6.10% inflation and key policy rate hikes

By Dean dela Paz

Following what controversies generated with what might have been just the first of many revealing high-level flaps and faux pas exposing an administration seriously challenged by an inherited problem whether externally generated and or not behooves us to hit the books and review if indeed government officials know what they are doing. This applies to self-declared democracies and those faking it.

The first controversy spread over mainstream and social media as memes, jokes and cartoons was the disbelief that the current inflation rate was as high as 6.10%. Where a senior White House official, confronted with scathing criticism on domestically attributable inflation denied a recession existed by altering the textbook definition of two consecutive quarters of negative growth, in our neck of the woods, the denial focused on a historically high 6.10% inflation.

In politics, truth is typically inconvenient. Its opposite has become the default tack. Pronouncements are disengaged from reality. Unfortunately, some resort to spin and the misdeclarations, as jokes or gaffes.

But the disconnect is not funny. Ordinary housewives and homemakers sans college degrees and educated only with a rote understanding of comparative pricing for such goods as a pound of chicken, a kilo of rice or even just a small pack of salty dried noodles to feed a family of five would certainly validate that indeed inflation has risen in the last quarter. Any person, whether a veteran in the lengthening unemployment and underemployment lines or those condemned there by Draconian pandemic measures, would feel that inflation might even be higher than 6.10%.

Economic modelers normally assume from 3% to 5% for corporate budgetary purposes. Our economic managers seem to be reading the same playbook. They should not.

There is a vast difference in levels of resiliency between corporate entities and the ordinary person. For the victimized who represent an increasingly larger population, promised riches in the last presidential campaign, the quantification of soaring prices is not half as important as the growing desperation behind the realization that government does not really feel their hopelessness, hunger pangs and pain.

One way for leaders to feel those, as they are genuinely felt by the increasingly poor, is to earn honest wages, pay taxes, actually purchase, and pay for the essential expenditures within our consumer price index (CPI) and, at the end of the day, try to make ends meet. Despite the apolitical quantification, the Gini Coefficient disconnect among those governed and those who govern accounts for the difference in perception of the 6.10% inflation and officialdom’s credibility.

Teleprompters are magnificent devices that fill in for cranial and verbal inadequacies. They can transform the ineloquent, or the cognitively challenged into excellent speakers who can spin the inflation rate down. Albeit inadequate for debates and Q&A, others resort to other methods. To bring the inflation rate to within the yearly traditional forecasted range necessitates aggressive monetary intervention in the local economy.

Inflation occurs when too much money runs after too few goods. It is impoverishing when people can buy less for their peso. The laws of supply and demand apply to money as much as they apply to goods and services. Inflation reflects this. It is Economics 101. There are two kinds of inflation. Necessarily the responses to each differ.

Cost-Push inflation is caused by the rise in the costs of inputs. One example are increases in transportation and electricity tariffs when the cost of fuels increases. One recourse is to increase and diversify the sources of energy or resort to non-petroleum based fuels.

Demand-Pull inflation occurs when the demand for a specific good or service spikes. An example are the prices of red roses at St. Valentine’s Day, or ham and turkey during the yuletide season. One recourse is to dampen demand by providing alternatives that yield higher returns relative to spending for products whose prices rose due to increased demand.

When treasury bill rates rise or when interest on savings accounts go up, money in circulation is rechanneled into the banking system. This dampens the desire to spend where demand-pull inflation impacts negatively.

There are other textbook ways to control inflation. One way is to limit money supply in circulation, what monetarists count as M1. Printing unusable plastic peso bills would be an alternative. It forces consumers to keep these at home or in the bank. Doing so would pull supply out of circulation and thus limit M1.

When establishments refuse to accept a particular currency, that also effectively reduces M1. Payment will be through other denominations or forms not as constrained. But circulating unusable currency to limit M1 would be both absurd and ridiculous. No intelligent monetarist would think of that.

As discussed, among the increasingly limited instruments in the toolbox of monetary authorities is manipulating key policy rates to tame inflation down to the typical yearly 3-5% range. One way is to print money. Another is to manage bank reserves so only a regulated amount are lent out and enter M1. A third is to reject auction bids for treasury bills where lower or higher returns are filtered out. A fourth is to actively buy and sell pesos in the open market.

A skilled carpenter uses the right tool for the right job. This should apply to monetary authorities, and it behooves economic literacy upon inadequately educated politicians.

(Dean dela Paz is a former investment banker and a managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance and Mathematics professor.)

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