Taming Inflation: Drivers and Options

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Inflation in the Philippines has accelerated over the course of 2018, with year-on-year headline inflation rising from 2.9 percent in December 2017 to 6.7 percent as of September 2018. Amidst such trends, calls have been sounded for the advanced suspension of scheduled increases in oil levies planned by R.A. 10963 (the TRAIN Law) for 2019 and 2020. In fact, the Duterte administration has reportedly began undertaking steps to suspend the next tranche of increases in fuel excise taxes.

This policy note provides an overview of the main factors shaping the country’s present inflation dilemma, and are likely to continue molding the country’s price outlook for the foreseeable future. While we tackle issues related to the TRAIN law and role of self-fulfilling expectations, we focus especially on the drivers and potential responses to rice and food price changes, given the inordinate repercussions of such inflationary dynamics on the poor and near-poor. Overall, we highlight the cost-push dimensions underlying recent inflation trends in the country, in order to emphasize various supply-side responses that are necessary to mitigate the burden of price changes, particularly on poorer households.