The year-on-year January 2018 inflation rate of 4 percent, which is still within the target set by the Bangko Sentral ng Pilipinas (BSP), was partly the result of better compliance with the payment of excise taxes on “sin” products, with tobacco inflation recorded at 17.4 percent during the same period even though the expected increase arising from the tax hike for cigarettes was only 8 percent, according to the Department of Finance (DOF).

At the same time, Finance Undersecretary Karl Kendrick Chua said the temporary inflation spike could also be attributed to the apparent “profiteering” by some traders, contrary to claims that this was caused by the implementation of the new tax reform law.

Chua said certain retailers selling old stocks they procured before the Jan. 1 effectivity of the Tax Reform for Acceleration and Inclusion Act (TRAIN) seemingly took advantage of this new law and imposed excessive price adjustments, which led to last month’s higher-than-expected inflation rate.

Prices are expected to normalize once the markets adjust and the government intensifies its monitoring campaign to check any unwarranted price movements of basic goods, Chua noted. ​

Chua recalled that last year, cigarette manufacturer Mighty Corporation sold its assets to Japan Tobacco Inc. (JTI) in order for it to settle its tax liabilities after the Bureau of Internal Revenue (BIR) filed several criminal complaints before the Department of Justice (DOJ) for its massive use of counterfeit tax stamps.

With JTI now in control of Mighty, the company is now paying the correct amount of taxes, which in turn, would mean it is charging higher prices for its cigarettes to make up for the higher tax rate, he said.

“In fact, if Mighty continued to evade tax and therefore cigarette prices remain low, overall inflation would have gone down to around 3.75 percent,” Chua said.

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The BSP has set an overall inflation target of 2 to 4 percent for 2018. It later raised its inflation forecast for this year to 4.3 percent which it expects to recede to the target range in 2019. ​

Chua said the inflation rate in Metro Manila for January 2018 rose to 5.45 percent, while outside Metro Manila, where most of poor households reside, it was lower at 3.53 percent.

“This means that the poor, who are mostly outside NCR, are less affected,” Chua said.

Rice inflation for the same period was only 1.4 percent, defeating claims that the TRAIN would lead to escalating food prices.

“In January 2018, month-on-month inflation was only 0.99 percent and when the effect of tobacco is removed, it was only 0.80 percent. Since the tax increase is not expected in the first half of the month due to sale of old stock, we can surmise that profiteering is a major reason for the higher than expected inflation,” Chua said. “We expect this to ease in the coming months as the government intensifies monitoring of prices and as the markets adjust.”

Chua noted that the Philippine Statistics Authority (PSA) collects data on prices twice a month: first, during the 1st to 5th of the month; and second, during the 15th to 17th of the month.

“Given this, TRAIN is unlikely the reason for higher inflation as retailers were still selling old stock from 2017,” Chua said.

In an earlier economic bulletin, Finance Undersecretary Gil Beltran, who is the DOF’s chief economist, also pointed out that the inflation spike in January was partly the result of the excessive price adjustments by traders to compensate for the excise tax hike on “sin” products such as cigarettes and alcoholic drinks.

Beltran said “the prices of sin products increased by 12.3 percent even as specific excises were adjusted by only 4 percent as the sin tax law provides.”

“While the price of rice has remained stable, that of other commodities such as non-alcoholic beverages which were affected by the tax on sugar-sweetened beverages (SSB) in the TRAIN Law and vegetables, by weather disturbances, increased,” Beltran said in his economic bulletin.

Beltran said “the rise in inflation in January may be partly traced to the excessive price adjustment for the sin tax, the SSB tax in the TRAIN Law in the case of non-alcoholic beverages, and weather disturbances in the case of vegetables.”

“However, it should be noted that a significant portion of January’s inflation rate is contributed to by tobacco and alcoholic beverages and sugar-sweetened beverages. Of the 4 percent inflation, 2.1 percentage points was accounted for by sin products and sugar-sweetened beverages,” Beltran added.

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