Aug. inflation fastest in over 2 years

By Lourdes O. Pilar, Researcher

THE OVERALL year-on-year increase in prices of widely used goods accelerated to its fastest pace in 32 months in August, driven by higher food and utility prices amid the stricter lockdown, the statistics agency said on Tuesday.

Preliminary data from the Philippine Statistics Authority (PSA) showed headline inflation at 4.9% in August, picking up from 4% in July.

The August inflation result marked the fastest pace since the 5.1% reading in December 2018.

The latest headline figure is higher than the 4.4% median in a BusinessWorld poll conducted late last week, but falls within the 4.1-4.9% estimate given by the Bangko Sentral ng Pilipinas (BSP) for August.

Year to date, inflation averaged 4.4%, still above the BSP’s 2-4% target range this year and its 4.1% forecast for the entire year.

Core inflation, which discounted volatile prices of food and fuel, stood at 3.3% in August — faster than the previous month’s 2.9% and 3.1% a year earlier. It averaged 3.3% so far this year.

The PSA attributed the faster inflation in August primarily to the higher annual uptick in the heavily weighted food and non-alcoholic beverages at 6.5% from 4.9% in the previous month. These goods account for 38.3% of the average Filipino household’s theoretical basket of goods.

The government also noted faster annual increases in alcoholic beverages and tobacco (10.3% in August from 10.2% in July); transport (7.2% from 7%); restaurant and miscellaneous goods and services (3.8% from 3.6%); housing, water, electricity, gas and other fuels (3.1% from 2.6%); furnishing, household equipment and routine household maintenance (2.5% from 2.3%); and clothing and footwear (1.8% from 1.7%).

Recreation and culture inched up 0.5% in August following annual declines since August 2020.

The food-alone index likewise accelerated to 6.9% in August, from 5.1% in July 2021 and 1.7% last year. This marked food’s fastest year-on-year increase since the 7% in February.

Similarly, the August inflation rate for the bottom 30% of households further picked up to 5.2% from 4.4% in July and 2.7% in August 2020. The inflation rate for this segment was the fastest in five months or since the 5.5% in March. From January to August, the bottom 30% inflation averaged 4.9%.

“[T]he rise in the inflation rate last month can be traced to several factors, namely supply bottlenecks due to restrictions and lockdowns that contributed to higher prices of food and related commodities, higher electricity rates, and the weaker peso which could have raised prices of imported commodities (e.g., crude oil and petroleum products) at a time when international commodity prices are rising due to better demand conditions outside of the country,” said University of Asia and the Pacific Senior Economist Cid L. Terosa in an e-mail.

“Of course, we cannot discount the influence of base effects since inflation for the same month last year was quite low,” he added.

Metro Manila was placed under the strictest form of lockdown for two weeks in August, which meant tighter curbs on mobility.

In a statement, the National Economic and Development Authority (NEDA) attributed the uptick in inflation for fish (12.4% in August from 9.3% in July) and vegetables (15.7% from 5%) to the impact of the southwest monsoon (habagat) and the ongoing rainy season.

“Meat inflation slightly increased to 16.4% in August from 16% in July. However, on a month-on-month basis, meat inflation slowed down to -0.4% suggesting some price stabilization,” NEDA said.

The economic planning agency also cited the decline in retail prices of frozen and fresh pork, as well as a sustained drop in rice inflation.

President Rodrigo R. Duterte signed Executive Order (EO) No. 133 and 134 that increased the quota of pork imports and modified the tariff rates on imported pork products, respectively. Meanwhile, EO 135 lowered the tariff on rice imports to 35% from 40% for a year.

“We are beginning to see the impact of our proactive interventions to ease food prices, especially pork and rice. The government will continue to adjust and strengthen its policies to ensure that the people have access to affordable food amid the pandemic,” Socioeconomic Planning Secretary Karl Kendrick T. Chua was quoted in the NEDA statement as saying.

In a Viber message, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the inflation uptick so far this year is “only partly transitory.”

“It is clear that there is persistent component in the CPI (consumer price index) rise and is not just about food. Looking at the breakdown of the August [inflation] print, you will see that even if food prices didn’t spike in August, we would still be at 4.3% which is still a substantial breach of the BSP’s target,” Mr. Neri said.

INFLATION TO REMAIN ELEVATED
Mr. Neri said the sustained reopening of the economy along with the peso’s “mild” depreciation and the gradual recovery in demand are expected to keep inflation elevated throughout the rest of the year and the entire 2022.

Meanwhile, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said in a Viber message to reporters that inflation could “settle close to the high end” of the 2-4% target range in the near term before easing back to within the target range by the end of the year.

“The uptick in international commodity prices due to supply-chain bottlenecks and the recovery in global demand could lend upside pressures on inflation. Meanwhile, the emergence of new coronavirus variants, leading to stricter lockdown measures and delayed reopening of the economy, is seen to pose downside risks to both aggregate demand and inflation,” Mr. Diokno said.

“Looking ahead, the BSP stands ready to maintain its accommodative monetary stance for as long as necessary to support the economy’s sustained recovery to the extent that the inflation outlook would allow,” he added.

The BSP slashed benchmark rates by a cumulative 200 basis points (bps) last year. Borrowing costs have been at record lows since the Monetary Board’s last adjustment, which was a 25-bp cut in November 2020.

The Monetary Board will review the current policy settings on Sept. 23.

Analysts also see the central bank to keep policy settings steady.

In a note, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the BSP will “likely look past” the spike seen in August.

“A BSP rate hike will not likely be able to address the current food price spike nor make imported energy cheaper and thus we fully expect BSP to retain its accommodative stance all the more with the economy still in the midst of a recession,” Mr. Mapa said.

“Furthermore, we doubt that BSP will continue to craft policy that benefits the Philippines and refrain from conducting monetary policy via-proxy that would entail mimicking rate hikes of other nations around the world,” he added.

In an e-mail, Security Bank Corp. Chief Economist Robert Dan J. Roces said the prospect of a gradual economic recovery “will likely keep the central bank accommodative for an extended period.”

“We also think that this latest inflation reading supports the case against any further rate cuts. Gains in oil prices and returning domestic activity could contribute to inflation upside by [the fourth quarter], although base effects should keep the reading in check,” Mr. Roces said.

Alex Holmes, economist at Capital Economics, said a rate cut is still possible.

“While the spike in August inflation in the Philippines makes the [BSP’s] policy decision this month an even closer call, the worsening outlook for the economy means we are sticking with our non-consensus view of a 25-bp cut on [their next meeting on Sept. 23],” he said in a statement.