Philippine inflation rate

[In This Economy] The tricky business of taming inflation

JC Punongbayan

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[In This Economy] The tricky business of taming inflation
Taming inflation is far from straightforward, and there are too many variables and complex interactions at play. On top of everything, nobody is perfect, and some trial-and-error is bound to happen.

Inflation dropped yet again.

In October 2023, inflation clocked in at 4.9%, down from 6.1% in September (Figure 1).

Figure 1.

On the one hand, that’s a bit of good news. While prices are still increasing, they’re doing so at a slower pace. The 4.9% figure is also closer to the 4% inflation upper target of the government.

If you look at the contributors to inflation, more than half of inflation was due to food and non-alcoholic beverages. But its contribution went down a lot, thus the decline of overall inflation (Figure 2).

Figure 2.

On the other hand, if you just look at Figure 1 above, the trend of inflation is rather erratic these days. After six consecutive months of decline from January’s peak, it rose again from July to September, and dropped again in October. In fact, the recent drop surprised even the Bangko Sentral ng Pilipinas itself, which forecasted 5.1% to 5.9% for October. Inflation went down faster than they expected.

The thing is, we don’t want inflation to move up and down so much, because that makes peoples’ purchasing power – and thus their ability to budget, plan their spending, and provide for their families – just as volatile.

At any rate, what you should also know is that Philippine inflation is still the highest among the biggest ASEAN countries (Figure 3).

Figure 3.

Conflicting views

Obviously, taming inflation in the Philippines has been quite the challenge. Policymakers themselves are not of one mind as to the best policy to pursue.

This was manifested in an indirect exchange between Socioeconomic Planning Secretary Arsenio Balisacan on the one hand, and Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona on the other. Both of them raise valid concerns.

On October 6, Secretary Balisacan warned against the idea of further interest rate hikes to combat inflation, saying that the BSP’s rate hikes have already been the “most aggressive’” in the region and “not something to be proud of.” He said, “There’s really no urgency in creating another round of high interest rates. Higher interest rates will really put us too far away from our peers in the region.”

Interest rate hikes are a go-to policy to combat inflation. When interest rates are higher, the cost of borrowing is higher as well. This discourages people from taking out loans for new houses, cars, or businesses. This, in turn, tempers demand and the rise of prices.

Essentially, Secretary Balisacan is wary that further interest rate hikes might hurt the economy at large, if it makes borrowing too costly, and therefore discourages too much investments.

Besides, if inflation is due largely to food items (like rice and vegetables), then interest rate hikes will do little (if anything at all) to tame overall inflation.

For his part, Governor Remolona said days later, “I wouldn’t say that we’re done with the tightening…I wouldn’t rule out 25 basis points [rate hike], for example.” Why?

Sure, food is a huge part of inflation, and the BSP has nothing to do with food prices. But persistently high inflation plants in the minds of people that maybe inflation will continue to be high in the next months of the year.

That’s dangerous. From the BSP’s perspective, the last thing they want is for people to come to expect runaway inflation in the coming months, because that, in itself, will bring about higher inflation – what’s called in economics a “self-fulfilling prophecy.” The BSP wants to avert that.

Based on this (and other reasons), the BSP went ahead and raised its policy interest rate by a quarter of a percentage point (or 25 “basis points”) on October 26. The problem, though, is that the PSA released data on November 7 showing that inflation already went down quite fast in October – even without such a rate hike.

So, was the BSP’s rate hike needless, then? Not really. As reasoned by the BSP, persistent inflation induced transport fare hikes and minimum wage adjustments. All these “sharply” raised peoples’ expectations of inflation, and a rate hike could help temper this.

Recent research

This mini debate is quite fascinating, and I made sure to include this in my macroeconomics classes this sem. But it also underscores the fact that policymakers need solid data to inform their decisions about how to fight inflation.

Crucial here is an understanding of whether inflation at any given time is driven by supply or demand factors. Incidentally, that’s the subject of a research paper I presented on November 7 at the country’s biggest conference of economists (the 61st Annual Meeting and Conference of the Philippine Economic Society).

My findings are preliminary. But I find that there’s good reason to believe that the recent inflation episode was due largely to supply factors, not demand. In fact, as of the second quarter of 2023, demand-driven inflation was at its lowest since 2018.

This may argue in favor of pushing non-monetary interventions (such as policies coming from the Department of Agriculture to tame food prices) rather than further rate hikes.

At any rate, I hope that my research, once published and peer-reviewed, can be useful to BSP economist friends, or policymakers in general, who are looking to tame inflation.

What’s next?

One datapoint doesn’t constitute a trend. Even if inflation went down in October, it can still spike in the coming months, notably due to the El Niño season, which could hamper agricultural (especially rice) production. We should also watch out for higher oil, electricity, and transport fares, as warned by the BSP.

On Thursday, November 9, we’ll know the gross domestic product or GDP figures for the 3rd quarter of 2023. It’s bound to be disappointing. Alongside elevated inflation (and other longer-term problems), things are not looking very good for the Philippine economy.

But the difficulty of fighting inflation recently has taught me to be more sympathetic to our economic policymakers. Taming inflation is far from straightforward, and there are too many variables and complex interactions at play. On top of everything, nobody is perfect, and some trial-and-error is bound to happen. Such is the nature of policymaking. –

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. JC’s views are independent of his affiliations. Follow him on Twitter (@jcpunongbayan) and Usapang Econ Podcast.

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JC Punongbayan

Jan Carlo “JC” Punongbayan, PhD is an assistant professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for He is also co-founder of and co-host of Usapang Econ Podcast.