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Philippines doles out cash to soften inflation's blow

Recent tax overhaul faces pushback for exacerbating issue and ignoring poor

MANILA -- The Philippines has launched a fleet of subsidies to shield against accelerating inflation and criticism of doing little for the poor.

Price growth exceeded the government's target range of 2% to 4% for four months straight through June, when the consumer price index increased 5.2% on the year. Manila is now working frantically to mitigate the trend's impact on the less well-off.

Poor households would receive government subsidies of 200 pesos ($3.74) per month under a new proposal. Plans are to raise this to 300 pesos in 2019. Eligible households are said to number 10 million.

While the subsidy is not sufficient in itself, it should provide some help to seniors, the authorities say.

Various anti-inflation measures should bring price growth to a more modest pace by year-end, Ernesto Pernia, head of the National Economic and Development Authority, said last Thursday. Markets expect the country's central bank to hike interest rates for a third time in as many meetings this August. But the government still expects inflation between 4% and 4.5% for all of 2018.

Rising oil prices are a key contributor to the inflation problem. Another is that U.S. interest rate hikes have weakened the peso, driving up the cost of imports. Manila compounded the problem in January with a comprehensive tax reform plan that imposed or increased excise taxes on goods including petroleum products. Diesel fuel, which previously incurred no levy, is now taxed at 2.5 pesos per liter. It now sells for around 45 pesos per liter, nearly 30% more than in the latter half of 2017.

Rising fuel costs have pinched operators of jeepneys -- the colorful minibuses widely used by the working class. Drivers have staged demonstrations, calling on the government for assistance. Now, the country will pay a 5,000 peso fuel subsidy to 179,000 jeepney drivers and owners. The government has also approved a hike in base fares to 9 pesos from 8 pesos, though this will come at riders' expense.

Efforts are also underway to control rice prices, which have risen roughly 8% over the past year to more than 40 pesos per kilogram. Rice is a key staple here, but flawed import controls have caused inventories to dwindle. The government has submitted legislation that would open to door to more imports and announced in June a price ceiling for rice and other agricultural products.

Though the Philippines cut individual income taxes as part of the January overhaul, most Filipinos do not make enough to owe them in the first place. President Rodrigo Duterte's government faces mounting criticism that the reforms only hurt the less well-off. Unemployment is high, and wage growth is sluggish even as inflation accelerates.

The Duterte administration is pushing massive infrastructure development plans to invigorate the economy. January's tax overhaul is expected to bring in roughly 90 billion pesos in additional revenue that could be used for this purpose. But if the cost of mitigating inflation climbs too high, the government may have to downsize its grand building plans -- an outcome that would also exact a political price.

The Philippines is not alone in its efforts to fight inflation. India's consumer price index increased 4.87% in May, picking up pace from the previous month and prompting the Reserve Bank of India in June to raise interest rates for the first time in four and a half years. India imports 80% of its oil, leaving it vulnerable to rising petroleum prices. Rising U.S. interest rates, meanwhile, put the rupee at its weakest ever against the greenback at the end of June.

Indonesia's rupiah has been losing value since the start of the year, hurting an economy dependent on imports for food and petroleum products. The central bank increased rates 50 basis points in late June, more than markets expected. While price growth was within the official target range that month, the government is still working frantically to stave off higher inflation, opening state rice reserves and fixing the retail price of gasoline.

But excessive interest rate hikes could combine with price volatility to deal these economies a double blow, argues Toru Nishihama of the Dai-ichi Life Research Institute.

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