Inflation hits 2-year high

by Czeriza Valencia (The Philippine Star), 6 Feb 2021

Jumps to 4.2% in January

MANILA, Philippines — Prices of basic goods and services rose for the fourth straight month to reach a two-year high in January, driven by higher food and transportation costs, the Philippine Statistics Authority (PSA) said yesterday.

Headline inflation – the rate of increase in the consumer price index – quickened to 4.2 percent from 3.5 percent in December 2020, the fastest since it hit 4.4 percent in January 2019.

This breached the higher end of the revised inflation assumption of four percent set by the Development Budget Coordination Committee (DBCC) last December.

The PSA said the sustained uptick in inflation was caused largely by spikes in food prices particularly for meat, vegetables and fruits attributed to the lingering effects of typhoons in the last quarter of 2020 and the continued presence of African swine fever (ASF) in the country.

For its part, the Bangko Sentral ng Pilipinas (BSP) said the breach of its inflation target still does not warrant a quick action in monetary policy.

BSP Governor Benjamin Diokno said average inflation would still fall within the central bank’s two to four percent target this year as the projected upturn in the first half is seen as temporary.

“Nonetheless, the latest outturn is consistent with the BSP’s prevailing assessment of a transitory uptick in inflation in H1 2021, reflecting largely supply-side pressures related to the African swine fever, weather-related disturbances, higher global oil prices, along with positive base effects,” Diokno said.

Price increases were significantly faster in meat, vegetables and fruits, the PSA said.

Pork prices increased the most amid continuing supply constraints caused by the prevalence of ASF.

In the National Capital Region (NCR), the price of fresh pork with bones and pure meat rose by 68 percent and 77 percent year-on-year, respectively.

On the other hand, rice prices declined by 0.1 percent in January as falling prices in areas outside NCR offset the 2.3 percent growth in prices in Metro Manila.

National Statistician Dennis Mapa noted that in January, price pressures coming from food items would likely drive the uptrend in inflation in the coming months.

“If prices of meat, fish, vegetables and fruits continue to rise, there is a high probability that we will see an increase in inflation in the coming months,” he said in a briefing yesterday.

Transportation costs, which had a 17.4 percent share to the headline rate, accelerated to 8.6 percent in January from 8.3 percent in December as fares for tricycles, jeepneys and buses continued to rise because of pandemic-related limitations in carrying capacity.

Slower declines were also seen in the indexes of petroleum and fuels as well as domestic airfare, reflecting the series of fuel price hikes in January as well as the gradual resumption in domestic travel and tourism.

Also contributing to the uptick were increases in the prices in restaurants and miscellaneous goods and services, which had a 9.5 percent share to the headline rate. This was driven by meals, barbershop services and hairdressing salons.

The uptick in inflation was faster in the NCR at 4.3 percent in January from 3.2 percent in December mainly due to food prices. Mapa said 80 percent of inflation growth in Metro Manila came from spikes in the prices of meat, fish and fruits.

To help ease the price burden on food, the government will impose a price ceiling on pork and chicken products for 60 days beginning Feb. 8 and will increase imports.

Mapa said data by mid-February may reflect the impact of this policy on inflation.

With the sustained uptick, inflation could remain at four percent levels in the coming months because of lower base effects.

“Inflation could also mathematically pick up further especially starting March 2021 and in the coming months of 2021, and could remain at four percent levels largely due to much lower base,” said Michael Ricafort, chief economist of Rizal Commercial Banking Corp.

The latest uptick, he said, could limit further monetary easing measures for now, particularly on policy rates which has been kept at a record low of two percent.

He noted, however, that this may still be transitory in nature as it is largely seen as supply-side in nature.

“Food prices could ease in the coming months once new food supply comes in with new harvests,” said Ricafort.

“The 60-day price ceiling on pork and chicken in Metro Manila, on top of increased importation of pork, chicken, and other agricultural productions, would help boost local supplies that help ease local prices and overall inflation.”

The BSP chief pointed out supply-side shocks are best addressed by non-monetary interventions that ease domestic supply constraints.

“Currently, direct measures are being pursued by the national government to enhance the availability of affected commodities,” Diokno said.

The BSP has been doing the heavy lifting to cushion the impact of COVID-19 on the economy, emerging as one of the most aggressive central banks in the world after cutting interest rates by 200 basis points to an all-time low of two percent and lowering the reserve requirement ratios (RRR) of banks.

Diokno said the central bank’s Monetary Board would consider recent price developments, particularly in global commodity markets, along with the fourth quarter 2020 GDP outturn in its assessment of the monetary policy stance on Feb. 11.

“The BSP stands ready to deploy its full arsenal of instruments as needed in fulfillment of its mandate to maintain price and financial stability conducive to sustainable economic growth,” Diokno added.

Jun Neri, lead economist at Bank of the Philippine Islands, said there is a significant chance that full-year inflation will exceed the BSP’s four percent target to average 4.3 percent, unless the supply constraints are addressed.

Neri said the ASF problem would not likely subside soon since it’s going to take the swine industry several months to address this even if President Duterte has issued an order imposing a 60-day price ceiling on pork and chicken products in Metro Manila.

“With inflation now above four percent, the BSP will likely refrain from doing additional rate cuts this year. On the other hand, the possibility of a rate hike is slim right now given the economic situation, but we are not discounting this especially if inflation becomes unmanageable,” Neri said.

He also cautioned against the risks of keeping real interest rates in negative territory for a long time.

“Negative real interest rates are difficult to reverse as policy makers tend to overreact to volatility by the time policy needs to be reversed. Low rates for an extended period can also lead to property, asset bubbles and more income inequality,” Neri said.

He added negative real interest rates erode the margins of financial institutions, making it difficult to preserve capital more so with rising non-performing loans (NPLs).

“We also reiterate our view that monetary policy has done so much already, and overdependence on it will likely provide marginal benefits. Interest rates have been low for many months, and yet loan growth continues to slow down and may soon plateau. Cutting interest rates does not address the underlying problem or the main reason why loan growth is deteriorating,” Neri said.

For his part, ING Bank senior economist Nicholas Mapa said it would be difficult for the BSP to hike rates in the near term as this would run counter to the objective of providing support to the ailing economy.

“We had signaled the possibility of slowflation, a period of fragile economic growth in an environment of accelerating prices, but we had not expected it to show up this quickly,” Mapa said.

He added the long pause suggested by the BSP chief makes even more sense given that any potential rate hikes would have little impact on increasing the supply of pork or vegetables in the market.

Mapa said he does not expect a repeat of the inflation episode in 2018 when inflation peaked at 6.7 percent, as the planned price caps would work initially.

“And although we do not expect this inflation episode to resemble the 2018 breach where prices surged by as high as 6.7 percent with the peso in much better shape than back then, the acceleration in prices will nonetheless whittle down whatever is left of purchasing power and likely delay the return of the consumption juggernaut a little longer,” Mapa said.