Falling oil prices to ease inflation pressure in Philippines

The expected decline in global oil prices will help tame inflation in Asia, with the Philippines among the countries seen to most benefit from this, ANZ Research said.

“Despite gains in recent days, average global oil prices in September so far have softened materially, and the transmission to pump prices in several economies in the region is underway,” it said in a report.

“If the weakness in global oil prices persists, disinflation will gather pace, and most of the region’s external positions will improve. Thailand and the Philippines will see the biggest drag to inflation.”

Data from ANZ showed that the estimated pass-through of a 10% decline in global oil prices is a -0.2-percentage-point (ppt) change in Philippine headline inflation.

“Thailand and the Philippines are likely to see relatively larger drags on inflation, with a pass-through of 0.2-0.3% for every 10% fall in global oil prices,” it said.

Headline inflation slowed to a seven-month low of 3.3% in August from 4.4% in July and 5.3% a year ago.

Transport inflation contracted by 0.2% in August as pump price adjustments stood at a net decrease of PHP 2.70 a liter for gasoline, PHP 2.80 for diesel, and PHP 3.70 for kerosene during the month.

The Bangko Sentral ng Pilipinas (BSP) earlier said that inflation is expected to ease further from August onwards.

ANZ estimates also showed that a 5% decline in benchmark gasoline pump prices would have an -0.12-ppt impact on September headline inflation for the Philippines.

“The fastest channel of transmission from falling global oil prices is typically through inflation. The Philippines, Thailand, South Korea, mainland China and Taiwan have already seen local gasoline pump prices adjust, with declines ranging from 1-5% relative to their August average,” it said.

The local statistics authority is set to release September inflation data on Oct. 4.

ANZ noted that the impact of inflation also depends on the weight of vehicle fuels. “While the Philippines has seen the largest fall in pump prices, vehicle fuels make up a smaller share of its inflation basket,” it added.

Meanwhile, ANZ also noted the impact of lower oil prices on food inflation.

“Another angle to consider is the food price channel, as oil is a key input in agricultural production. While isolating the impact of oil price changes on food prices is challenging, there is generally a positive correlation,” it said.

Food inflation eased to 4.2% in August from 6.7% a month ago, largely driven by easing rice prices. Rice inflation slowed to 14.7% from 20.9% a month prior.

“Assuming all other factors influencing food prices remain constant, economies with a higher proportion of food in their inflation basket are more likely to experience a greater reduction in inflation from lower global oil prices,” ANZ said.

“Within Asia, food has the highest weight in the inflation baskets of India, Thailand and the Philippines,” it added.

The heavily weighted food and non-alcoholic beverages index is typically the main contributor to headline inflation in the Philippines, with rice accounting for almost half of overall inflation.

Easing inflation will also make the case for further rate cuts, ANZ said.

“The combination of lower inflation and stronger external positions will open up scope for a deeper-than-anticipated rate-cutting cycle in the region, particularly if weaker global growth is a key driver keeping energy prices subdued,” it said.

Last month, the Monetary Board reduced the target reverse repurchase (RRP) rate by 25 basis points (bps) to 6.25% from the over 17-year high of 6.5%.

BSP Governor Eli M. Remolona, Jr. signaled another 25-bp cut in the fourth quarter. The Monetary Board’s remaining meetings this year are on Oct. 17 and Dec. 19. — Luisa Maria Jacinta C. Jocson