Gov’t response on rice crisis crucial to inflation — study

05/02/2008

The rice problem is among the factors drivING up inflation but since the problem is projected to die down by the end of the year, inflation or price increases will also decline if the measures being implemented by the government against the current crisis are the right ones in the long run, Deutsche Bank strategist Anton Periquet, in a special report last April said

“This is the logic behind why commodity price increases are counted as part of the non-core component of inflation, as they are supposed to be non-recurring in nature,” he said.

Citing his recent conference call with two economists — former Budget Secretary and University of the Philippines (UP) professor Benjamin Diokno and Deutsche Bank chief economist for Asia Michael Spencer, Periquet said both economists agreed that the crisis will be over before year-end.

He said the current situation is caused by the supply-demand imbalance “but at the same time, there was also a suspicion that the spike in world prices this year is in part being fueled by the Philippine government’s aggressive (and pre-announced) buying into a thin market, at a time when key suppliers Thailand and Vietnam were curbing exports.”

The country is the world’s largest rice importer despite being among the biggest rice producer in the globe.

Price of imported rice has ballooned in the last months with the current price at over $ 1,000 per metric ton, way above the government’s assumption of about $ 700 per metric ton.

However, Periquet said, Diokno and Spencer both agreed that rice prices“would at least halve before the end of the year.”

And since the problem is still here, Periquet said Diokno projects inflation would average this year at around 6 percent, even as March inflation already reached 6.4 percent, which “implies a moderation toward the yearend after a likely rise in the coming months.”

The Bangko Sentral ng Pilipinas projects the higher end in the average inflation last April will be about 7 percent.

The government is already studying proposals for wage and transportation fare hikes due to the continued price increases but the bank strategist warned about the consequences of the possible approval for these calls.

“The real danger lies in how the government responds — if politicians press the panic button and respond to the temporary chock with measures that permanently increase costs — i.e. legislated wage increases that outstrip productivity growth — they run the risk of triggering a supply chain reaction that will be almost impossible to reverse,” he said.

Periquet said runaway inflation is a “more serious threat” to the country than the impact of the subprime crisis in the US, which causes the world’s largest economy to slowdown and impact on other major economies.

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