Economy 5 MIN READ

Higher-than-expected wage hike, El Niño pose upside risks to inflation

June 29, 2023By BusinessWorld

A higher-than-expected minimum wage adjustment and the El Niño weather phenomenon could fan inflation, according to analysts.   

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said possible wage hikes would boost consumers’ purchasing power, which may fuel inflation.

“A significant increase in wages would also likely force firms to pass on higher wage costs or expenses to end-consumers by raising prices of the products or services they are providing,” he said in an e-mail.

The BSP sees full-year inflation at 5.4% for this year, 2.9% for 2024 and 3.2% for 2025.  

At its June 22 monetary policy meeting, the Bangko Sentral ng Pilipinas (BSP) said risks to the inflation outlook include wage hikes, transport fare increases, persistent food supply constraints and El Niño.

“In our baseline, we have assumed that wage adjustments will be at historical levels, so about 4.2%. If the actual adjustment in minimum wages is higher than that, then that could feed into inflation,” BSP Deputy Governor Francisco G. Dakila, Jr. said at the policy briefing last week.   

China Banking Corp. Chief Economist Domini S. Velasquez said a modest increase in wages to combat higher cost of living would have a minimal effect on inflation.  

She said the 4.2% quoted by the BSP is a reasonable amount, citing a study titled “Do Higher Wages Cause Inflation?” by Faith Christian Q. Cacnio, a bank officer from the BSP’s Department of Economic Research.   

The study showed that a 1% increase in regional wage affects regional inflation by 0.1 percentage point. Hence, small minimum wage adjustments are acceptable, Ms. Velasquez said.   

“However, when wage adjustments are more than these, they will tend to be inflationary. If wage adjustments are deemed too much, it may cause employers to lay off workers and will be detrimental to employees and the economy as a whole,” she added.   

The Unity for Wage Increase Now in March filed a petition seeking to raise the PHP 570 daily minimum wage in Metro Manila to PHP 1,100. The Kapatiran ng Mga Unyon at Samahang Manggagawa in December 2022 filed a petition seeking a PHP 100 increase for the capital region.

Lawmakers have also filed bills seeking across-the-board minimum wage hikes for workers in the private sector.

In June last year, the National Capital Region’s wage board approved a PHP 33 minimum wage hike to help workers cope with soaring prices.   

“If it does go beyond the threshold as prescribed by the BSP, then it may feed into inflation more via cost-push in the medium term,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message.   

Oxford Economics assistant economist Makoto Tsuchiya said in an e-mail that wage increases might not necessarily drive up the prices of goods and services “if firms opt not to hike their prices either due to deficient demand or fear of losing market share.” 

Despite the risks, Philippine inflation will continue to ease due to base effects.

“What’s more important down the road is that inflation expectations remain anchored, which will avoid self-fulfilling prophecy of higher wages and higher prices,” Mr. Tsuchiya added. 

Headline inflation slowed to 6.1% in May from 6.6% in April. April marked the 14th straight month that inflation surpassed the central bank’s 2-4% target range.

Inflation averaged 7.5% for the first five months, well above the BSP’s 5.4% forecast for the year.   

El Niñ0 impact 
According to Mr. Dakila, the El Niño weather event may have a more moderate impact on inflation, likely adding only 13 basis points to overall headline inflation.   

During the Kapihan sa Manila Bay Forum on Wednesday, Finance Secretary Benjamin E. Diokno said the impact of El Niño this year on inflation is projected to be mild.   

“It’s not as bad as other (previous) years, it’s not as severe,” Mr. Diokno said.   

The El Niño is a fluctuating weather pattern in the area around the equator in the Pacific. The last time an El Niño weather event hit the Philippines was in 2019, with agricultural damage reaching up to PHP 8 billion.   

Earlier in May, the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) said the El Niño weather pattern may emerge in the next three months with an 80% probability and likely to persist until the first quarter of 2024.

Ms. Velasquez said the strength and longevity of El Niño will affect both domestic and global food prices.

“We might see some water shortages also, driving up the price of utilities. Right now, it is one of the major risks as PAGASA expects it to extend until 2024,” she said.   

Ms. Velasquez also said the African swine fever (ASF) outbreak appears to be problem again and should be addressed as soon as possible.

“If ASF spreads, meat prices hopefully can be augmented by timely importation,” she said.   

The Department of Agriculture earlier said it is working with the private sector to manage pork importations from other countries amid the ASF outbreak. It is also working on a vaccine to mitigate the spread of ASF among livestock. — Keisha B. Ta-asan

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