Food, oil, electricity spur Aug. inflation

HIGHER food, oil and electricity costs spurred prices of widely used goods and services in August at the fastest clip in three months, according to government data, but the fact the pace fell within expectation led the central bank to say it retains “flexibility” in its monetary policy options.

The Philippine Statistics Authority said yesterday that headline inflation quickened to 3.1% last month from July’s 2.8% and 1.8% in August last year. August’s pace matched that of May and was the fastest since March and April’s 3.4%.

The preliminary result fell within the 2.6-3.4% estimate range of the Bangko Sentral ng Pilipinas’ (BSP) Department of Economic Research for that month and was slightly above the 3.0% median estimate in a poll of 13 economists which BusinessWorld conducted late last week.

August’s pace brought year-to-date inflation rate to 3.1%, within BSP’s 2-4% target band but below its 3.2% forecast full-year average for 2017.

Core inflation, which strips out volatile food and energy prices, went up to 3.0% in August from July’s revised 2.8% and August 2016’s 2.0%, taking the year-to-date pace to 2.8%.

“Inflation is still expected to remain well within government’s target for the year despite accelerating for the second time in a row. Nonetheless, we should continue to closely monitor upside and downside risks,” Socioeconomic Planning Secretary Ernesto M. Pernia said in a statement of the National Economic and Development Authority (NEDA), which he heads as director-general.

The Philippines continues to have a “manageable inflation outlook over the policy horizon” even after taking into account the latest reading in August, BSP Governor Nestor A. Espenilla, Jr. said.

“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,” Mr. Espenilla told reporters via e-mail.

“August inflation reading is as expected. We remain on target.”

The PSA attributed August’s inflation rate to a pickup in the heavily weighted food inflation and non-alcoholic beverages at 3.5%, compared to July’s 3.3%.

Higher increments were also recorded for alcoholic beverages and tobacco (6.3% from the preceding month’s 6.2%); transport (4.4% from 3.8%); housing, water, electricity gas and other fuels (2.8% from 2.2%); restaurant and miscellaneous goods and services (2.2% from 2.1%); recreation and culture (1.4% from 1.2%); and communication (0.3% from 0.2%).

“Higher electricity and fuel prices, the weaker peso’s impact on import goods, and the bird flu scare, though temporary, were important factors behind the inflation uptick last August,” said Union Bank of the Philippines Ruben Carlo O. Asuncion.

For Standard Chartered’s Economist Chidambarathanu Narayanan, the headline rate “rose mildly more than expected.”

“The cause of the rise was as expected: housing, electricity and fuel rising, and at a faster pace than anticipated… [W]e and the BSP expect inflation edging up in 2018 on the government’s proposed tax increases,” he said.

For Mr. Pernia, the continuing increase in domestic fuel pump prices and the depreciation of the peso against the dollar — after the local unit hit 11-month lows in August — “may exert upward pressures” particularly in the cost of electricity, gas and other fuels in the near term.

Manila Electric Co., the country’s biggest power distributor, announced last month a P0.1338 per kilowatt-hour (kWh) increase in basic rate to P8.3849/kWh, adding about P27 to the bills of those using 200 kW per month who constitute the biggest segment of residential customers.

For the food alone index, average prices picked up by 3.7% last month from the previous month’s 3.4% and 2.5% in August 2016.

“Food and transport inflation dominated as the series of typhoons over the month affected prices of fresh produce,” economists at ANZ Research said in a commentary sent to the journalists via e-mail.

Mr. Pernia cited damage from Typhoon Jolina (known internationally as Pakhar), which affected agriculture in Central Luzon, particularly in Aurora province.

Security Bank Corp. economist Angelo B. Taningco said inflation will likely stay within the government’s 2-4% target range and that monetary policy settings will remain unchanged.

“I think food, transport, and utilities will be the main drivers if inflation picks up pace in the coming months,” he said.

Standard Chartered’s Mr. Narayanan concurred, saying: “[W]e think that BSP should still be comfortable enough with inflation, to keep rates on hold through this year.”

Land Bank of the Philippines market economist Guian Angelo S. Dumalagan thought otherwise, saying: “[T]he recent uptick in domestic inflation, together with rising US interest rates, might prompt the BSP to hike policy rates once before the year ends.”

DBS Group Research, in a note published before yesterday’s official data release, said that inflation settling within government targets does not necessarily mean that the BSP will maintain current policy settings.

“Two considerations will dominate the rate debate going forward. The first concerns the strength of domestic demand and if it can tolerate a slightly higher interest rate. The second concerns how tolerant the central bank is of a weaker currency, given how the peso has been underperforming its regional counterparts this year,” the DBS note read.

“That the BSP has been tolerant of a softer peso is presumably the main reason why the central bank has held back from raising rates so far this year. At this juncture, there is still a good chance to see a 25 basis points (bps) rate hike by the yearend.”

The economists at ANZ Research likewise said they still expect “upside risks to future inflation,” partly due to the impact of impending tax reform.

“We are still of the view that tighter monetary conditions are unavoidable. The combined imbalances of strong credit growth, excessive expansion in the real estate sector and current account deterioration are intensifying risks on the quality of growth,” they said, expecting the BSP to hike the interest rate corridor by 25 bps next quarter.

Mr. Pernia also cited the possibility of even higher domestic prices of oil products as world prices might be pushed up due to US production disruptions caused by Hurricane Harvey. “Any significant increases in domestic oil prices could push up transport and electricity inflation in the country in the near term,” he said.

The risks, however, could still be offset by positive developments locally such as higher domestic productivity and stable commodity prices, the NEDA statement quoted Mr. Pernia as saying. — Ranier Olson R. Reusora