INFLATION has so far settled close to the price impact expected by the Department of Finance (DoF) for tax reform, noting the pace of overall price increases remains manageable and should not raise concerns for now.

“A moderate increase in the inflation rate is expected and not alarming in a fast-growing economy,” the DoF said in an analysis prepared by Undersecretary Karl Kendrick T. Chua and e-mailed to reporters yesterday.

February inflation picked up to 3.9% from 3.4% in January under the rebased index using 2012 prices, according to the Philippine Statistics Authority. It was the fastest pace in over three years.

Month-on-month increments of annual inflation have so far stayed within bounds since Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) law, kicked in last January: by 0.5 of a percentage point in January and in February, against an expected 0.7-of-a-point impact. While it slashed personal income tax rates in order to give households more money to spend, TRAIN introduced additional levies on fuel, cars, coal, sugar-sweetened drinks and a host of other items.

While respondents in a monthly survey IHS Markit conducts for Nikkei, Inc. had blamed TRAIN’s inflationary impact on production inputs for a marked February slowdown in improvement of Philippine factory activity, Mr. Chua said it may still be premature to put all the inflation blame on the first of up to five planned tax reform packages. “The higher month-on-month inflation might suggest some profiteering, which we have already observed in January 2018,” he said.

The Bangko Sentral ng Pilipinas (BSP) has said that February’s higher inflation rate reflected the “full pass-through” cost of the additional taxes under the new law.

Broken down, the DoF expects prices of non-alcoholic drinks to rise by 15% given the new excise taxes on sugar-sweetened beverages.

Higher duties on petroleum products is also expected to drive up the cost of electricity, gas and other fuels by around 9.2%.

Other commodity groups affected by the TRAIN law are tobacco (eight percent increase), private transport (seven percent), and alcoholic drinks (four percent).

“TRAIN has begun to impact inflation as expected, though other factors are the bigger contributors to higher inflation,” the DoF added, as it pointed out that rising global crude prices and a weaker peso aggravated price movements.

“Private vehicle owners paid 14.5% more in fuel and other operating cost, of which around half is attributable to higher excise tax while the other half is attributable to higher crude oil price, as the Dubai crude price grew by 15.8% while the peso depreciated by 3.6%.”

Mr. Chua also noted that February inflation went up due to higher prices of food, particularly corn and fish which posted double-digit increases.

BSP Governor Nestor A. Espenilla, Jr. has said that monetary authorities expect prices to keep climbing this year, but will unlikely go beyond five percent using the 2006 base year.

The central bank sees inflation averaging 4.3% for 2018 which will overshoot the 2-4% target band.

Still, the BSP maintains that the TRAIN’s impact will be “temporary” as it expects inflation to return to 3.5% in 2019.

“The MB (Monetary Board) stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability,” according to minutes of the central bank’s Feb. 8 meeting during which policy was kept steady.

The policy-setting body opted to keep borrowing rates unchanged at 2.5-3.5% last month, even as inflation rose to a three-year-high at four percent in January. A week later, it announced an operational cut in bank reserves which took effect March 2.

“[T]he MB saw that inflation expectations continue to be anchored within the inflation target band over the policy horizon,” the central bank said.

“The BSP is watchful against any sign of second-round effects and inflation becoming broader based.”

BSP Governor Nestor A. Espenilla, Jr. has said these second-round effects include higher transport fares and minimum wages.

On the flipside, lower rice prices after the planned replacement of import quotas with tariffs is expected to offset higher prices of other goods, the central bank said.

While prices are trending higher, the central bank said latest forecasts showed that inflation will eventually “moderate” and settle within the 2-4% target range in 2019.

“Whatever monetary policy action we do now, will more likely be felt in 2019 and beyond rather than 2018. That’s why we don’t necessarily react to February 2018 but must look much further ahead and rely on forecasts,” the central bank chief had said on Tuesday of last month’s inflation spike.

Using 2012 as base year, inflation clocked 3.9% in February, faster than January’s 3.4%. — Melissa Luz T. Lopez