How weak peso vs dollar affects inflation, purchasing power

On Monday, the Philippine peso weakened against the US dollar to a new all-time low amid the strengthening of the greenback due to the hawkish stance of the Federal Reserve to tame inflation.

The local currency closed at P56.999:$1, shedding 22.9 centavos from Friday’s close of P56.77:$1, its previous record low.

The peso almost plunging to P57 against the US dollar has never been seen before.

But how does a weaker peso against its US counterpart affect inflation and the purchasing power of Filipinos?

The Philippine Statistics Authority (PSA) and economists weigh in.

At a press conference on Tuesday, National Statistician and PSA chief Claire Dennis Mapa said that although the purchasing power of the peso is not computed based on the US dollar’s value, its inflationary impact could affect the local currency’s purchasing value.

“Strong dollar versus the peso has an impact on the items in the consumer price index,” Mapa said, noting that imported commodities such as petroleum, which are bought using dollars, could impact local pump prices and, therefore, affect inflation.

“Purchasing power of the peso is really a function of inflation. [A stronger US dollar] will affect the purchasing power of the peso only if the strong dollar will have an impact on our headline inflation,” Mapa said.

The PSA chief added that the purchasing power of the peso or the value of P1 in 2018 remained at 86 centavos in August this year as inflation slowed down to 6.3%, albeit still elevated.

Sought for comment, Rizal Commercial Banking Corporation chief economist Michael Ricafort said that, since the start of 2022, the peso depreciated against the US dollar by nearly 12%.

“[M]eaning the costs/prices of imported oil, other commodities, and other products already became more expensive by nearly 12% since the start of 2022, assuming all other factors are the same, already much higher or more than double the average inflation of 4.9% from January-August 2022,” Ricafort explained.

“Thus, the weaker peso exchange rate would contribute to higher overall inflation and would fundamentally erode the purchasing power of the peso relative to the US dollar as there would be more pesos needed to pay the same amount in US dollars, clearly showing the outright deterioration of the peso’s purchasing power.”

“On top of the effects of higher prices/inflation in the local economy that also separately erodes the peso’s purchasing power from the point of view of local residents, with more pesos needed to pay the same local products due to higher local prices/inflation,” Ricafort said.

Likewise, economist Professor Emmanuel Leyco, president of the Pamantasan ng Lungsod ng Maynila, said that a depreciating peso against the dollar may weaken the purchasing power of the peso, especially when buying imported goods.

“It may also accelerate inflation since it may also cause imported petroleum and food prices to increase,” Leyco said.

Will a stronger US dollar benefit recipients of OFW remittances?

Mapa said that recipients of overseas Filipino workers’ (OFWs) remittances in the Philippines could benefit from a strong US dollar as the peso equivalent of their money transfers will increase.

“Their purchasing power will increase slightly,” Mapa said.

However, Leyco said that while a stronger dollar could benefit those who receive remittances from OFWs, “it will only be temporary as inflation could easily wipe out the benefits of a stronger dollar.”

Data from the Bangko Sentral ng Pilipinas showed that in June cash remittances — money transfers coursed through banks — stood at $2.755 billion, 4.4% higher than the $2.638 billion the same month last year.

First-half remittance inflows totaled $15.347 billion, up by 2.9% from $14.918 billion during the comparable period last year.

Meanwhile, personal remittances — the sum of transfers sent in cash or in-kind via informal channels — grew by 4.4% to $3.064 billion from $2.936 billion in June 2022.

Year-to-date personal remittances stood at $17.086 billion, up by 2.8% from $16.616 billion in the first half of the previous year. — DVM, GMA News