Higher-than-expected wage hikes may stoke prices, keep rates high

Higher-than-expected minimum wage increases could spur prices to spiral out of control and prompt the central bank to keep rates tighter for longer, according to analysts.

“Although raising the minimum wage might boost household spending via higher real disposable income, such a hike would not be ideal from a price stability view,” Oxford Economics economist Makoto Tsuchiya said in an e-mail.

“Higher wages could potentially raise inflation expectations, which might start a wage-price spiral, requiring the central bank to keep rates higher for longer,” he added.

Lawmakers are seeking across-the-board minimum wage hikes for workers in the private sector.

The Senate last week approved on second reading a bill that seeks an across-the-board wage increase of P100. The House of Representatives said it is studying a proposal to increase wages by P350 to P400.

Bangko Sentral ng Pilipinas (BSP) Senior Assistant Governor Iluminada T. Sicat earlier said the central bank’s baseline inflation projections did not take these into account.

In June, the National Capital Region Tripartite Wages and Productivity Board approved a P40 increase in the daily minimum wage for Metro Manila.

“To the extent the assumed increase in minimum wage is beyond what we have incorporated in the baseline, and if you notice, it’s not part of the risk adjustments we presented, this could pose a threat to the inflation outlook,” Ms. Sicat told a news briefing last week.

BSP’s baseline inflation forecast for this year is 3.6% and 3.2% for next year. Inflation may average 3.9% and 3.5% this year and next year if the risks materialize.

Inflation eased to 2.8% in January from 3.9% in December, the second straight month it fell within the central bank’s 2-4% target.

“In the absence of wage hikes, subsiding inflationary pressures and softer economic activity should lead the bank to ease monetary policy as soon as the second quarter in our view,” Mr. Tsuchiya said. “A minimum wage hike would jeopardize this process.”

The BSP kept its benchmark rate unchanged at 6.5% at its third straight meeting on Thursday. It last raised borrowing costs by 25 basis points (bps) in October. It hiked rates by 450 bps from May 2022 to October 2023.

“If the hike materializes, the central bank’s inflation forecast will also likely rise, possibly making them more cautious to unwind tight monetary policy depending on the magnitude of the wage hikes,” Mr. Tsuchiya added.

Diwa C. Guinigundo, country analyst for the Philippines at GlobalSource Partners, said any wage adjustments should not fan inflation.

“Our workers deserve some adjustment in their daily wage,” he said in a Viber message. “The issue is the amount. Less than their own productivity contribution, the resulting final wage should not be inflationary. Higher than that, people argue it could be inflationary.”

A family of five needs at least P13,797 a month or P460 a day to meet basic food and nonfood needs, according to data from the local statistics agency.

Labor groups and employers should negotiate to help achieve fair adjustments, Mr. Guinigundo said. Congress should involve wage and job experts in the debates so that wage increases are “neither inflationary and anti-capital nor meaningless to workers themselves.”

“An increase in wages can help households cope with rising prices,” Nicholas Antonio T. Mapa, a senior economist at ING Bank N.V. Manila, said in an e-mail. “However, it might be best to go through the current practice of regional wage boards precisely in order to tailor-fit wage increases to the cost of living per region.” – Luisa Maria Jacinta C. Jocson, Reporter