Households to still feel inflation pain

Filipino households will still feel the pain from elevated inflation even as price increases continue to moderate in the next few months.

BMI Country Risk and Industry Research projects that consumer spending in the Philippines will expand by 5.5% this year, but noted that elevated inflation, high borrowing costs and an uptick in unemployment rates pose risks to the outlook in the near term.

“While the rate of price changes is slowing, (inflation) remains higher than central banks’ targets and higher than what consumers have grown accustomed to, especially over the past decade. The impact will not be spread evenly across the different consumer spending segments, with the prices of some components, such as rent; services and some food items (e.g., meat and poultry), continuing to remain stickier and more elevated over (the second half),” BMI said in an Aug. 11 report.

The research firm said inflation will likely remain above the 2-4% target range of the Bangko Sentral ng Pilipinas (BSP) and average 5.7% this year.

“If nominal wages cannot keep up with these high rates of inflation, consumers will continue to see erosion in their purchasing power,” BMI said. “The uneven nature of price increases will mean that consumers will have to increasingly allocate more of their disposable income towards meeting basic necessities.”

Headline inflation slowed for a sixth straight month to 4.7% in July from 5.4% in June. It marked the 16^th straight month of inflation exceeding the BSP’s 2-4% target band.

From January to July, inflation averaged 6.8%. The BSP projects inflation to average 5.4% this year and 2.9% in 2024.

BMI said that Philippine inflation remains one of the highest since the global financial crisis in 2008, noting that prices for household goods, clothing and non-essentials are unchanged or have quickened.

“The risk now is that inflation remains elevated at these levels for longer than anticipated, which will accelerate the erosion of household purchasing power,” the research firm said.

BMI said its Philippine consumer spending growth projection of 5.5% for this year does not consider the latest gross domestic product (GDP) data.

Philippine GDP expanded by 4.3% in the second quarter, much slower than the 6.4% growth in the first quarter and 7.5% a year ago. For the first semester, GDP growth averaged 5.3%. To achieve the 6-7% target growth, GDP needs to expand by at least 6.6% in the second half.

Private consumption, which accounts for three-fourths of the Philippine economy, rose by 5.5%. This was weaker than the 6.4% growth in the first quarter and 8.5% a year earlier.

Following the release of the second-quarter GDP data, BMI slashed its full-year forecast to 5.3% from 5.9% previously.

Other risks
As the BSP keeps interest rates at near 16-year highs through the second half, BMI said households are facing higher debt servicing costs for longer.

“Additionally, many households took on significant levels of debt in the previous low-interest rate environment. While there are few indications that this is bad debt, the risk to consumer spending is that the cost of servicing this debt at higher interest rates becomes a larger than anticipated draw on disposable incomes, to a point where consumers have to cut back spending, especially in more non-essential segments,” it said.

Slower economic growth may also push unemployment rates slightly higher. BMI said unemployment, which is expected to average 6.3% this year, is a key risk to its consumer outlook in the short term.

“Lower levels of personal savings… will see households have to reorient the purchasing patterns and cut back on their spending (moving down price points or buying fewer goods, but at similar spending levels),” it added.

In June, the unemployment rate fell to 4.5%, from 6% a year ago. This brought the average jobless rate to 4.6% in the first half.

BMI also flagged risks to remittances, which is an important source of income for many households, arising from the negative impact from the rising inflation in major economies.

“In addition, the possible weakening of the peso will reduce the amounts sent back by overseas workers in local currency. This could put pressure on households with fixed expenditures,” BMI added.

The research firm said that the Philippine peso may depreciate against the dollar over the near term, with the local currency likely reaching P55.3 per dollar in 2023 and P55.8 per dollar in 2024.

“For the Philippines, which remains heavily reliant on imports to meet local demand, this will provide further headwinds as imports will become costlier,” it said.

Filipino households are also exposed to other global risks, such as a global slowdown and the Russia-Ukraine conflict.

“The effect is being felt in higher food, fuel and utility costs… The initial impact of the conflict has fed through to prices, and we highlight the ongoing risks of future spikes from this conflict zone,” BMI said. — KBT