The connection between oil prices and inflation in the Philippines: 5 industries affected

Ever wonder why the government celebrates a low inflation rate of just 1.9%, even though it still means a 1.9% increase in prices for consumers? When was the last time a country experienced deflation?

As oil prices soar, the effects ripple through various industries, significantly impacting the economy and fueling inflation. Remember the basic economic rule: when demand is high, prices rise. This is especially true in the Philippines, where a growing population and increasing reliance on imported oil drive prices higher as the country expands, consumes more energy, and develops more land. So, when inflation is slow, it becomes a reason to celebrate.

Let’s explore five key industries that influence prices and directly impact the economy, particularly in relation to the fluctuations of oil prices.

Transportation drives inflation

In every part of the world, including the Philippines, everything needs to be transported—whether it’s goods, services, or even ourselves. Higher oil prices directly affect transportation costs across various sectors, from airlines to shipping companies and public transportation like buses. As fuel expenses rise, these companies are forced to increase ticket prices and shipping fees, ultimately passing these costs on to consumers. This spike in transportation costs doesn’t stop there—it can trigger a chain reaction across the economy, driving up the prices of goods and services and reinforcing inflation.

Impact of inflation on agriculture

Agriculture, a vital sector in the Philippines, heavily depends on oil for fuel, fertilizers, pesticides, and transportation. When oil prices increase, Filipino farmers encounter rising production and distribution costs, making it more expensive to cultivate and deliver essential commodities like rice and livestock. This spike in food prices directly impacts consumers and food processing plants, further exacerbating inflation in the Philippines.

Manufacturing costs fuel Philippine inflation

Once agricultural and raw materials are transported, they enter the manufacturing stage, which is impacted by rising oil prices. Oil is crucial as both an energy source and a raw material in producing goods like clothing, fertilizers, packaging, and medicines. As oil prices rise, manufacturers in the Philippines face higher production costs, leading to increased prices for consumer goods, from electronics to essentials.

Inflation in the Philippine construction industry

The construction industry relies heavily on oil, not just for operating machinery but also for transporting materials like sand, cement, and metals. Extracting these raw materials also requires oil-powered machines, adding another layer of cost. Beyond housing and commercial buildings, government projects such as roads and bridges also face rising costs, especially with asphalt, which is an oil derivative. When construction costs increase, the prices of homes, office spaces, and rentals in the Philippines rise as well. This impacts both businesses and individuals, as companies often pass these higher expenses on to their customers, whether they serve other businesses (B2B) or everyday consumers (B2C).

Consumers directly feel inflation in retail sector

The retail industry is influenced by rising costs from transportation, agriculture, manufacturing, and construction. This sector also faces the burden of oil price increases along with high electricity and shipping costs. These expenses are often passed on to consumers as higher prices for everyday items. Additionally, inflation affects consumers’ disposable income, leading to declining retail sales and pressuring businesses to adjust pricing strategies. As prices rise in stores, consumers may feel the strain on their budgets, prompting demands for higher salaries to keep pace with increasing costs, thereby perpetuating a cycle of inflation.

In summary, it is worth celebrating when there’s slow inflation, as it reflects a certain level of stability in an economy. While rising oil prices are significant contributors to inflation, they are not the sole cause. The depletion of resources, coupled with a growing population, plays a crucial role in driving prices upward. As we’ve explored, rising oil prices can have profound implications across various industries—transportation, agriculture, manufacturing, construction, and retail—resulting in higher costs for consumers and fueling inflation throughout the economy. Understanding this interconnectedness is vital, as it sheds light on why countries consistently experience inflation rather than deflation.

When has a country experienced deflation? To answer the question, it typically occurs in the aftermath of a war, when the overall value of goods and services declines below their perceived or original value.