Inflation slowest in almost two years in June

By Christine Joyce S. Castañeda, Senior Researcher

INFLATION eased in June to post its slowest reading in almost two years, the Philippine Statistics Authority (PSA) reported on Friday, giving more room for the central bank to continue loosening monetary policy.

Preliminary data from the PSA showed headline inflation at 2.7% last month, down from 3.2% in May and 5.2% in June 2018. It was also the slowest since the 2.6% logged in August 2017.

The June result fell within the Bangko Sentral ng Pilipinas’ (BSP) 2.2%-3.0% estimate for the month and was lower than the 2.9% median in BusinessWorld’s poll of 12 economists conducted late last week.

Year to date, inflation averaged 3.4%, past the midpoint of the BSP’s 2-4% target range though still above the 2.9% full-year forecast average.

Core inflation — which strips volatile food and energy items in the consumer basket — was 3.3% last month, slower than May’s 3.5% and 4.3% in the same period last year.

“We continue to experience the effects of the administrative measures the government had set in motion starting late last year. Further, the implementation of the Rice Tariffication Law (RTL) allowed the entry of ample imported rice into the country that helped bring rice prices down,” the National Economic and Development Authority (NEDA) said in a statement, referring to Republic Act No. 11203 which replaced quantitative restrictions on rice with regular tariffs and liberalized importation, aimed to slash retail prices of the staple.

Economists attributed the better-than-expected inflation print to the slower increase in the prices of food and non-alcoholic beverages.

“The heavily-weighted food and non-alcoholic beverages index has again led the way in slower annual growth. This softness can be attributed to the continuing decline in global oil prices in general,” UnionBank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion said in an e-mail.

“In addition, government policies addressing supply-side issues last year are seemingly working to soften price levels of food and other basic commodities,” he added.

Similarly, ING Bank NV-Manila senior economist Nicholas Antonio T. Mapa noted in a separate e-mail the easing in food inflation. “Inflation for the index heavy food subcomponent was the main driver for the slowdown just as the 2018 inflation spike episode, with food inflation peaking at 9.7%. Stable food supply, as well as the RTL, helped in improving supply and pushing down prices,” he said.

The food-alone index likewise eased to 2.6% versus the previous month’s 3.2% and 5.8% a year ago as slowdowns were observed in most food groups. In particular, rice — which accounts for 10% of the average household’s consumer basket — saw its annual rate decline further by 1.7% in June from a 0.7% contraction in May.

ING’s Mr. Mapa was of the same view, adding that other food items are also seeing disinflation with imports of food items increasing from last year “to make up for possibly poor harvest due to the drawn-out El Niño episode.”

Alex Holmes, Asia economist at Capital Economics, pointed out in a research note the “broad-based easing in price pressures,” citing the slowdown in the transport index as the “largest driver of the drop.”

Slower annual increments were observed in the food and non-alcoholic beverages at 2.7% in June from 3.4% in May. Other commodity groups that saw decelerations were housing, water, electricity, gas and other fuels (3% from 3.3%); alcoholic beverages and tobacco (9.3% from 9.5%); transport (1.6% from 3.5%); furnishing, household equipment and routine maintenance of the house (3.1% from 3.2%); and communication (0.3% from 0.4%).

Contributing further to the slowdown was the faster decline seen in the education index at 4.5% from the previous month’s -3.8%.

In Metro Manila, inflation slowed to 3% last month from 3.4% in May while overall price hikes in areas outside the National Capital Region (NCR) eased to 2.6% from 3.1%.

Aside from NCR, six other regions recorded rates faster than the 2.7% national average, namely: MIMAROPA Region (5.2%), Northern Mindanao (3.7%), SOCCSKSARGEN (3.3%), Davao Region (3.2%), Bicol Region (3%), and Central Luzon (2.9%).

OUTLOOK
In an economic bulletin sent to reporters, Finance Undersecretary and Chief Economist Gil S. Beltran noted that on a month-on-month basis, inflation in food items “is at most 0.5 percentage points” with those of non-food items being negligible.

“For the rest of the year, below-4% inflation can be achieved if month-on-month price increase is at most 0.5 percentage points,” he said.

Meanwhile, ING Bank’s Mr. Mapa expects inflation to continue slowing in the coming months as supply conditions “remain normalized.”

“Oil prices remain softer for the most part of this year but will likely be higher year on year by [the fourth quarter] should prices hold at current levels. Meanwhile, the negative base effects from tertiary education should wash out by next month…” he said.

“[O]verall, we should see inflation [to be] well-behaved in 2019 and 2020 for as long as supply side measures are in place and given BSP’s ability to safeguard against demand-side pressures by way of macro-prudential measures,” Mr. Mapa added.

UnionBank’s Mr. Asuncion shared this outlook, adding that they have downgraded their inflation forecast to three percent for this year from 3.2% previously.

“The downgrade comes from the expectation that global oil prices are going to continue to decline due to potential global economic woes outweighing the impact of geopolitical events that may affect supplies in the medium term,” Mr. Asuncion explained.

In a note e-mailed to reporters, HSBC Global Research economist Noelan Arbis sees inflation staying below the 3% mark for most of the second half of the year on “favorable base effects” and “benign demand-side pressures,” which should provide the central bank with further room to ease monetary policy.

“We see no significant risks to inflation in the months ahead, as the momentum of both headline and core prices have largely stabilized and are moving well within their historical trend,” Mr. Arbis said, expecting two 25-basis point rate cuts in the second half of the year with the first likely to be made in August.

For Capital Economics’ Mr. Holmes, the June inflation reading is likely to be a “green light” for the central bank to ease monetary policy.

“Barring any hints to contrary, a cut is likely at the Bank’s next meeting in August and with inflation set to fall further, we expect more easing thereafter, taking the policy rate from 4.5% now to 3.75% by early 2020,” Mr. Holmes said.

In a social media post, BSP Governor Benjamin E. Diokno said the 2.7% June inflation rate “is consistent with the BSP’s prevailing assessment” that inflation will firmly settle within the BSP’s 2-4% target range for 2019 and 2020.

“Looking ahead, the BSP will remain watchful of evolving price trends to ensure that the monetary policy stance remains consistent with the BSP’s price stability objective while being supportive of economic growth,” Mr. Diokno said separately in a central bank press release.

The BSP’s Monetary Board is scheduled to review policy on Aug. 8, a few hours after the PSA reports second-quarter gross domestic product growth.