4.6 percent May inflation highest in 5 years

by Lawrence Agcaoili, Czeriza Valencia, with Christina Mendez(The Philippine Star), Jun 6, 2018

MANILA, Philippines — The rate of increase in consumer prices hit a fresh five-year high of 4.6 percent in May and monetary authorities said inflation remains a concern despite signs it is slowing down.

Last month’s inflation – or the rate of increase of consumer prices – was slightly higher than the 4.5 percent recorded in April but lower than the 4.9 percent forecast of the Department of Finance (DOF) and at the lower end of the 4.6 percent to 5.4 percent range projected by the Bangko Sentral ng Pilipinas (BSP).

BSP Governor Nestor Espenilla Jr. said the inflation outlook requires close attention, as the consumer price index (CPI) in May remained generally high.

“The Monetary Board will consider what further adjustments are necessary to firmly anchor inflationary expectations and ensure that the inflation target will be achieved in 2019,” Espenilla said.

Last May 10, the central bank raised interest rates for the first time in more than three years on higher inflation forecasts due to rising global oil prices and the effects of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law.

The BSP’s Monetary Board lifted benchmark rates by 25 basis points to help arrest potential second-round effects.

Based on the latest assessment of the MB, inflation is seen averaging 4.6 instead of 3.9 percent this year and 3.4 instead of three percent next year.

“There are also signs that inflation is slowing and may be close to peak,” he added.

Inflation averaged 4.1 percent in the first five months of the year, slightly higher than the central bank’s two to four percent target for this year and next year.

“Still above target but maybe not going to be as bad as some might think,” Espenilla said.
He explained that inflation slowed in the National Capital Region (NCR) to 4.6 percent in May from 5.2 percent in April, but still accelerated to 4.6 percent from 4.3 percent in areas outside NCR.

Meanwhile, the BSP chief pointed out month-on-month seasonally adjusted inflation also continued to decelerate to 0.2 percent in May from 0.7 percent in March and 0.3 percent in April.

“It helps that oil prices seem to have peaked and food price inflation is also slowing down,” the BSP chief said.

Core inflation, which excludes selected food and energy items, is slightly higher at 3.6 percent in May from 3.5 percent in April.

Speaking from Seoul, Finance Secretary Carlos Dominguez III said consumers should expect a downtrend in the prices of basic commodities after crude prices start to decline in the world market.

Dominguez – along with other officials – was in the entourage of President Duterte in the latter’s official visit to South Korea.

Wrong projections

Dominguez admitted that the administration’s economic team may have made wrong projections on inflation.

“I guess our projections were wrong. We always try to project on the conservative side, but I guess our estimates on the effects of these price increases were too much. But it seems to me that the inflation rate is… I hope it’s leveling off,” he said, citing “a sign of leveling off and probably a dropping.”

“As you know, we watched very carefully the prices of fuel and they have been on the downtrend. In fact, the futures market of fuel is – the technical term is in backwardation, the prices of future deliveries of fuel are actually lower than the current prices. So we are seeing that trend going down,” he pointed out.

Dominguez also said initiatives of North Korea and the US to engage in talks “are going to calm the markets quite a bit.”

“And we hope that the Middle East also will be calmer than what it has been in the past few weeks, so that fuel prices will not be too volatile,” he said.

“The projections of all the government economists has been that in the second half of the year inflation should be on the downtrend; in fact the estimate for the inflation for next year is below four percent,” Dominguez maintained.

Despite the implementation of TRAIN, Domiguez argued more workers now have higher take-home pay and, in effect, more spending power.

Euben Paracuelles, economist at Nomura Securities Ltd. of Japan, said they expect inflation to further accelerate in the coming months and average 4.6 percent this year due to the impact of the TRAIN law and the impending increase in power rates, among others.

“We believe inflation expectations are likely to rise further, given still-accelerating headline inflation, as evident in rising demand for wage increases,” he said.

Nomura sees the BSP raising interest rates by 25 basis points in its next two meetings this month and in August.

ING Bank Manila senior economist Joey Cuyegkeng said the lower-than-expected May inflation could further delay the central bank’s tightening.

Cuyegkeng said the arrival of imported rice this month would bring back low-priced subsidized rice to the market and offset other price pressures, while the weaker peso would prevent the full translation of the drop in global oil prices.

“We believe that recent developments would mean that inflation is at or near the peak. These developments also cut the pressure on BSP to hike policy rates this month. However, we still expect BSP to hike policy rates at the June 21 meeting to pre-empt second round effects and stabilize inflation expectations,” he added.

“This is slower than expected by the market,” said Rosemarie Edillon, undersecretary for policy and planning of the National Economic and Development Authority (NEDA), referring to the inflation figure.

“In fact, even BSP overshot its forecast,” she pointed out.

“This was still a bit higher than April 2018 but we are seeing signs of tapering off,” she told a press briefing.

For the average household with a P10,000 monthly budget, the latest inflation figure translated to additional expense of P459 in May.

Edillon said the sharp increase in the prices of rice and fresh vegetables is pushing food inflation. Fish production was affected by declining catch while meat production was hampered by the high cost of feeds. Rice prices, meanwhile, were pulled up primarily by market panic triggered by the reduction of the stocks of the National Food Authority (NFA).

Pass rice tariff bill now

This, she said, should convince lawmakers to pass immediately the rice tariffication bill so that domestic rice prices could shrink by half.

“We want to encourage our legislators to fast-track the passage of the rice tariffication bill because Filipinos are paying twice for rice compared with other countries,” she said, noting the local price of P38.95 per kilogram for well-milled rice as against the P19.00 per kilogram in Vietnam.

She said this weighs heavily on consumption, since 72 percent of Filipinos are net consumers of rice. She noted that poor families spend 20 percent of their monthly budget on rice.

The NEDA official also explained that rising international crude oil prices explained the higher inflation figure for electricity, petroleum and fuel for transport. Crude prices have risen by $22 per barrel since the end of 2017.

“So the increase in domestic oil prices is really externally-generated,” she said.

Edillon, noted, however, that international oil prices may ease because the Organization of Oil Exporting Countries or OPEC is now discussing the possibility of increasing output.

NEDA and the Department of Budget and Management (DBM) said the increase in global oil prices beyond the programmed level of $60 per barrel contributed 0.5 percentage points to the overall inflation rate in May 2018.

Adding other external and domestic factors, the joint contribution to the inflation rate was 0.7 percentage points. The effect of excise taxes on petroleum, sweetened beverages and tobacco under the TRAIN law remained at 0.4 percentage points, the same as in April.

Budget Secretary Benjamin Diokno said there is still a possibility of further upticks in inflation within the year, especially with the further increase in tobacco excise taxes in July.

But he made it clear the tobacco excise tax is only a small component of inflation.

“We are not ruling out the possibility that there will still be an uptick in inflation,” he said. “But we are confident that it will taper off.”

Diokno said there is no need to adjust the inflation target of two to four percent for the year as the average year-to-date figure is only 4.1 percent.

The budget chief also dismissed proposals to suspend the implementation of the TRAIN law. He said the TRAIN’s effect on prices was only minimal and that suspending the measure would greatly deprive the government of revenues for public investment.

“Suspending TRAIN and adopting other band aid solutions will only have a minimal and short-term impact on inflation and will stifle our growth, further delaying our nation’s progress toward becoming an upper-middle-income country by 2019,” he explained. –