Slower June inflation leaves policy space

By Patrizia Paola C. Marcelo

INFLATION slowed to a five-month low in June — missing estimates — on softer food, utilities and transport price increases, giving the central bank room to continue keeping policy steady for now.

In a report released yesterday, the Philippine Statistics Authority said that the prices of widely used goods and services rose by 2.8% last month — the slowest since January’s 2.7% though still faster than June 2016’s 1.9%.

The preliminary result falls below the 3.0% median estimate in a poll of 13 economists conducted by ����ý last week, and lies at the midpoint of the 2.4-3.2% range the Bangko Sentral ng Pilipinas (BSP) had given for that month

June’s headline figure put year-to-date inflation at 3.1% — the forecast full-year average and well within the 2-4% target band BSP has set for 2017.

Core inflation — which strips out food and energy items which are volatile — came in at 2.6% in June, lower than May’s 2.9% though faster than the year-ago 1.9%, taking the year-to-date pace to 2.8%.

“This is welcome news but not unexpected. The further deceleration in inflation in June is in line with our forecast,” BSP Governor Nestor A. Espenilla, Jr. told reporters in a text message. “This validation gives us the space to carefully consider our policy options with respect to fine-tuning deployment of our monetary instruments to further the market-based development of the domestic financial market.”

The deceleration of inflation can be attributed to dips that month in the indices of certain commodity groups, primarily food and non-alcoholic beverages that cumulatively account for the biggest chunk at 38.98% of the theoretical basket of goods and services used to compute annual inflation.

Inflation of food and non-alcoholic beverages clocked 3.5% last month, down from 3.8% in May.

Increase in prices of housing, water, electricity, gas and other fuels — a group that accounts for the second-biggest contribution to the consumer price index (CPI) at 22.46% — eased to 2.1%, from 3.5% over the same months.

Price increases also settled at 2.1% for the following commodity groups: clothing and footwear (from 2.2%) as well as for furnishing, household equipment and routine maintenance of the house (from 2.3%).

Transport inflation eased to 2.3% from 2.7%, while inflation of recreation and culture dropped to 1.1% from 1.4%.

The following commodity groups logged bigger annual increments: alcoholic beverages and tobacco at 6.2%; health at 2.3%; education at 2.1%; restaurant and miscellaneous goods and services, 1.7%.

Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines, said the decrease in the price of oil in the global market affected prices of many basic commodities like electricity, while better weather eased the increase in food prices, taking the food-alone index to 3.6% in June from May’s 3.8%.

“Inflation dipped to 2.8% in June 2017 primarily because of the decline in oil prices in the international market. Lower oil costs resulted in softer price increases in housing, electricity, gas and other fuels, and transport”, Mr. Dumalagan said in an e-mail.

“Better weather conditions also pulled inflation down by tempering the rise in food prices.”

Angelo B. Taningco, economist at Security Bank, shared this view, noting in an e-mail that “[t]he price reductions in electricity and fuel products were instrumental in dampening inflationary pressures during the month.”

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, cited upward pressure on education “because of tuition hikes in most of the country.”

“But the general trend has been a decline, even just looking at the core inflation for the month,” he said in an e-mail.

The National Economic and Development Authority in a statement yesterday quoted its officer-in-charge, Undersecretary for Policy and Planning Rosemarie G. Edillon, as saying that “[t]he significant decline in the probability of extreme weather disturbance due to El Niño and La Niña until the end of 2017 bodes well for agricultural production and commodity prices moving forward.”

Still, prices could pick up next year as the first of up to five tax reform packages that now awaits Senate approval is implemented.

In the face of the latest inflation data, Nomura Global Research said it now sees “downside risks to our average 2017 CPI inflation forecast of 3.3%.”

“Accordingly, the risks to our baseline forecast that BSP will hike rates by a cumulative 50bp in H2 2017 have risen further, with BSP looking increasingly likely to remain on hold for 2017,” Nomura said in its report.

For ANZ Research economists Eugenia Fabon Victorino and Sanjay Mathur: “With our downward revision in inflation outlook, we have trimmed our policy rate call: we now expect only one increase of 25bps (basis points) in Q4 2017 and two hikes in Q1 2018.” ANZ had previously expected two hikes this semester. — with Melissa Luz T. Lopez