After three months of hitting 4.5 percent, the country’s inflation rate slowed down to 4.1 percent in June due to lower price increases in transport costs as strict pandemic-related rules begin to fade.
But the slower pace brings the average inflation for the first semester of 2021 to 4.4 percent, still above the government’s target range of between 2 and 4 percent.
The Philippine Statistics Authority said the deceleration was primarily due to the lower annual rate of increase in the transport index at 9.6 percent, from 16.5 percent in May.
Alcoholic beverages and tobacco; clothing and footwear; health; and communication indexes also slowed down.
Inflation rates were higher, however, in the indices of food and non-alcoholic beverages at 4.7 percent. Housing, water, electricity, gas and other fuels; and restaurant and miscellaneous goods and services remained elevated, as well.
Excluding selected food and energy items, core inflation decelerated to 3.0 percent from the previous month’s 3.3 percent.
Benjamin Diokno, Bangko Sentral ng Pilipinas (BSP) governor, said the latest inflation number “is consistent with expectations that inflation could remain above target in the near term as meat and oil prices remain elevated.”
“Average inflation is projected to settle at the high-end of the target range. However, price pressures are seen to abate leading to the reversion of average inflation near the midpoint of the target in the next two years,” Diokno said.
“The effective implementation of direct non-monetary measures will be crucial in mitigating further supply-side pressures,” he added.
Diokno stressed the risks to the inflation outlook remain broadly balanced with the uptick in international commodity prices owing to supply chain bottlenecks, and the recovery in global demand could lend upward pressures on inflation.
“However, downside risks to the inflation outlook continue to emanate from the emergence of new coronavirus variants which could delay the easing of lockdown measures and temper prospects for domestic growth,” Diokno said.
Karl Kendrick Chua, socioeconomic planning secretary, said the slowdown was expected as policy interventions to stabilize commodity prices have begun to take effect.
“Recent policies to increase food supply are beginning to bring down inflation. Rest assured that the government will continue to address constraints in the availability and movement of goods amid quarantine restrictions to ensure that households have access to affordable food,” Chua said.
He said food inflation remained at 4.9 percent in June 2021 with the faster inflation in fish tempered by slower inflation in other food items including rice, vegetables and meat.
Meanwhile, meat inflation decelerated to 19.2 percent in June 2021 from a high of 22.1 percent recorded in April and May 2021.
“The declining meat inflation points to the positive effects of Executive Orders (EO) 133 and 134. These are expected to further bring down meat prices during the second half of the year,” Chua said. (See related story on this page)
Nicholas Mapa, ING Bank Philippines senior economist, said “the big surprise for the month was the stark deceleration in transport inflation which slowed considerably as base effects from pandemic-related rules for public transportation faded.”
However, Chua said the costs of transport services remain elevated primarily because of social distancing measures and the recovery of global oil prices.
“This is expected to partially decrease in the near term with the government’s accelerated vaccination program. Keeping transport expenses low complements our efforts to safely bring people to their workplaces. We are accelerating the vaccination of the A4 priority group of workers to keep them and their families protected as they earn a living. These efforts will help the economy recover strongly in 2021,” Chua added.
Mapa said downside pressure on inflation remains present as the economy struggles to dig itself out from the recession with overall economic activity still sluggish.
“In the near term, we could see higher global energy prices exerting upward pressure on utilities and fuel costs but we also expect base effects from tricycle fares and other services to offset this increase. The probability of inflation hitting 5 percent has diminished considerably,” Mapa said.
Chua said in managing the country’s inflation, the government’s priority will be “to continue improving our domestic production and providing needed support to our farmers and producers.”
“When necessary, we will augment supply with importation to keep prices stable and to guarantee food security. This balancing act will help us better manage the impact of inflation on the people and the economy,” Chua said.
Diokno said the BSP “remains watchful over the evolving economic conditions and challenges brought about by the pandemic to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.”
Key rates of the BSP were kept steady for the fifth straight session last month as economic recovery momentum remains “tentative” even if inflation is still seen to settle within the government’s target range for this year.
The Monetary Board maintained the interest rate on the BSP’s overnight reverse repurchase facility at 2 percent.
The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
Diokno said although economic activity has improved in recent weeks, “the overall momentum of the economic recovery remains tentative as the threat of COVID-19 infections continues.”
“The sustained implementation of targeted fiscal initiatives as well as the acceleration of the government’s vaccination program should help boost market confidence and recovery of the economy in the coming months,” Diokno said.
Mapa said the BSP will not likely alter the course anytime soon as Diokno has signalled he will likely retain his accommodative stance for at least another year.
With price pressures fading, Mapa said inflation is expected to decelerate in the second half of the year as meat prices normalize with authorities allowing higher import volume for the commodity.
Base effects tied to social distancing guidelines for transport and other services are also likely to fade in the coming months, offsetting a projected acceleration in utility and fuel costs given the surge in global oil prices.
“With inflation set to glide back within target, we expect BSP to retain policy rates at 2 percent for the balance of 2021 and only consider adjusting policy by mid-2022,” Mapa said.
