CONSUMER spending should remain strong in the Philippines despite rising inflation, analysts at BMI Research said, noting that stable incomes and remittance inflows will likely offset the impact of higher prices of goods.

“The consumer outlook in the Philippines remains bright on the back of a strong economic performance and rapidly rising incomes, influenced by a tight labor market and sustained remittance inflows,” BMI said in a report.

“Although we do expect inflation to tick up over 2018, we do not expect it to have a pronounced effect on consumption.”

The Fitch Group unit gave this assessment following the faster-than-expected four percent inflation rate recorded in January that hit the ceiling of the 2-4% target range of the Bangko Sentral ng Pilipinas (BSP) for the full year.

BSP Governor Nestor A. Espenilla, Jr. has attributed the overall jump in prices to rising global crude prices as well as higher taxes under Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN) that took effect last month.

While slashing personal income tax rates, the new law also imposed an additional P2.50 excise tax per liter of diesel and P3/liter for kerosene, which came at a time of three-year highs for world crude prices. It also either increased or introduced additional taxes on cars, coal, sugar-sweetened drinks and a host of other items that likely drove up prices of widely used goods and services.

BMI said inflationary pressures pose a risk to consumption over the coming year, largely due to an expected upturn in oil prices. Rising consumer lending as well as the government’s aggressive infrastructure spending plans could likewise push prices upward.

The central bank expects full-year 2018 inflation to average 4.3%, although Mr. Espenilla said the impact of tax reform should be temporary.

Still, the expected surge in prices of widely used goods and services will not stifle household consumption, as Filipinos will have more funds in their pockets due to strong remittance inflows and a stable jobs sector.

Real private consumption is expected to grow by five percent this year, albeit slower than the 5.5% rise in 2017. This will keep economic growth at 6.3% for the entire year, against a 6.7% increase the prior year.

Majority of Filipinos will also enjoy bigger disposable incomes under TRAIN, as it reduced the income tax rates for those earning below P2 million yearly.

BMI also expects money sent home by overseas Filipino workers to remain a “vital source of secondary income for Filipinos,” enough to sustain upbeat household spending this year.

“With over 2.5 million Filipinos living and working in the US, Philippine households will continue to receive a large share of remittances in US dollar and therefore depend on the strength of the USD,” the research unit added.

“Philippine households receiving remittances denominated in USD will see purchasing power fall as the USD depreciates, acting as a drag on essential spending categories such as food and clothing.”

An improving labor market will likewise support domestic consumption, with BMI expecting joblessness rate steady at seven percent for the year.

Unemployment rate stood at five percent in October, higher than the 4.7% recorded in the same month a year ago, according to preliminary data from the Philippine Statistics Authority. Budget Secretary Benjamin E. Diokno said he expects the joblessness to maintain its decline, as big-ticket infrastructure projects will require the hiring of more workers.

However, BMI pointed out that some areas will likely experience stronger spending than others, as minimum wages vary across regions. “While we expect to see further wage growth across the board in 2018, the best consumer prospects will remain concentrated in the urban retail hubs of Manila, Quezon City and Davao.” — Melissa Luz T. Lopez

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