Easing inflation to lift consumer spending but household debt a risk

HEADLINE INFLATION is seen to settle within the 2-4% target this year, which could provide a much-needed boost to consumer spending, Fitch Solutions’ unit BMI said.

In a report, BMI said its country risk team expects inflation to average 2.2% this year. “In 2026, inflation will rise further and average 2.7% year on year,” it added.

However, it noted these forecasts are still lower than rates seen before the coronavirus pandemic. Inflation averaged 2.8% from 2015 to 2019.

“If nominal income growth keeps pace with inflation, the purchasing power of consumers will improve, which would be a boost to their spending,” it said.

The Bangko Sentral ng Pilipinas (BSP) projects inflation to average 1.6% for this year and 3.4% for 2026.

This year so far, monthly inflation has settled within the 2-4% target, with the March-to-June print even falling below the target band.

A BusinessWorld poll of 17 analysts yielded a median estimate of 1.2% for the July consumer price index, slower than the 1.4% in June and 4.4% clip a year ago. If realized, this would be the slowest inflation in nearly six years or since the 0.6% print posted in October 2019.

“Easing inflationary pressures will provide relief to real household incomes and enable growth in spending,” it added.

BMI said it is keeping a “cautious but positive” outlook for consumer spending. Real household spending growth is seen to slow to 4.5% this year from 5% in 2024.

“Spending will remain influenced by the elevated inflationary pressures seen over 2025 as well as currently high debt levels, along with related debt servicing costs,” BMI said.

“A tight labor market will support spending, as real wage growth returns to positive territory, which will support purchasing power over the year.”

BMI noted consumer confidence was “sluggish” despite the market recovering from the pandemic.

“The recent weakness in consumer sentiment is driven by pessimism over the Philippines’ economic condition and consumers’ personal family financial situation,” it added.

The BSP’s latest Consumer Expectations Survey showed that Filipino consumers were more pessimistic in the second quarter as the overall confidence index in the second quarter fell to -14% from -13% in the previous quarter.

Consumers cited “higher inflation, lower family income, and fewer job opportunities” as the reasons for the downbeat sentiment, according to the survey.

BMI said its outlook for consumer spending is in line with its gross domestic product (GDP) forecast of 5.4% this year.

“A deteriorating external demand will likely be a drag on the Philippines’ GDP,” it added.

The government trimmed its growth target to 5.5-6.5% this year. A BusinessWorld poll of 17 economists yielded a median estimate of 5.5% for second-quarter growth.

If realized, this would be faster than the 5.4% growth recorded in the first quarter but slower than the 6.5% expansion in the same period a year ago.

HOUSEHOLD DEBT
Meanwhile, BMI flagged rising levels of household debt as a risk to its consumer outlook.

“It not only constrains future borrowing capacity but impacts current disposable income levels. This is particularly true as debt servicing costs rise in response to increases in interest rates,” it said.

“In many markets, central banks rapidly hiked interest rates during the 2022-2023 high inflationary period, reaching levels to which most households have not been accustomed over the past decade.”

If inflationary pressures worsen, central banks could turn hawkish and “reignite the burden of debt servicing.”

This year, BMI said the consumer sector could also be “significantly impacted by a highly uncertain macroeconomic outlook.”

“Persistent inflationary pressures, heightened trade tensions, fluctuating interest rates and the potential weakening of labor markets are key concerns,” it said.

“These factors, combined with elevated geopolitical and economic risks, are likely to shape consumer spending decisions, particularly on discretionary purchases.”

Political turmoil could also impact household purchasing power and corporate margins, indirectly influencing consumer and business sentiment, it added.

“While inflationary pressures have largely eased in many markets, price levels remain high, leaving many households without real wage growth sufficient to restore purchasing power to those levels seen before 2022-2024.”

PESO
Meanwhile, BMI said it expects the peso to settle at P58 per dollar this year from an average of P57.30 in 2024.

“Despite the 1.7% depreciation of the peso, this is still a relatively positive outcome compared with the depreciation of 11% seen in 2022 and the 2% seen in 2023.”

“The weaker rate in 2025 is due to the combination of a higher expected consumer price index in the Philippines as well as the US Federal Reserve’s hawkish tilt.”

BMI said intervention by the BSP in the foreign exchange market “will help to curb depreciatory pressures on the peso” but earlier rate cuts will continue to weigh on the peso.

“Nevertheless, the relatively stable rate will mean that the Philippines, which remains heavily reliant on imports to meet local demand, will see relative stability in import inflation,” it added. — Luisa Maria Jacinta C. Jocson