INFLATION expectations largely dictate price trends in the Philippines more than changes in oil and non-oil import rates. — BW FILE PHOTO

By Melissa Luz T. Lopez, Senior Reporter
INFLATION expectations largely dictate price trends in the Philippines more than changes in oil and non-oil import rates, economists from the International Monetary Fund (IMF) said.
In a working paper, the IMF said inflation readings in the Philippines and its neighbors Indonesia, Malaysia, Singapore and Thailand have been largely dependent on market expectations more than actual price movements for key commodities.
“Over the entire sample, forward-looking dynamics account for 72% of headline inflation (on average 3.6 percentage points of 4.9% headline inflation). In comparison, the contributions of economic slack and import inflation are rather limited,” according to the paper “Monetary Policy and Inflation Dynamics in ASEAN Economies” which was published last month.
Tracking price movements from 1997 to 2017, IMF economists Geraldine Dany-Knedlik and Juan Angel Garcia said the average headline inflation is actually explained by “forward-looking dynamics.” In turn, the deceleration observed over the past decade may “reflect the effect of decreasing trend expectations,” they said.
“Our results suggest that the increasing contribution is not due to increasing sensitivity of inflation to forward-looking expectations but rather explained by the fact that both inflation rates and long-term inflation expectations have declined steadily,” the analysts added.
The same trend is observed for the other Southeast Asian economies, where inflation expectations have turned out to be “the most important component” of inflation.
“At the same time, increased exchange rate flexibility and further economic integration may have reduced the effect of non-oil and oil import inflation on headline inflation,” the analysts said. However, they flagged market bets of below-target inflation, which increase the risk of “de-anchored” expectations.
Philippine inflation has averaged 4.1% over the first five months of 2018, surpassing the 2-4% target set by the Bangko Sentral ng Pilipinas (BSP). In turn, the policy-setting Monetary Board introduced back-to-back rate hikes during its May and June meetings in order to rein in inflation expectations.
More than half of bank economists believe that inflation will clock in between 4.1-5% for 2018 according to the BSP’s first-quarter inflation survey published in April.
The BSP has also conceded to missing this year’s inflation target and now expects a full-year average of 4.5%, compared with the 2.9% tallied in 2017. Central bank officials, however, said the 50-basis point increase in benchmark rates is enough to temper price increases to the 3.3% level by 2019.
In a separate report, Standard Chartered Bank said inflation will hit its peak in August and may be accompanied by a third rate hike from the central bank.
Bank economists said they see inflation touching 5.6% by August, which will sustain the monthly uptrend seen since January. The faster pace of price increases is the result of the second-round effects of tax reform by way of higher transport costs.
The bank sees full-year inflation at 4.8%, with upside risks drawn from elevated oil prices and a weaker peso.
“We expect a third hike in August as inflation rises beyond 5%. BSP signaled an openness to further hikes at its 20 June meeting, after showing earlier reluctance; this increases the likelihood of further action if inflation continues to rise,” the bank said.
Despite this, Standard Chartered sees economic growth of 6.7% this year, but noted that a faster rollout of infrastructure projects “could push growth closer to 7%.”