Inflation slows in September

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Preliminary data showed headline inflation at 2.3% in September – the lowest since May’s 2.1%. — BLOOMBERG

INFLATION eased for the second straight month in September to its lowest level in four months on the back of moderating prices in the heavily weighted food and nonalcoholic beverages, the Philippine Statistics Authority (PSA) said on Tuesday.

Preliminary PSA data showed headline inflation at 2.3% in September — the lowest since May’s 2.1%. The result was also down from 2.4% in August, but higher than 0.9% in September 2019.

The latest reading, which matched the median estimate of 2.3% in a BusinessWorld poll conducted last week, fell within the Bangko Sentral ng Pilipinas’ (BSP) 1.8%-2.6% forecast range for September.

Headline inflation rates in the Philippines (Sept. 2020)

The PSA attributed the slowdown mainly to the heavily weighted food and non-alcoholic beverages, which slowed at an annual rate of 1.5% in September from 1.8% in August.

The PSA also noted the annual slowdown in alcoholic beverages and tobacco (12.9% from 17.7% in August); clothing and footwear (1.8% from 1.9%); and furnishing, household equipment and routine maintenance of the house (3.7% from 3.9%).

Meanwhile, recreation and culture declined at a faster rate of 0.5% in September compared with -0.1% in August.

Year-to-date inflation averaged 2.5%. This was higher than the BSP’s revised forecast of 2.3% for 2020, but within its 2-4% target for the year.

Food inflation registered at 1.5% in September compared with 1.7% in August and -1.3% in September last year.

Core inflation, which excludes items such as food and energy that are prone to volatile price swings, edged up to 3.2% from 3.1% in August. This was also faster than last year’s 2.7%.

“The latest result is consistent with BSP’s assessment that inflation is expected to remain benign over the policy horizon with the balance of risks tilting toward the downside due largely to the impact on domestic and global economic activity of possible deeper economic disruptions caused by the coronavirus pandemic,” BSP Governor Benjamin E. Diokno told reporters in a Viber group message.

“Nonetheless, the significant monetary easing and liquidity enhancing measures done by the BSP and the timely implementation of fiscal measures in the Bayanihan II Act (Republic Act 11494) are seen to provide sufficient support to economic recovery in the coming months,” he added.

In a note, ING Bank N.V. Manila Branch Senior Economist Nicholas Antonio T. Mapa said price gains in September “remained muted despite unfavorable base effects” with “anemic demand” and a strong peso helping limit price increases during the month.

“The peso continues to outperform Asian peers, logging a 4.78% gain year to date, which has helped limit imported inflation for most of the year. With the economy in recession, consumer demand remains anemic as unemployment stays elevated at around 10% as of the first half of the year,” he said.

Meanwhile, inflation for the bottom 30% income households logged in at 2.8% in September. This was faster than the previous month’s 2.7% and last year’s 0.2%.

The consumer price index (CPI) for the bottom 30% modifies the model basket of goods to reflect the spending patterns of the poor. This compared with the headline CPI which measures inflation as experienced by the average household.

RISKS AND OUTLOOK
Mr. Mapa said he does not expect the BSP to cut rates again this year.

“Inflation will likely settle at 2.4% in 2020 and will help preserve purchasing power for Filipinos consumers given the economic recession. However, we also note that the downtrend for inflation points to fading economic momentum as consumer demand remains constrained despite recent moves by the government to gradually reopen the economy,” he added.

The BSP’s Monetary Board last week kept rates on the overnight reverse repurchase, lending, and deposit facilities at record lows of 2.25%, 2.75% and 1.75%, respectively. It has cut borrowing costs by a total of 175 bps this year.

In a separate note, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the inflation print for September is still slightly higher than the key policy rate of 2.25%, making it “fundamentally challenging to cut policy rates further.”

Nevertheless, Mr. Ricafort said the lack of additional funding for fiscal stimulus measures “would still lead to more monetary easing measures that help reduce borrowing costs.”

“[F]or the coming weeks/months, any further monetary easing measures… remain possible as the economy needs all the support measures that it could get at this time largely due to the adverse economic effects of the COVID-19 pandemic…,” he said.

For Security Bank Chief Economist Robert Dan J. Roces, the BSP “may be pressed to ease further in the coming months” with inflation remaining benign and a “relatively resilient” peso.

“The Inter-Agency Task Force (IATF) approved loosening restrictions on shopping malls, restaurants, and public transport, and economic managers have called for further relaxation of quarantine for the months ahead. Thus, we still expect inflation to track slightly higher with increased mobility, business reopenings, and increased aggregate demand,” Mr. Roces said in an e-mail.

“Full-year inflation is expected to average 2.5% in 2020 and 3% by 2021, or still within the central bank’s inflation target of 2-4%,” he added. — Michelle Anne P. Soliman with inputs from Luz Wendy T. Noble

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