ANALYSIS: Even living simply

now costs a lot more

Jose Galang -- Your Business
Posted at Feb 06 2018 05:09 PM

No thanks to the newly imposed bundle of taxes on the Filipino people, the cost of food and
household utilities—the two largest expense items on family budgets—could now gobble up more
than P0.65 of every P1.00 that an average family earns.

Food and alcoholic beverages became costlier by 4.5 percent on average in January, according to the
Philippine Statistics Authority’s latest inflation report. If you live in Metro Manila, the rate of
increase was a faster 5.2 percent compared to that experienced by residents outside the provinces.

 Inflation accelerates to 3-year high in January

Expenses related to housing, water, electricity, gas and other fuels jumped by 4.2 percent last month,
significantly faster than the meager 0.2 percent increase in the same month last year, the same
government statistics show.

The PSA report says overall inflation was 4.0 percent in January, a big increase compared to just 2.7
percent in the same month last year. Those living in Metro Manila saw a much faster 5.4 percent rate
of price increases, a brisk pace last seen in late 2014.

Top expense items

These numbers are averages. A closer look at the numbers shows that the price of rice (which is the
dominant food item of the Filipino diet), corn, bread and other cereal preparations, meat, fish, milk,
cheese and eggs, oils and fats, fruits and vegetables all registered higher rates of increases in January
compared to last year.

Just staying at home and trying to live simply indeed costs a bit more, a result of the wave of mark-
ups in most products sold on the market affected in varying degrees by the new sales taxes. How
these price levels will be offset by the cuts in personal income taxes of wage earners remains to be
seen, although some analysts are already saying that the higher take-home pay won’t be enough.

Eating out and commuting to work, activities that account for about P0.20 of every P1.00 spent by
the average Filipino family, are also among the fast-rising items. And with the prospect of further
increases in petroleum products and business costs, expect these expense items to go up some more
in the coming months. Steeper increases could be felt by Metro Manila residents.

The recent wave of price increase can be attributed mainly to the added burden of excise taxes that
individuals and businesses now shoulder. If the Duterte economic managers’ Pollyannaish view that
wage earners’ supposedly fatter take-home pay materializes, then that could only mean an added
push to price increases. Economists often remind us that where there is a bigger supply of money
chasing goods, prices are bound to go up.
There is another emerging concern among finance analysts that could impact on inflation: the
possibility that interest rates would go up soon. This is based on expectations that the US monetary
authority, the Fed, is planning a series of rate increases this year, after keeping them at historically
low levels in past years.

When the US central bank does increase its rates, ripples will be felt across the globe. Developing
countries like the Philippines will be among those affected, and one option to cope with that is for the
local central bank to also raise its own rates. That will trigger adjustments in the cost of using bank
credits and businesses will experience higher operating costs that will be recovered through increases
in the prices of goods and services they produce.

Market slump

These fears are now being manifested in big selloffs of corporate shares on stock markets worldwide.
The Philippine Stock Exchange has seen its key stock price indicators plunging in recent days, with
trade volumes bloated by investors unloading holdings.

 Wall Street plunges, S&P 500 erases 2018's gains

 Philippine shares fall after Wall Street plunge

Still, the local stock market index, mirroring sentiments in most bourses worldwide, has recently
been hitting record highs. Some analysts say the decline this week represents more of a market
correction from those highs rather than a sign of any crisis.

A longer term effect of the expected US rate increases will be the added cost of repaying Philippine
government debts, some of them incurred only in the past few months. At end-December 2017, the
national government had total outstanding debt of P6.65 trillion, an increase of nearly 9.3 percent
from the year-ago amount.

Of the total, a third, or P2.21 trillion, was owed to creditors abroad. This part of the debt burden
could be vulnerable to any further decline in the peso exchange rate, which this week has weakened
to nearly P51.55 against the US dollar.

Pressure for increased rates on the government’s domestic borrowings, on the other hand, has grown
in recent weeks, with the national treasury having to reject bid offers for Treasury bills. This
pressure, according to some analysts, is not likely to go away very soon.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views
of ABS-CBN Corp.