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No cause for alarm about inflation

INFLATION reached 4.5 percent in April, the Philippine Statistics Authority reported on Friday. The increase in consumer prices accelerated from the 4.3 percent inflation rate recorded in March, and was significantly higher than the 3.2 percent inflation rate a year earlier. April’s inflation rate was in fact the highest in more than six years, since the 4.7 percent rate recorded in November 2011.

Those figures may be worrisome at first glance, and they certainly seem to confirm recent, largely anecdotal but widely publicized reports of growing negative consumer sentiment about higher prices. A closer look at the data, however, should ease concerns; the news is not as bad as it seems, and in some respects indicates some important positive developments.

Perhaps the most significant thing about the April inflation data is that it was accurately anticipated, both by the government and external analysts. The 4.5 percent result matched the forecast of the Department of Finance. The Bangko Sentral ng Pilipinas, which tends to hedge its bets a bit when making forecasts, had predicted a range of 3.9 to 4.7 percent. Outside analysts polled by The Manila Times also called the April inflation result correctly, forecasting a range of 4.4 to 4.6 percent.

The accuracy of the forecasts indicates that policymakers and other economy watchers have a firm understanding of what the economy is doing in terms of how it is reflected in consumer prices. While a 4.5 percent inflation rate might not be ideal, it has not in any way taken anyone by surprise, and that is reassuring. It suggests that any policy moves that are made, most particularly as a result of the upcoming Monetary Board meeting on May 10, are very likely to be well-calibrated and effective in the Philippines’ current circumstances.

The second significant indicator in April’s inflation result is in what parts of the consumer price basket the highest inflation is actually occurring. While the higher April inflation rate was generally attributed to a weaker peso, uncertainty over the US-China trade dispute, higher oil prices – things that are all largely beyond the Philippines’ control – and higher excise taxes, most of the acceleration in April was driven by higher prices for “sin” products, primarily alcohol and tobacco; inflation in this category jumped 20 percent year-on-year. These are discretionary, non-essential items, so higher prices are not nearly as harmful as higher prices on vital staples such as food and fuel. And in the case of sin products, almost all of the price inflation can be attributed to higher excise taxes; the negative connotation of higher prices to the consumer price index is more than offset by the increase in government revenues they represent.

Although not quite as positive as these other indicators, it should be noted that inflation for food slowed moderately in April from the previous month – nationwide, the inflation rate for food items in April was 5.5 percent, compared with 5.7 percent the month before. That may suggest that one major area of concern is easing, although it will take another month or more of price data to determine whether April was the start of a positive trend.

Inflation is still a concern, and the government’s economic team and monetary authorities are right to prioritize its management. With more positive conclusions than negative ones to be drawn from April’s inflation result despite the higher figure, however, we remain confident that the Philippines’ economic managers have a clear understanding of conditions, and will respond appropriately to them.

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