The Philippines last month experienced its highest inflation rate over the past 17 years. The Filipinos had to grapple with the 12.2% average increase of commodity prices in July 2008 compared to their year ago price levels. Double-digit inflation rate always hurts.
High commodity prices mean there are a lot more consumers of those commodities than producers. Another way of looking at this is that the capacity of producers to produce more is lower than the capacity of the consumers to consume more. High commodity prices therefore favor producers and penalize consumers.
Why this thing happened – and will continue in the years to come – is a problem that is created mainly by the incentives and disincentives system in society. If there are lots of subsidies to consume more, then more consumption will happen. Or if people experience increases in income, whether from their own effort or bonanza from remitted income from abroad by their kins, more consumption can happen. If there are lots of taxes, regulations and bureaucracies in producing more, then less production will happen. And a worst-case situation can happen when "demand-pull" inflation (consumers are spending a lot) and "cost-push" inflation (cost of production and cost of bureaucracies are soaring) occur at the same time.
The solution therefore is to remove disincentives in more production, remove subsidies in more consumption, and let some of the consumers become producers themselves.
Some people argue that "inflation is caused solely by printing more money." The argument is that too much money chasing too few goods and services is causing high inflation. This is wrong. There are dozens of causes why prices rise, or why inflation happens. For instance:
1. A supertyphoon wipes out all potential agricultural harvests in one province or region. This abrupt cut in food supply will cause food prices to rise in that province or region and the neighboring places.
2. Mr. Warren Buffet and Bill Gates suddenly decided to give away $30 billion of their savings to all poor people in Delhi, Jakarta, Hanoi, Pnom Penh and Manila. Tens of millions of poor people suddenly awash with cash, will go on spending splurge say within one week. The price of most products and services that the poor will consume will rise, at least temporarily, if there is no corresponding increase in the supply of the commodities that they buy.
3. Government over-spends in a fiscal year, borrows money left and right to finance the budget deficit (revenue is lower than expenditures) . This raises interest rates since government competes with private borrowers, both individuals and corporations. High interest rates cause high cost of capital, that investors will pass on to the consumers. Or high interest rates discourage some potential investors – lack of new investment and production results in higher prices since the supply is not increased.
4. High world oil prices due to geopolitical instabilities (a war in the Middle East, imposition of economic sanction on a major oil exporting country, etc.) push retail oil prices to increase, fares will increase, transportation cost of bringing food products from the province to the cities will increase, etc.
There are many other instances and cases why inflation can occur. Over-supply of money due to huge printing of money by a central bank or monetary authority is only one of those reasons.
Fight inflation with more government subsidies.
This is among the "standard" policies adopted by many governments around the world. It pays to remain poor sometimes because dole-outs and subsidies are coming your way. But subsidies seldom, if ever, contribute to increasing an economy's productive capacity. Subsidies are money confiscated by the State from some productive and hard-working citizens, then it turns around to distribute that money first to its own personnel (politicians and bureaucrats) and second to the intended beneficiaries – the poor. In a sense, subsidies perpetuate the retention, if not expansion, of a group of people who are neither producers nor traders, not even scientists or technologists who help producers improve their productivity or reduce crop losses.
The bigger the number of people who administer the subsidies (those in government) and receive the subsidies (the poor, especially the lazy and irresponsible) , the heavier it is for the productive and hard-working people to sustain them. That is why taxes and government fees remain high and plenty, and taxes are among the biggest inflation-generator s in an economy. More subsidies, more taxes, more inflation. And a vicious cycle is created and perpetuated.
Global inflation: is globalization in a rut?
Not a bit. The current growth meltdown experienced by the US and its major trade and investment partners in the industrialized world is a necessity. It should happen, and I'm glad it is happening. Irresponsible investors and individuals should suffer and go bankrupt, they should become poor. Before, they got saved, their irresponsibility was rewarded with subsidies and huge bail-outs. As one CATO scholar noted, capitalism without failure and bankruptcy is like religion without sins.
What we are seeing are adjustments and adaptation. The irresponsible get punished; the responsible survive, if not thrive. But there is one big entity that is both irresponsible and yet does not go bankrupt: government.
* See also: Inflation and CBs 3: "Bank of Last Resort", March 18, 2008