Inflation likely settled within 4.8%-5.6% in Aug.

HEADLINE INFLATION likely settled within the range of 4.8% to 5.6% in August amid a sharp increase in rice and fuel prices, the Bangko Sentral ng Pilipinas (BSP) said on Thursday.

If realized, August inflation would exceed the central bank’s 2-4% target band for the 17^th straight month.

It would also be faster than the 4.7% print in July, which would end six straight months of slowing inflation.

The Philippine Statistics Authority (PSA) will release August consumer price index (CPI) data on Sept. 5.

“Higher prices of rice and other agricultural commodities due to weather disturbances, sharp rise in fuel prices as well as increased transport costs owing to higher train fares and toll rates, and the peso depreciation are the primary sources of upward price pressures in August,” the BSP said.

In August alone, oil companies raised pump prices by PHP 5.90 per liter for gasoline, PHP 9.90 per liter for diesel and PHP 10 per liter for kerosene.

Higher fares at the Light Rail Transit Lines 1 and 2 took effect on Aug. 2. The minimum boarding fee was increased from PHP 11 to PHP 13.29, while distance fare was hiked to PHP 1.21 from PHP 1 per kilometer.

The peso closed at PHP 56.595 on Thursday, depreciating by 3% or PHP 1.715 from the PHP 54.88 finish on July 31. Year to date, the peso depreciated by 1.5% or PHP 0.84 from its PHP 55.755 close on Dec. 29.

“Meanwhile, lower electricity rates from major providers could contribute to downward price pressures for the month,” the central bank said.

Manila Electric Co. (Meralco) lowered rates by P0.29 per kilowatt-hour (kWh) to P10.90 per kWh in August from P11.19 per kWh in July.

Debalika Sarkar, an economist from ANZ Research, expects 4.7% inflation in August due to base effects. Headline inflation was at 6.3% in August 2022. 

However, a large increase in rice prices may add to food inflation last month, she said in an e-mail.

The average price of a kilogram of local well-milled rice ranged from PHP 47-PHP 56 as of Aug. 30, higher than the PHP 41-PHP 49 range as of Aug. 1

“A sharp rise in rice prices in the domestic market, following India’s ban on rice exports in late July, will be reflected in August inflation data. We are expecting a rebound in food prices following six consecutive months of deceleration,” Ms. Sarkar said.

In July, India banned the export of non-basmati white rice to control rising domestic prices. India accounts for more than 40% of world rice exports.   

Based on PSA data, food inflation further eased to 6.3% in July from 6.7% in June and 7.1% a year ago.

“Food prices in the Philippines are again on the radar with rising global rice prices and fears of agricultural production loss due to El Niño. Food makes up around 35% of the Philippines’ CPI basket, therefore a decoupling trend (food prices rising but headline falling) may not last once the base effects fade,” Ms. Sarkar said.

Meanwhile, Metrobank Research in a note cut its full-year inflation outlook to 5.6% from 5.8% previously. This matched the BSP’s average inflation forecast for 2023.

“Metrobank Research expects (the downward)  trend to persist in the succeeding months sans supply shocks. However, the bank also recognizes looming upside risks emerging from higher rice prices which may feed into the headline inflation by yearend and until the following year,” it said.

The BSP sees inflation returning to the 2-4% target band by the fourth quarter this year. It projects inflation to settle at 5.6% in 2023, before easing to 3.2% in 2024.   

“While price pressures have significantly tempered for 2023, we see these upside risks to be a major consideration for the BSP that may push currently stable inflation expectations higher,” Metrobank Research said.

The research firm said the BSP may keep interest rates steady at 6.25% for the rest of the year, before cutting by 100 basis points (bps) to 5.25% in 2024.

The Monetary Board raised borrowing costs by 425 bps from May 2022 to March 2023 to tame inflation.

“The continued slowdown in inflation which may return within the BSP’s target range towards yearend is anticipated to prompt rate cuts in the following year which will then push growth to rebound in 2024,” it said.

Metrobank Research also slashed its Philippine growth forecasts to 5.5% from 6% previously due to the second-quarter figures. This is below the government’s 6-7% target for the year.

The Philippine economy expanded by just 4.3% in the second quarter, bringing the first-half average to 5.3%. — Keisha B. Ta-asan