After five months of accelerating prices, inflation in February slowed slightly to 8.6 percent from 8.7 the previous month, solely driven by slower price increases in the transport index, the Philippine Statistics Authority said yesterday.
Among the 13 commodity groups, transport was the sole driver of the downtrend of the overall inflation during the month, recording a 9 percent inflation rate in February from 11.1 percent inflation in January.
Nine commodity groups showed higher inflation rates: food and non-alcoholic beverages, 10.8 percent; alcoholic beverages and tobacco, 11 percent; clothing and footwear, 4.8 percent; furnishings, household equipment and routine household maintenance, 6.2 percent; health, 4 percent; information and communication, 0.8 percent; recreation, sport and culture, 4.4 percent; restaurants and accommodation services, 8.1 percent; and personal care, and miscellaneous goods and services, 5.3 percent.
“The indices of housing, water, electricity, gas and other fuels; and education services moved at their previous month’s annual rates at 8.6 percent and 3.6 percent, respectively.
The financial services index continued to record zero percent annual rate,” National statistician and civil registrar general Dennis Mapa said.
Core inflation, which excludes selected food and energy items in the headline inflation, rose to 7.8 percent in February from 7.4 percent in January.
Felipe Medalla, Bangko Sentral ng Pilipinas (BSP) governor, said inflation is likely to remain above the government’s 2023 target range of between 2 and 4 percent until the end of the year.
“The February 2023 inflation outturn of 8.6 percent is within the BSP’s forecast range of 8.5 to 9.3 percent. Inflation is projected to remain above the target until early Q4 2023 before decelerating close to the low end of the target range by January 2024 due mainly to negative base effects and the likely decline in global oil and non-oil prices,” Medalla said.
He said the inflation path “continues to be driven by supply-side factors as pressures from elevated global and domestic commodity prices broaden.”
“At the same time, the risks to the inflation outlook are tilted to the upside for both 2023 and 2024. The potential impact of uncertainties in the global food market, increased domestic prices of key food items facing supply constraints, additional transport fare hikes due to elevated oil prices, and higher-than-expected wage adjustments in 2023 are the major upside risks to the inflation outlook. The impact of a weaker-than-expected global recovery is the primary downside risk to the outlook,” Medalla added.
Aggressive campaign
Finance Secretary Benjamin Diokno said an aggressive and focused campaign to address food supply and higher utility rates is necessary to tame high inflation.
“I emphasize that in order to tackle inflation, (we must undertake an) all-of-government approach,” Diokno said. “The pressure now is on the fiscal side. We need to focus on commodity prices.”
“We will continue to work with Congress to legislate priority bills for the agriculture sector.
These bills include the New Agrarian Emancipation Act, the National Land Use Act, Livestock Development and Competitiveness Bill, and the Amendments to the Philippine Crop Insurance Charter,” Diokno added.
Arsenio Balisacan, National Economic and Development Authority secretary, stressed the need to recalibrate government strategies to alleviate the impact of higher commodity prices.
“We must rethink our strategies to combat rising food prices. The country’s current high inflation is largely driven by domestic, supply-side constraints. Agricultural imports were ill-timed and food supplies have been inadequate. The solution is to get to the root of the problem, including fixing the bottlenecks along all segments of the agricultural value chain,” Balisacan said.
Safeguard the target
Medalla said the Monetary Board, in-charge of the country’s monetary policy stance, will review its assessment of the inflation outlook in its monetary policy meeting scheduled on March 23.
“The BSP remains prepared to adjust its monetary policy settings as necessary to prevent inflation expectations from becoming disanchored and safeguard the inflation target over the policy horizon. The BSP also continues to call for the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” Medalla said.
With inflation now possible to average 6 percent this year — a couple of percentage point higher than the government’s top-end of the target — the Monetary Board last month jacked up the key rates of the BSP anew to hit its highest in 15 years.
The interest rate on the BSP’s overnight reverse repurchase facility was raised by another 50 basis points (bps) to 6 percent. The interest rates on the overnight deposit and lending facilities were set to 5.5 percent and 6.5 percent, respectively.
This was the eighth consecutive tightening action by the Monetary Board. Prior to last month’s tweak, the key rates have been raised by a total of 350 bps.
Michael Ricafort, Rizal Commercial Banking Corp. chief economist, said supply-side inflation factors “would be better addressed by non-monetary measures to increase the supply and lower tariffs (though temporarily) and prices of local food products.”
He pointed out that the economy does not need the “still relatively higher inflation,” especially households hit hard by the coronavirus pandemic in terms of lower income, thus the need for intervention preferably through non-monetary measures.
“But (it) would require further monetary tightening at some point, but only if there would be evidence of second-round inflation effects…to prevent inflation from eating further the already reduced budgets of the most vulnerable sectors as the economy is still reeling from the adverse effects of the pandemic,” Ricafort added.
He stressed higher inflation would slow down the economic recovery “amid the reduction in the purchasing power amid more spending for oil and other global commodities and to pay for higher prices of affected goods and services.”
“Further reopening of the economy towards greater normalcy with the easing of the Alert Level to 1, the lowest in Metro Manila and in more areas since March 2022, could help economic recovery prospects and some pickup in demand and potentially some pickup in prices, going forward, though could be offset by the relatively slower pace of economic recovery,” Ricafort said.
Jun Neri, Bank of the Philippine Islands economist, said despite the lower headline print, “risks to inflation remaining elevated and well above BSP’s target are still significant as shown by core inflation.”
“There is a significant chance that headline inflation may have reached the peak already, and succeeding prints will be lower moving forward. The contribution of transport to inflation may continue to shrink in the coming months if oil prices remain stable. The agriculture sector continues to struggle amid structural problems, preventing it from keeping up with the country’s rising population. Importation will help in tempering price pressures, but this is only a short-term solution. Surge in food prices may recur in the future given the structural problems in the agriculture sector. Considering the latest print, we expect full year inflation to settle near 5.8 percent,” Neri said.
Neri noted the need for the BSP to hike rates further in the coming months with core inflation still rising, adding that aside from inflation, the magnitude of the hike will depend on the upcoming data in the United States, the size of the Federal Open Market Committee (FOMC) hike and the behavior of currency markets.
“So far, markets are still expecting a 25- bp hike in the March FOMC meeting, but an upward surprise could be bolstered by upcoming US economic data and policy decision,” Neri added.
Aris Dacanay, HSBC economist for Asean, said although headline consumer price index (CPI) only decelerated by a tenth of a percentage point, “it is still welcome news given how inflation in the Philippines is the highest in Asean today.”
“It’s difficult to conclude whether this was already the peak. Indeed, the momentum of inflation eased significantly in February, but it’s difficult to determine the peak with confidence given the extent to which inflation was spreading to other goods and services,” Dacanay said.
“Last week, (BSP Governor) Medalla stated that if the CPI in February would rise by more than 9percent, the BSP would need ‘to do something’ and he would support another punchy 50 bp hike come the next meeting. Since inflation came in below 9 percent, the case of a 25 bp hike, which is our baseline forecast, increases. In addition, we think the BSP not hiking is highly unlikely given how broad inflation spilled over to other commodity baskets,” Dacanay said.
