Inflation continued to pick up in December, hitting a fresh 14-year high, driven by higher food prices with vegetables and sugar rising by more than 30 percent.
Inflation increased to 8.1 percent from 8.0 percent in November 2022.
The Philippine Statistics Authority said this is the highest inflation rate reported for 2022 and the highest since November 2008.
Inflation in December in 2021 was lower at 3.1 percent.
“The higher inflation in December was primarily brought about by the faster year-on-year growth rate in the index of food and non-alcoholic beverages of 10.2 percent, from 10 percent the previous month. This was followed by restaurants and accommodation services whose inflation rate accelerated to 7 percent, from 6.5 percent. Came third was housing, water, electricity, gas and other fuels with inflation rate of 7.0 percent from 6.9 percent,” national statistician and civil registrar general Dennis Lapid said.
Other commodity groups that recorded higher year-on-year increments in December 2022 were alcoholic beverages and tobacco (10.7 percent); clothing and footwear (3.9 percent); furnishings, household equipment and routine household maintenance (4.8 percent); health (3.1 percent); recreation, sport and culture (3.9 percent); and personal care, and miscellaneous goods and services (4.5 percent).
Lower annual increase was observed in the transport index at 11.7 percent from 12.3 percent the previous month.
Inflation for information and communication, education services and financial services remained at their previous month’s rates, Lapid said.
“The higher year-on-year growth rates in the indices of vegetables, tubers, plantains, cooking bananas and pulses at 32.4 percent; rice at 3.4 percent; and fruits and nuts at 7.6 percent were the main contributors to the increase in food inflation. Sugar, confectionery and desserts index also rose 38.8 percent,” Lapid said.
Excluding selected food and energy items in the headline inflation, core inflation in December went up to 6.9 percent, from 6.5 percent in November 2022.
Core inflation in December was observed at 1.8 percent.
Above target
The average inflation rate for 2022 stood at 5.8 percent, higher than the 2021 average inflation rate of 3.9 percent.
This is way above the 2022 target range set by the government of between 2 and 4 percent.
Felipe Medalla, Bangko Sentral ng Pilipinas (BSP) governor, however said the December outturn is within the BSP’s forecast range of 7.8 to 8.6 percent and “is consistent with the assessment of elevated inflation could peak in December before decelerating in the succeeding months due to easing global oil and non-oil prices, negative base effects, and as the impact of BSP’s cumulative policy rate adjustments work its way to the economy.”
“The risks to the inflation outlook remain tilted to the upside for 2023 but are seen to be broadly balanced for 2024. Upside risks continue to dominate the inflation outlook up to 2023 while remaining broadly balanced in 2024,” Medalla said.
The government has set the same inflation target range of between 2 and 4 percent for this year and next.
Medalla said the expected upside risks to inflation over the policy horizon “stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints.”
“On the domestic front, trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards,” Medalla said.
He said the impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook.
“The BSP remains prepared to take all monetary policy action necessary to bring inflation back to a target-consistent path over the medium-term. The BSP also continues to support the timely implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” Medalla said.
Top priority
Arsenio Balisacan, National Economic and Development Authority (NEDA) secretary, said “protecting the purchasing power of Filipinos remains on top of the government’s priorities as domestic and global headwinds continue to be a challenge.”
“As part of the 8-point Socioeconomic Agenda of the Marcos Administration and as laid out in the Philippine Development Plan (PDP) 2023-2028, the government will continue to prioritize addressing the impact of inflation as it remains to be a challenge not only in the country, but throughout the globe,” Balisacan said.
He likewise noted the timely decision of President Ferdinand Marcos Jr. to extend the validity of the reduced import rate duties on various products such as pork, rice, corn and coal until December 2023.
“Executive Order No. 10, s 2022 will continue to provide diversified sources of food and agricultural inputs in the short term. The operational intervention, however, is to ensure food security by boosting food production, improving farm-to-market connectivity, and investing in disaster resilience, climate adaptation measures, and coordination mechanisms,” Balisacan added.
More rate hikes
Michael Ricafort, Rizal Commercial Banking Corp. chief economist, said “local policy rates would still likely move towards 6 percent levels by early 2023.”
“Local rate hikes and other measures would still be deployed from the policy toolkit to stabilize both the peso and overall inflation, if needed, especially in the quest to bring down inflation back to the 2 to 4 percent target range in fulfilling the mandate of stable prices that is conducive to long-term economic growth and development,” Ricafort said.
After noting the further uptick in prices of major consumer prices in November, the Monetary Board last month raised the interest rate on the BSP’s overnight reverse repurchase facility by 50 basis points (bps) to 5.5 percent.
This is the highest in more than 14 years or since November 2008, when it was at 6 percent.
The interest rates on the overnight deposit and lending facilities were also set to 5 percent and 6 percent, respectively.
“Seasonal increase in demand during the holiday season in December may have led to some pickup in prices, but expected to seasonally ease after the holidays upon crossing the new year. Prices have already corrected lower for some food and agricultural products, including onions, after the New Year holiday. Thus, still relatively high inflation at new 14-year highs recently would still support and justify further local policy rate hikes that could still possibly match future Fed rate hikes to help stabilize the peso exchange rate and, in turn, overall inflation,” Ricafort said.
Jun Neri, Bank of the Philippine Islands lead economist, said the BSP may need to hike its policy rate further in the first half of the year.
“Recent indicators have shown that demand remains strong as consumers continue to engage in revenge spending, and there might be a need to temper this through rate hikes in order to guide inflation back to the preferred path. Moreover, the hiking cycle of the Federal Reserve has not ended. The central bank will likely continue to hike in the next two quarters,” Neri said.
However, Neri said the direction of interest rates could change in the second half of 2023, depending on what the Fed will do.
“If a recession in the US happens, the FOMC might decide to take back some of their hikes and bring down the Fed funds rate closer to 3 percent. In this scenario, the BSP policy rate might peak at around 6.5 percent in 2023. The BSP will likely deliver their own cuts following the Fed, but still maintaining the 100 to 200 bps differential with US rates. The BSP policy rate could go down to 4.75 percent in the latter part of 2023 if this happens,” Neri said.
Ricafort cautioned that further hikes in local policy rates “at some point, could become a drag on loan growth and overall economic growth amid much higher borrowing costs/financing costs.”
“There was never an instance wherein the local policy rate (now at 5.50 percent) is lower than the Fed Funds Rate (now at 4.50 percent), at least over the past 20 years or even before that, in view of the difference in the credit ratings of the US and the Philippines as well as the difference in the long-term inflation outlook of the two countries. Higher local policy rates would lead to some increase in borrowing costs that could lead to lower earnings and valuations, as well as slow down the economy as an unintended consequence in the quest to fight off inflationary pressures,” Ricafort noted.
