Inflation edges up in July

By Jochebed B. Gonzales, Researcher
and Melissa Luz T. Lopez, Senior Reporter

PRICES of widely-used goods edged up last month on account of higher costs of fuel and transport, the government reported on Friday.

Preliminary data from the Philippine Statistics Authority (PSA) showed that the consumer price index (CPI) rose 2.8% last month, faster compared to a revised 2.7% in June and 1.9% seen in July last year. Year-to-date, inflation averaged 3.1%.

The headline print settled within the 2-4% target band set by the Bangko Sentral ng Pilipinas (BSP) for full-year 2017. It also landed near the 2.85% median estimate yielded in ����ý’s poll of 10 economists last Monday.

Excluding items that are prone to volatile price swings, core inflation stood at 2.1% last month.

“The July inflation reading confirms our assessment of continuing benign inflation conditions. We’re on track to comfortably meeting our 2017-2018 inflation target,” BSP Governor Nestor A. Espenilla, Jr. said in a text message to reporters.

Angelo B. Taningco, economist at Security Bank Corp., said the higher headline inflation in July was brought about by faster price increases in four commodity groups in the Consumer Price Index (CPI).

“[T]hese include housing and utilities amid increases in rental rates for dwelling units, petroleum prices, and electricity rates, as well as transport,” he added.

For University of Asia and the Pacific (UA&P) economist Cid L. Terosa, the upticks in fuel prices were brought by the weakening of the peso after sliding nearly to an 11-year low.

“Higher prices were driven up in July by higher prices for petroleum products due to the weakening of the peso,” he said.

Comprising more than a fifth of the CPI basket, the housing, water, electricity, gas, and other fuels index climbed 2.2% from 2.1% in June. The transport index quickened to 3.8% from 2.4%.

Meanwhile, easing inflation was observed in the food items, which make up nearly 40% of the consumer basket.

Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (Landbank), said this had offset inflation for all items. Food and non-alcoholic beverages rose 3.3%, easing from 3.5% in the previous month.

“The acceleration in transport prices was partly offset by the slowdown in the costs of food and non-alcoholic beverages, which as a group comprises a huge chunk of the consumer market basket. Food inflation moderated last month likely because of better weather conditions in the country,” he said.

Other commodity groups which saw notable price increases were: alcoholic beverages and tobacco (6.2%), health (2.4%), education (2.3%), restaurants and miscellaneous goods and services (2.1%), and clothing and footwear (2.1%).

Meanwhile, inflation in Metro Manila was recorded at 3.8%, above the national average with the transport sub-index posting 10.1%, a reversal from a 0.9% contraction seen in the same period last year. The food and non-alcoholic beverages sub-index, meanwhile, has a 5.1% reading — higher than last year’s 3.1% while alcoholic beverages and tobacco was at 7.6%, up from 4.8%.

Inflation in areas outside Metro Manila was much lower, at 2.6% last month, driven by upticks in “sin” products (6%), food items (2.9%) and utilities (2.6%).

MORE TIME FOR BSP
The steady inflation reading in July is seen to provide room for the central bank to keep borrowing rates unchanged.

“The BSP continues to see a manageable inflation outlook over the policy horizon after taking into consideration the latest inflation reading in July,” the BSP said in a separate statement.

The central bank did not mention any specific course of action but further said in the statement that the inflation path will be “supported by the continued strength of the domestic economy as well as negative base effects in the last four months of 2017.”

“The within-target path of inflation over the policy horizon provides the BSP with the flexibility to assess our monetary tools to enhance further our responsiveness to the evolving requirements of the economy with due consideration of external factors with potential impact on domestic monetary conditions.”

With inflation falling within official targets, analysts do not expect the BSP to tweak monetary policy settings anytime soon.

“For the coming months, inflation will hover close to the level achieved in July. The BSP, however, will still maintain existing policy rates because inflation is well-managed and controlled,” said UA&P’s Mr. Terosa.

For Security Bank’s Mr. Taningco: “I expect inflation to stay moderate, i.e., averaging 3.0% for the remaining months of the year. Since this figure is within the BSP’s inflation target range of 2-4%, I expect the BSP’s key interest rates to remain unchanged.”

Landbank’s Mr. Dumalagan also believes that the BSP will maintain the present policy rates but did not rule out the possibility of tightening in the fourth quarter of this year.

“Despite the slight increase, July’s inflation remained relatively benign, supporting views of steady BSP policy settings at least until the third quarter of this year,” Mr. Dumalagan said.

“While the chances of a BSP rate hike in the fourth quarter has declined due to easing inflation in the past few months, the possibility of such event happening cannot be eliminated, as rising US interest rates and higher domestic inflation expectations might warrant some adjustments from the BSP.”

However, two global banks noted that while the within-target inflation print would allow the BSP to hold fire on rate hikes, the central bank would have to eventually raise rates ahead of expectations of faster inflation and rapid credit growth.

“Headline inflation will likely stay within the central bank’s target range this year. However, upside risks to future inflation are significant,” economists at ANZ Research said in a commentary sent on Friday, pointing out the expected inflationary impact of the government’s tax reform plan eyed in place by 2018.

The ANZ economists said a rate hike from the BSP was “inevitable,” noting that they still expect a 25-basis-point increase in borrowing rates by yearend.

The Monetary Board, which is the BSP’s highest policy-making body, will review policy settings on Thursday. The central bank has kept its monetary policy stance unchanged since September 2014, except for procedural cuts introduced in June last year for the interest rate corridor.

Singapore-based DBS Bank said separately that the current inflation path “puts less pressure” on the BSP to tweak policy settings, but noted that a tightening move is expected over the near term.

“Even if the inflation trajectory doesn’t scream for higher policy rates as yet, the BSP can definitely afford to adjust rates higher in the coming months,” the bank said in a report.