* My article in BusinessWorld, April 8, 2020.
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When I saw the huge drop in electricity demand for March
2020 compared to March 2019, -5.5%, a result of business shutdowns and enhanced
community quarantine (ECQ) in the second half of the month, I was expecting
that March inflation would be something like 1.5%. I was wrong.
I checked other major economies with March 2020 inflation
data, and it shows that deflationary pressure is building up fast in Europe, in
places like Italy, Spain and France, but not so much in Asia (see the Table).
The reason for my rather bleak expectation for the
Philippines’ March inflation is that I was expecting that less economic
activities and business shutdowns means less income for the people and so their
demand for various goods and services will decline, leading to decreased
prices.
Of the 11 commodity groups that constitute the inflation
basket, only Transport registered a price contraction in March, -1.8%, and it
is understandable. But with closure of all malls and movie houses, all
restaurants and bars (except food take out and delivery), I was expecting that
at least these three commodity groups — Recreation and culture, Alcoholic beverages
and tobacco, Restaurants and Misc. — would experience price contractions too.
Did not happen. Prices of alcohol and tobacco products are now determined more
by high and rising taxes, not consumer demand.
What spiked inflation instead was in Food and
Non-alcoholic beverages, from 2.1% in February, it went up to 2.6% in March.
The likely reason for this are those blockades and lockdowns starting March 15
when Metro Manila quarantine was implemented, worsened by the so-called
“enhanced community quarantine” (ECQ) for Luzon by March 17. These adversely
affected food supply — chickens, hogs, beef, vegetables, fruits, rice, etc. —
with delayed or even spoiled products.
Government cash and food distribution started around
March 27 when P65 billion of the P275 billion in new spending under the
Emergency/Bayanihan law have been released to local government units and have
given spending power to some poor households.
So three factors — high taxes on alcohol, tobacco, sugar
products; blockades and delays in transportation of raw food products; and
government cash handouts — were the main reasons why a decrease in economic
activities did not result in significant decrease in prices.
I am expecting that inflation will decline significantly
in the next two to three months, then go up in the succeeding months as the
impact of Central Bank money printing will kick in.
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