Prices may be stabilizing
but who’s buying?

That’s good news. Inflation is a scourge that that takes its silent toll on everybody, especially the poor as their income buys less and less over time. This is the reason price stability ought to be the concern of everybody.

We more or less know why prices have stabilized. Harvest from the main rice cropping season is in. Prices of oil in the world market have tumbled to about half of what they used to be before the global financial crisis – with an expected deep recession in its train – struck.

Also inflation is generally self-correcting. As goods become more expensive, demand for these drop. Prices tend to stabilize at their new, higher levels.

Let’s round up Recto’s projected full-year inflation rate at 10 percent. That means one’s purchasing power has been eroded by that much over one year. Without a corresponding increase in income, one must have scrimped to get by. Is there a possibility in the days to come that those hit by the past sharp rise in prices would be able to earn more to recover their lost purchasing power?

We don’t see any chance of that happening soon. The forces that forced the drop in global prices are the same forces that will keep incomes down.

Earlier, there were estimates that a slowdown in economic activity in the United States would have a negligible impact on the Philippines. The estimates were based on how much exports would drop with a weakening of the demand from the United States.

Those estimates, it now appears, seriously underestimated the impact of the US crisis on local credit and foreign exchange flows.

Local banks, even as only a few suffered direct losses from placements in bankrupt or troubled US financial institutions, are now sharply curtailing their lending, including among themselves. We have yet to come across reliable estimates on what the credit crunch would mean to production and consumption, but it will be a serious dampener.

Foreign investors, especially the portfolio managers, are also scrambling to liquidate their holdings, presumably to shore up their positions back home or, in the case of AIG’s planned sale of Philamlife, to raise money to pay their debts. We can see the immediate result now: the peso tumbling and heading to P50 to a dollar.

So it’s still a stormy ride ahead, folks. Inflation is only one side of the coin. Prices might be at rock bottom, but that doesn’t mean a thing to somebody who does not have money in his pocket to start with.