The Wall Street Journal Interactive took a small sample of reactions by Philippine residents on the recent surge in consumer price inflation.
Very interesting comments or responses to the question by the Wall Street Journal on “How do you offset rising prices?” (bold mine)
-We cut off our family Sunday dinners in restaurants. I seldom spend on clothes, since I get these from my relatives abroad. I stopped buying accessories and pieces of jewelry. We now skip buying treats like pizza and ice cream.-We changed our shopping habits. Before [prices rose], we would go out on pay day. Now, we stay at home during the weekends and cook two kilos of fried chicken every pay day.-I reduce my costs by not shopping for women’s luxuries, like accessories.-I concentrate on basic needs. Traveling is no longer a necessity but a privilege. In the 1990’s when I was studying, the jeepney fare was 1.50 pesos. Then, while I was in college, I spent 6 pesos daily. In the past, price increases were not drastic. Today, we are experiencing price fluctuations.-Buying new clothes and accessories are costly and unnecessary. I decided to stop buying those.
Here is what I wrote last March (bold original)
Given that the Philippines has been relatively significantly less productive economy (as revealed by the huge informal economy and the lack of depth in both formal banking and capital markets) the average populace are likely to be more prone or highly sensitive to price inflation compared to her much wealthier neighbors.Price increases in energy, food, rentals and transportation will effectively reduce the average resident’s disposable income as spending will be diverted to essentials. This is the income effect.And should there be residual disposable income, rising prices may impel the average consumer to conserve resources by switching into the more affordable alternatives. This is the substitution effect.Sustained price pressures on basic goods would imply that the forces of the income and the substitution effects will increasingly come into play.
The above is a basic demonstration of rising consumer price inflation's impact on demand via the income effect (reduced or stop buying...) and the substitution effect (changed shopping habits...stay at home) in motion.
Soaring property prices combined with accelerating consumer price inflation in food that has spread to a broader base of consumer and even to producers goods (e.g. cement as shown signs of increase in black market activities) will serve as a lethal cocktail mix to the "this time is different" credit financed boom. The adverse impact will not only affect demand but likewise negatively impact incomes (jobs), earnings (profits) and eventually asset valuations.
The same forces will expose on the myth of the supposed "transformational" Philippine consumer economy which has underpinned the Shopping mall bubble.
Soaring property prices combined with accelerating consumer price inflation in food that has spread to a broader base of consumer and even to producers goods (e.g. cement as shown signs of increase in black market activities) will serve as a lethal cocktail mix to the "this time is different" credit financed boom. The adverse impact will not only affect demand but likewise negatively impact incomes (jobs), earnings (profits) and eventually asset valuations.
The same forces will expose on the myth of the supposed "transformational" Philippine consumer economy which has underpinned the Shopping mall bubble.
4 comments:
Hi Benson. Nothing new with "cutting back" on spending. Heard the same things for more than a decade. When consumption spending (and credit cards maxed) is exhausted, plus paying the costs of schooling the past month, people normally cut back.
Hi Anonymous,
Thanks for your comment
But to say that “cutting back” as representing ‘heard the same things for more than a decade’ is really a non-economic and a time irrelevant comment.
Hi Benson. Depends on demographics too. Mid aged working class people with growing kids (and old folks to take care of) will definitely cut down on spending. But yuppies and young families with kids not going to school yet... unlikely. There will always be mom and dad to bail them out (some but not all).
Indeed consumption, investment and spending patterns can be affected by demographics. But this is LESS of a factor than one of politics. During the pre-globalization era, population growth ala India and China hardly added to spending. It is only when these countries opened their economies, that spending surged. The reason is that expanded trade increased their real incomes. Japan and the US have declining demographics, but spending patterns fluctuated. Recently retail spending has been going down in the US as a result of the US mortgage crisis (bubble cycle), and secondarily from shifts to online spending from brick and mortar retailing.
When central banks debase money, which represents half of every transaction you and I do, there will be changes in spending patterns. And the law diminishing returns tell us, every marginal increases in the money supply devalues the real purchasing power of money thus a decline in real spending power. These are the primary factors affecting spending. Cutbacks are simply a symptom of such process. All the rest are additives.
Hope this helps
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