May 10, 2018

Stopping TRAIN Law will not be Enough to Curve Inflation




Some Philippines government official expressed their concern regarding inflation, suggesting stopping Tax Reform for Acceleration and Inclusion (TRAIN) Law to lessen inflation. TRAIN Law seeks to lower personal income tax, simplify estate and donor’s tax and VAT, increase excise tax for petroleum products, automobiles, sweetened beverages. 

Before anything else, what is the root of inflation in the Philippines today? The root of inflation in Philippines is strong consumption of the public and private sector; and strong consumption is rooted to strong economy (6.8% GDP Growth in 2017). Thus, it is highly probable that what we are experiencing today is a “good inflation”. In layman’s term, people have money to spend from earnings from their jobs, businesses, and retirement money and government has money to spend from tax collection, causing demand for goods and services to increase; with the assumption that supply of goods is not increasing as fast as demand, prices will increase. Eventually, when price increased, some people will shift their consumption - others will lower their consumption while some will shift their preference from superior good to inferior good; the shift will slowly normalize the inflation rate.


There is what we call in economics “cost-push inflation”, which is fueled by increase in overall price level caused by an increase in cost in an ‘imperfectly competitive’ market (Nafziger). I would define a “good inflation” as something triggered by a ‘perfectly competitive’ market (prices are increasing because demand is pushing the prices up), unlike “cost-push inflation” which is mostly triggered by price controlling cartels and monopolies. “cost-push inflation” should be the one monitored by the government, with todays inflation news hype, big companies and some retailers might use the news as an excuse to increase their prices. My observation is that Philippines inflation is closely triggered by what we call “demand-pull inflation”, which is defined as increase in the overall price level resulting from consumer, business, and government demand for goods and services in excess of an economy’s capacity to produce (Nafziger). On the other hand, prices can also increase when supply of goods is decreasing (shortage), but with current economic whether in the Philippines there is no overall shortage of goods; retailers are expanding businesses in the province and online shopping continues to gain momentum. 

My suggestion is that government should closely monitor the prices of basic goods and services such as water, energy, oil, food and rice, telecom, and transportation; impose the right sanctions to price manipulators. In 1998 when Asian Financial Crisis hit the Philippines, inflation rate rose to 9.33% (2006=100) on average; In 2008 US Financial Crisis, Philippines inflation rate rose to 8.16% (2006=100) on average; From Jan-Mar 2018 average inflation rate is 4.43% (2006=100), 100% lower compared to crisis years, and significantly far from Hyper Inflation (20% monthly inflation). 

As economy grows, inflation will increase, and government revenue will surely follow the trend; it would be a tremendous help to the people if government will use the revenue to create jobs for the bottom 30% of the society.


4 comments:

  1. really, or inefficiency in production?

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    Replies
    1. economy is so complex that a lot of assumptions should be made, jumping to conclusion is not an option if you really want to know truth about what's happening in the market.

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  2. Too much money in the system being printed or created in the computer out of thin air.

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    Replies
    1. that is possible, but it also possible that a lot baby boomers are retiring and using their money to enjoy life. Or the entry of the Y generation to work force and increasing consumption of Millennials. In general it could be that a part of the population that is not much consuming in the past, is now consuming more due to having a job or the family just need to create new consumption because their kids are now entering school. Or the 'tambays' of the past are getting entry level job in the government construction projects enabling them buy more goods. There are many possible theories. Just my thoughts.

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