Food prices drag Nov. inflation lower

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'We are starting to see year-on-year price declines for ampalaya, cabbage, carrots, tomato, white potato, and imported garlic in the National Capital Region. This signifies that supply is starting to stabilize again.’ -- Socioeconomic Planning Secretary Ernesto M. Pernia

By Lourdes O. Pilar
with Elijah Joseph C. Tubayan

LOWER food prices caused inflation to ease in November after four straight months of picking up, the government said yesterday.

Food prices drag Nov. inflation lower

The Philippine Statistics Authority (PSA) said headline inflation slowed to 3.3% last month from October’s 3.5%, but was still faster than the 2.5% clocked in November last year.

The preliminary result fell within the Bangko Sentral ng Pilipinas’ (BSP) 2.9-3.6% range for the month and was faster than the 3.2% median estimate in a poll BusinessWorld conducted last week.

With the November result, year-to-date inflation settled at 3.2%, matching the BSP’s full-year forecast and keeping within its 2-4% target band for 2017.

In a statement, the National Economic and Development Authority (NEDA) attributed November’s easing to lower prices of several food items, with the food and non-alcoholic beverages sub-index slowing to 3.2% in November from October’s 3.6%, the lowest since October 2016.

Food-alone inflation slowed to 3.3% during the month, down from October’s 3.8% and November 2016’s 3.5%.

“This can be attributed to lower prices of vegetables, sugar, jam, honey, chocolate and confectionery, fruits, oils and fats, and rice,” the NEDA statement read.

Core inflation — which excludes volatile food and energy prices — was also at 3.3%, slightly faster than the previous month’s 3.2% and past year’s 2.4%.

“We are starting to see year-on-year price declines for ampalaya, cabbage, carrots, tomato, white potato, and imported garlic in the National Capital Region. This signifies that supply is starting to stabilize again,” Socioeconomic Planning Secretary Ernesto M. Pernia said.

Slower annual increments were also observed in the indices of alcoholic beverages and tobacco (6.1% from October’s 6.8%), clothing and footwear (1.8% from 1.9%) and education (2.2% from 2.3%).

“Inflation fell in November as the appreciation of the peso and better weather conditions in the country resulted in a slower increase in the prices of food, beverages and tobacco,” said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (Landbank).

“In particular, there was a marked slowdown in the prices of fruits and vegetables, with the latter showing a decline in cost from previous year’s level. The softening in domestic inflation was tempered by higher oil prices, which contributed to higher upticks in the costs of transport, fuel, and electricity,” he added.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank), shared this view, saying: “With core inflation moving faster, a notable slowing of price growth came from the heavily weighted food and non-alcoholic beverages.

“Together with softer price increases in crude oil, the prices of these basic commodities were toned down by the peso’s recent strength impacting particularly imported goods,” he added.

Mr. Asuncion also noted that the easing of inflation was caused by “largely favorable” weather all-year-round, resulting in fewer supply shocks.

The peso has returned to the P50-per-dollar level since mid-November after breaching the P51-per-dollar level in the third quarter. The local currency’s recovery was attributed to the faster-than-expected 6.9% economic growth in the third quarter and the increased optimism following the approval of the tax reform plan in the Senate.

“Inflation during the last eleven months suggests that the full-year average might settle slightly above midpoint, but will still be well within our target of 2-4%. This already considers expected price spikes owing to holiday season spending this December,” NEDA’s Mr. Pernia said.

In addition, higher international crude oil prices brought by production cuts from the Middle East and higher electricity and fuel prices “will also continue to exert pressure on headline inflation in the near-term,” Mr. Pernia added.

BSP Governor Nestor A. Espenilla, Jr. was of the same view, saying in a text message to reporters that the inflation print “was expected” following October’s peak.

“We’re still on track with the 3.2% inflation [target] for 2017…” Mr. Espenilla said.

For UnionBank’s Mr. Asuncion, inflation is expected to settle within 3.2-3.5% this month, saying that inflation levels from November to December “usually rise” due to stronger domestic demand amid the holiday season.

On the other hand, Landbank’s Mr. Dumalagan forecasted inflation to come in at 3.4%, citing the possibility of a depreciation of the peso amid expectations of another US rate hike when the Federal Open Market Committee meets for the last time this year on Dec. 12-13.

For analysts at Nomura Global Research, a rate hike by mid-year 2018 is possible despite inflation clocking in below their 3.6% estimate for November.

“As such, we continue to see rising risks that our policy rate forecast of two 25 basis point-hikes in H2 2018 may be delivered earlier in the year,” they said in a research note.

“While some of these price pressures in 2018 are driven by supply-side factors (particularly oil and tax reform adjustments), we believe it will be difficult for BSP to look through the resultant inflation risks with growth persistently coming in above potential, which could push core inflation higher, as well as rising concerns of overheating.”

ANZ Research analyst Eugenia Fabon Victorino expects the BSP to keep policy on hold in its next Monetary Board meeting on Dec. 14.

“We are pencilling in rate hikes to begin in [the first quarter]. Inflation pressures are rising even before the tax reform is implemented. Considering the continued rise in credit growth, we believe that tighter monetary policy is necessary,” she said.

“Strong domestic demand should keep average inflation in the upper half of the central bank’s target range. Even with delays in the tax reform, inflationary pressures are already rising.”

For Jose Mario I. Cuyegkeng, senior economist of ING Bank, seasonal demand could push inflation to 3.4-3.5% this month.

“The likely implementation of the Philippine tax reform measure in 1Q 2018 would also exert some upward pressure on inflation. BSP regards the tax-related pressure as transitory,” Mr. Cuyegkeng said.

“Nevertheless, the BSP at the last policy meeting expected inflation in 2018 to average at 3.4%, within the target range of 2-4%. We remain cautious and expect average inflation in 2018 closer to the upper end of the range at 3.7-3.8%,” he added.

“The moderation argues for BSP to continue to utilize this leeway of moderate and within-target inflation expectation by keeping policy settings steady at its Dec. 14 policy rate meeting. We anticipate the first tightening move of BSP in 2Q 2018.”

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