measures of inflation. While CPI reflects the inflation for a basket of commodities that comprise the consumer’s budget, there are other inflation measures that reflect a wider array of goods and services that the whole economy produces and consumes,” Beltran said.
He mentioned the GDP deflator, which shows the price movement of all the goods produced and consumed by the economy, including consumer goods, investment goods and government supplied goods and services.
The 2017 GDP deflator shows an inflation rate of 2.1 percent for the third quarter, going down from 2.7 percent in the first quarter and 2.5 percent in the second quarter.
“Second, we have the manufacturing sector producers’ price index which shows the movements of production costs of the manufacturing sector. It shows that the manufacturing sector’s inflation rate has been declining by 3.63 percent annually from 2012 to 2017, implying rising competitiveness for the sector,” he said.
Meanwhile, he said the general wholesale price index is an indicator designed to measure the changes in the price levels of commodities that flow into the wholesale trade intermediaries.
Wholesale price refers to the price of commodity transacted in bulk for further resale or processing. It is the sum of the producer price, wholesale trade margin, tax mark-ups and distribution cost of the wholesaler.
“Wholesale prices have risen by 1.2 percent annually from 2012 to 2017 but there was a sudden spurt by 4.6 percent in 2017 as petroleum prices began to normalize. Since the sector is involved in transport and distribution, it is susceptible to movements in prices of transport inputs, mainly gasoline and labor,” he said.
Beltran also said that food inflation mirrors the movement of the overall CPI. He said when the CPI Inflation spiked in 2014 at 4.18 percent, food CPI Inflation also spiked at its highest peak in a five-year period, posting 7.0 percent.
“It was observed that as food inflation rises, CPI Inflation also rises. For the first 10 months of 2017, food inflation averaged 3.8 percent, higher than the 2.1 percent in the same period of 2016,” Beltran said.