Inflation hits fresh five-yr high of 4.6%

INFLATION accelerated to a new five-year high in May but the 4.6 percent result — up from 4.5 percent a month earlier — was lower than expected, raising expectations that price increases were nearing their peak.

It settled at the lower end of the Bangko Sentral ng Pilipinas’ (BSP) 4.6-5.4 percent forecast range and was also lower than the Finance department’s 4.9-percent estimate and the 4.8-percent average in a Manila Times poll of economics.

The Philippine Statistics Authority (PSA) said the month saw significantly higher annual increases for the following commodity groups: alcoholic beverage and tobacco (20 percent); furnishing, household equipment and routine house maintenance (2.9 percent), transport (6.2 percent); and restaurant and miscellaneous goods and services (3.7 percent).

The heavily-weighted food and non-alcoholic beverages index saw price growth slow to 5.7 percent while other commodity groups retained their previous month’s rates, the PSA added.

Core inflation, which excludes selected food and energy items, rose to 3.6 percent from 3.5 percent.

Year to date, headline inflation remained above the BSP’s 2.0-4.0 percent target for 2018 at 4.1 percent – the highest in five years based on a revised data series using 2012 prices. Core inflation for the period, meanwhile, was at 3.3 percent.

‘Lower than expected’ ‘

“The May inflation rate is actually lower than expected by the market. In fact, the BSP (Bangko Sentral ng Pilipinas) overshot its forecast,” National Economic and Development Authority Undersecretary Rosemarie Edillon said in a press briefing.

Central bank Governor Nestor Espenilla Jr. noted that inflation had slowed in the National Capital Region, to 4.9 percent from 5.2 percent in April, and that month-on-month and seasonally adjusted, inflation had fallen to 0.2 percent from 0.3 percent.

“There are also signs that inflation is slowing and may be close to peak,” Espenilla said, adding: “It helps that oil prices seem to have peaked and food price inflation is also slowing down.”

The Bangko Sentral chief, however, pointed out that while May inflation had hit the lower end of the central bank’s forecast, “the inflation outlook continues to be a concern and requires close attention.”

He pointed to the rise in core inflation and noted that outside the National Capital Region, inflation had picked up to 4.6 percent from 4.3 percent.

“The MB (Monetary Board) will consider what further adjustments are necessary to firmly anchor inflationary expectations and ensure that the inflation target will be achieved in 2019,” he added.

Rising inflation, along with strong economic growth, prompted the BSP’s policymaking Monetary Board in May to raise rates for the first time in over three years.

The 25-basis point (bps) adjustment took the BSP’s overnight borrowing, lending and deposit rates to 3.25 percent, 3.75 percent and 3 percent, respectively.

The Monetary Board also raised inflation forecasts for 2018 and 2019 to 4.6 percent and 3.4 percent, respectively, from 3.9 percent and 3 percent previously

Monetary authorities are set to meet again on the 21st of this month to update their policy stance.

Further hikes seen

Following the release of May inflation rate, ANZ Research and ING Bank Manila analysts said they expected further policy tightening by the central bank.

ANZ Research economists Shashank Mendiratta and Sanjay Mathur said the policy environment remained challenging given a combination of robust domestic demand, the lingering impact of tax reforms and elevated global crude oil prices amid a weaker peso.

“We continue to expect one more rate hike of 25 bps in August,” they said.

ING Bank Manila senior economist Joey Cuyegkeng said the May results could mean that inflation was at or near its peak for the year, reducing pressures on the Monetary Board to hike key interest rates.

“However, we still expect BSP to hike policy rates at the June 21 meeting to preempt second round effects and stabilize inflation expectations,” Cuyegkeng said.

Rising inflation has been blamed on the implementation of the Tax Reform for Acceleration and Inclusion (Train) law, which raised taxes on a number of goods and services such as tobacco and alcohol products in exchange for lower personal income tax rates.

Mounting calls for the law’s suspension — in whole or in part — prompted economic managers on Tuesday to issue a statement rejecting this.

‘Minimal and short-term impact’

Budget Secretary Benjamin Diokno, who delivered the statement in a press briefing in behalf of Finance Secretary Carlos Dominguez and Socioeconomic Planning Secretary Ernesto Pernia, said “suspending Train and adopting other band-aid solutions will only have a minimal and short-term impact on inflation and will stifle our growth, further delaying our nation’s progress…”.

Higher crude prices were a significant driver of inflation, he said, having risen beyond the programmed level of $60 per barrel and contributing 0.5 percentage points to overall May inflation.

“This means that for every additional peso due to inflation, one pays 11 centavos more. Adding other external and domestic factors together, their joint contribution to the inflation rate is 0.7 percentage points,” Diokno said.

“That amounts to 9 centavos for every additional peso due to inflation,” he added.

The effect of excise taxes on petroleum, sweetened beverages, and tobacco under the Train law remains at 0.4 percentage points, Diokno said.

Moving forward, the Budget chief said fuel prices could start going down amid reports that oil producers were considering ramping up output. Locally, the Energy department is working on the provision of discounts for public utility drivers while the Transportation department is finalizing fuel subsidy guidelines under the Train law.

Commodity prices are continuously being monitored to ensure that suggested retail prices are followed and upcoming rice imports will make the staple cheaper, Diokno added.

Also, Congress should work on passing the Rice Tariffication Act as this would cut 2018 inflation by around 0.4 percentage points if implemented in the third quarter, he said.

The government, the Budget chief said, was continuing to address the impact of higher prices on the poorest families via the Train law’s unconditional cash transfers and cash grants under the Pantawid Pamilyang Pilipino Program.

‘Something we planned for’

Speaking in South Korea, meanwhile, Dominguez said inflation accelerated because of the “planned” rise of non-essential products.

“We want the price of tobacco to go up, because it’s bad for your health. We also want the price of sugary drinks to go up, because it’s also not so good for your health. So those two prices have really driven the inflation rate, but it’s something we planned for — it’s not an accident,” Dominguez said.

“The thing that we did not planned for was the increase in the price of fuel. Unfortunately, we could not foresee that there was going to be a mess in the Middle East, and that drove the price of fuel up,” he added.

“The [global price before]at $44 per barrel, it went up to $71 to $72; now it is easing up to about $67. But, we are just seeing it go down. Hopefully that will continue, so that it will really lessen the tension on price.”

He also cited the need to pass the Rice Tarrification Act, saying the “estimates are it will bring down rice prices by around 7 pesos per kilo for the Filipino families and reduce inflation to below 4 percent by the second half of the year.”

“I would like to emphasize that Train is not the sole reason for the increase in inflation; the effect of high global oil prices driven by unfavorable geopolitical events, along with the import quotas on rice have affected prices on a much larger scale,” Dominguez said.


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