AGAINST EXPECTATIONS, inflation accelerated in May following six consecutive months of slowdown, the Philippine Statistics Authority (PSA) reported yesterday.

Headline inflation rates in the Philippines (May 2019)

Preliminary data from the PSA showed headline inflation at 3.2% last month, up from the three percent in April but still slower than the 4.6% recorded in May 2018.

The preliminary result fell within the Bangko Sentral ng Pilipinas’ (BSP) 2.8-3.6% inflation estimate range for that month. It was, however, higher than the three-percent median estimate in a poll of 11 economists which BusinessWorld conducted late last week.

Year to date, the average rate of overall increase in the prices of widely used goods and services settled at 3.6%, past the midpoint of the BSP’s 2-4% target range though still above the 2.9% full-year forecast average.

Discounting for commodities with volatile price swings such as food and energy, core inflation inched up to 3.5% in May from 3.4% in April.

The PSA attributed inflation’s May pickup primarily to faster annual increases in the heavily weighted subindices of food and non-alcoholic beverages index (3.4% in May from 3% in April) as well as housing, water, electricity, gas and other fuels (3.3% from 3.2%).

On the other hand, the PSA noted slower annual increments were observed in alcoholic beverages and tobacco (9.5% in May from 9.9% in April); transport (3.5% from 3.8%); as well as restaurant and miscellaneous goods and services (3.3% from 3.5%).

The rest of the commodity groups sustained their annual rates from the preceding month.

The National Economic and Development Authority (NEDA) said in a statement that the slight inflation uptick was caused by the El Niño phenomenon.

“Faster price adjustments in food and non-alcoholic beverages drove the uptick in headline inflation as weak El Niño conditions persisted, and brought significant damage to the agriculture sector in the midst of the election period’s strong consumption demand,” NEDA’s statement quoted its director-general, Socioeconomic Planning Secretary Ernesto M. Pernia, as saying.

HSBC Global Research Economist Noelan C. Arbis shared the assessment, noting in a press statement that “[f]ood prices contributed 1.4 percentage points to headline CPI (consumer price index) growth as a result of El Niño, which has driven vegetable, fruit, and meat prices higher over the past few months”, adding that “stricter import measures to prevent the entry of African Swine Fever has likely led to a faster rise in pork prices.”

The food-alone index accelerated to an 3.2% in May from 2.9% in April. Specifically, upticks were observed in the indices of corn (-2.8% in May from -3% in April); other cereals, flour, cereal preparation, bread, pasta, and other bakery products (3.7% from 3.6%); fish (4.2% from 3.3%); fruits (4.6% from 2.4%); vegetables (12.5% from 7.6%); food products “not elsewhere classified” (6.8% from 5.3%).

Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort also attributed the May result to food prices, noting in an e-mail: “However, these were offset by increased rice imports with the rice tariffication law and non-monetary measures to increase rice supply to lower prices and better manage inflation since the latter part of 2018.”

In May, the index for rice dipped 0.7% compared to zero percent in April.

HSBC’s Mr. Arbis also noted that “higher fuel costs” contributed to May inflation, although he said these are “likely to pull back in June given a recent decline in global oil prices.”

“The other components of the CPI basket largely moved within their historical trend, suggesting benign demand-side pressures.”

BSP officials said that the May reading should be taken with a grain of salt.

“One should not read too much on the uptick. One data point does not constitute a trend. That’s elementary,” BSP Governor Benjamin E. Diokno told reporters in a mobile phone message, noting that the May reading fell within BSP’s estimate for the month.

BSP Deputy Governor, Diwa C. Guinigundo shared this view, saying: “Basically, the drivers of inflation remain on the supply side and, therefore, generally temporary.”

“The only risk is when the uptick gets prolonged and starts generating second-round effects and higher inflationary expectations especially in the face of the heavy catch up on public spending on infrastructure in the second half,” he told reporters via text message.

Notwithstanding the May result, economists still expect the BSP to continue its monetary policy normalization.

“The slight uptick in inflation may be considered a healthy upward correction amid the bigger trend of continuous easing of the inflation rate that may again resume the slower year-on-year inflation starting June 2019 until the end of 2019,” said RCBC’s Mr. Ricafort.

“Further easing in local monetary policy by way of another cut in policy rates remains possible as early as the next rate-setting meeting in June 20 (or in subsequent months).”

Similarly, HSBC’s Mr. Arbis said that generally benign inflation and slower economic growth — at a four-year-low 5.6% last quarter — “provide additional scope for the BSP to further ease monetary policy” through cuts in the policy rates and reserve requirement ratio (RRR), which is now undergoing a phased 200 basis point (bp) cut.

“We expect another 100-bp RRR cut, bringing it down to 15%, and another 25-bp cut to the policy rate (both in the fourth quarter), bringing the reverse [repurchase] rate down to 4.25% by year end,” he said.

Mr. Pernia flagged the threat of the African Swine Fever, the increase of rice prices in the international market and volatility of global oil prices as risks to inflation.

Mr. Diokno said monetary authorities “expect inflation to be in the neighborhood of two percent in the third quarter of 2019” and that “[w]ith world oil prices easing, we expect the annual inflation rate to be in the vicinity of three percent in 2019 and 2020.”

Even as Mr. Diokno “has been quite categorical” on the goal to reduce the RRR to lower levels, BSP’s Mr. Guinigundo said the “pace of the reduction will be governed by both data and evidence” as monetary policy makers continue to monitor key developments and indicators.

For HSBC’s Mr. Arbis, “[h]eadline prices are likely to decline below three percent in the second half of the year, given favorable base effects and benign demand-side pressures.”

For RCBC’s Mr. Ricafort, inflation “may likely resume” its decline “largely due to bigger inflation base effects” following its spike in the latter part of 2018. — Marissa Mae M. Ramos with R. J. N. Ignacio