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Second-round price pressures emerging

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jeepney driver
Jeepney fares form part of "second-round" inflation pressures.

LAST WEEK’s increase in jeepney fares has added to inflation pressures, which state economic managers have expected to peak this quarter.

The Land Transportation Franchising and Regulatory Board on July 4 approved a P1 provisional fare hike for public utility jeepneys in Metro Manila, Central Luzon and the Cavite-Laguna-Batangas-Rizal-Quezon region.

Emmanuel A. Leyco, economics professor at the Asian Institute of Management, said the fare hike will have a domino effect on prices of other commodities.

“The P1 fare hike should be viewed only as part of an evolving story… Naturally, workers can be reasonably expected to demand a higher wage to deal with a higher transportation fare and more expensive food prices,” Mr. Leyco said when sought for comment.

Both economic managers and private economists have been watching out for “second-round” price pressures from public transport fare hikes and minimum wage increases in the regions that could drive headline inflation further beyond the central bank’s 2-4% target for 2018.

Labor Secretary Silvestre H. Bello told reporters on July 1 that eight of the country’s 17 regions had recommended a hike in the daily minimum wage rates of private sector workers at that time, citing Central Luzon and Zamboanga Peninsula among them, while the regional wage boards of Western and of Central Visayas had separately announced their decisions to increase such pay.

Headline inflation saw the sixth straight month of increase to a fresh five-year-high 5.2% in June, which also marked the fourth consecutive month that the pace has pierced the central bank’s 2-4% full-year target range for 2018. June inflation fueled the year-to-date pace to 4.3%, which is just below the central bank’s downgraded 4.5% forecast for 2018.

“With unaddressed supply-side bottlenecks, six percent may not be impossible,” said Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines.

“The June inflation print, in my view, is largely due to structural bottlenecks, particularly on food items (rice, vegetables, etc). Aside from these, the economy’s vulnerability to global oil price volatility is another concern.”

Transport prices rose even faster at 7.1% year-on-year compared to the headline figure, according to the Philippine Statistics Authority.

Mr. Asuncion, however, said that these price developments are out of the control of the Bangko Sentral ng Pilipinas (BSP).

“I am a bit wary if further monetary policy tweaks will actually help rein in price levels,” the bank economist added.

“I am sure the economic managers are aware of these bottlenecks, and I understand that they see the need to have sound economic policies (not just monetary nor fiscal policies) in place to attain economic efficiency and steady economic growth.”

While the BSP will be “hard-pressed to intervene” by tweaking interest rates, Mr. Asuncion warned that such moves may be “distractive” as far as overall economic growth is concerned.

BSP Governor Nestor A. Espenilla, Jr. described June’s fresh peak as a “setback” for policy makers, saying the central bank will update forecasts and calibrate the “strength and timing” of its next move to rein in inflation expectations.

The central bank has acknowledged that inflation will pick up further to peak between this month and September, as it noted that uncertainties in the global oil market and unfavorable weather conditions continue to affect the prices of basic goods.

Reuters has reported that the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC crude producers agreed earlier this month on a slight output hike to dampen the oil price rally, which has hit a three-and-a-half year high. The supply hike reversed some of the cuts that OPEC and the other major producers put in place in early 2017 to end years of supply glut.

Several observers are noting that another policy interest rate hike may be on the table for the BSP at its Aug. 9 meeting which, if realized, will mark three consecutive tightening moves this year. Others have been pointing out that the BSP has been behind the curve as it kept interest rates low for far too long.

Other analysts have cautioned that inflation has been supply-driven — amid rising world crude rates and a shortage of rice supply — and had little to do with monetary policy.

In a joint statement issued on Thursday, economic managers acknowledged the need to tighten the watch against profiteering, implement the Pantawid Pasada fuel subsidy program for public utility vehicles, and for Congress to approve a bill that will shift to a regular tariff scheme for rice from the current import quota scheme that is expected to slash prices of the staple.

The central bank has conceded to missing its 2-4% inflation target this year, but is working to bring price increases back within range in 2019. — Melissa Luz T. Lopez