Higher inflation seen affecting consumption

ANZ research

Manila, Philippines – Price hikes arising from tax reforms could weigh on consumption — a primary driver of economic growth — and latest data appear to be confirming this view, the research arm of Australian bank ANZ said.

“Domestic demand is strong and is likely to remain so. However, the risk of some moderation in consumption growth remains,” ANZ Research said in a report released on Wednesday.

Inflationary fears have been stoked by the implementation of the Tax Reform for Acceleration and Inclusion (Train) law, which raised taxes on fuel and car sales, among others, in exchange for lower personal income tax rates.

ANZ Research noted that while the law means higher take-home pay would be higher for salaried workers, non-taxpayers would not have this buffer. It also said that for every percentage point increase in headline prices there was a corresponding 0.3-percent dip in private consumption.

Both headline and core inflation surged in January following the Train law’s implementation, the research firm pointed out.

At 4.0 percent for the month, inflation hit the upper limit of the Bangko Sentral ng Pilipinas’ 2.0-4.0 percent target range. Monetary authorities have forecast a breach to 4.3 percent this year but expect inflation to fall to 3.5 percent — back within the target range — in 2019.

ANZ Research said it expected inflation to hit 4.1 percent in 2018 and 3.4 percent the following year.
“If realized, it would be the first inflation overshoot since 2008,” it pointed out.

ANZ Research also noted that the growth in car sales eased substantially in January.

Earlier this month, the Chamber of Automotive Manufacturers of the Philippines Inc. and Truck Manufacturers Association 4.0-percent sales growth at the start of the year, significantly slower than a year ago’s 27 percent.

For its part, the Department of Finance (DoF) claimed that while higher fuel prices due to Train also raise prices of some commodities, the increases will only be minimal and temporary.

In a statement, Finance Undersecretary Karl Kendrick Chua said that the Finance department, the Bangko Sentral and the National Economic and Development Authority estimate inflation to increase by just 0.4 to 0.7 percentage points during the first year of the law’s implementation, with the impact tapering off over time.

He cited the 2005 Expanded Value-Added Tax (VAT) law that raised the sales tax to 12 percent from 10 percent as well as oil price shocks in 2011, which both raised prices but did not inflict devastating effects on inflation and the economy in general.

“Yes, adjusting excise taxes would raise prices of some commodities faced by consumers, but it will be minimal and it will be temporary,” Chua said.

“The economy and the people are more resilient than naysayers would have us believe. History has proven this to be true,” he added.

Far from benefiting the rich more than the poor, Chua said that Train ensured equality by making the tax system fairer, simpler and more efficient so that those who earn less pay less taxes and those who earn more are taxed more.

He noted that the significant increase in the take-home pay of low- and middle-income taxpayers — those earning below P250,000 do not have to pay personal income taxes — would more than offset the temporary and slight rise in family expenses resulting from higher commodity prices.

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