Inflation picks up to 6-month high

Inflation accelerated to a six-month high in May, driven by the faster rise in utility and transport costs, the Philippine Statistics Authority (PSA) said on Wednesday.

The consumer price index (CPI) picked up to 3.9% year on year in May from 3.8% in April but slowed from 6.1% in the same month last year.

It was the fastest inflation since 4.1% in November and matched the 3.9% inflation in December.

May inflation also fell within the Bangko Sentral ng Pilipinas’ (BSP) 3.7-4.5% forecast for the month. However, it was slightly below the 4% median estimate in a BusinessWorld poll of 16 analysts last week.

May also marked the fourth straight month of faster annual inflation, and the sixth straight month that inflation settled within the BSP’s 2-4% target band.

Month on month, inflation inched up by 0.1%. Stripping out seasonality factors, month-on-month inflation picked up by 0.3%.

Core inflation, which excludes volatile prices of food and fuel, slowed to 3.1% in May from 3.2% in April and 7.7% in the same month a year ago.

From January to May, headline inflation averaged 3.5%, matching the BSP’s full-year forecast.

“The inflation outturn is consistent with the BSP expectations that inflation could temporarily accelerate above the target range over the near term due to adverse weather conditions on domestic agricultural output and positive base effects,” the central bank said in a statement.

National Statistician Claire Dennis S. Mapa said the inflation uptick was driven by the faster increase in the housing, water, electricity, gas and other fuels index. It rose to 0.9% in May from 0.4% in April.

“One of the main contributors to the increase in housing, water, electricity, gas, and other fuels was the slower pace of decrease in electricity prices… (and) the faster rise in prices of liquified petroleum gas (LPG), which had 9.4% inflation,” he said in mixed English and Filipino.

He also noted that the yellow and red alerts placed on the Luzon and Visayas grids contributed to higher electricity prices.

Mr. Mapa also noted the faster annual growth in transport index at 3.5% in May from 2.6% in the previous month and -0.5% in May 2023. This was driven by higher gasoline and diesel prices, as well as rising fares for passenger transport by sea.

Meanwhile, the heavily weighted food and non-alcoholic beverages index was the main contributor to overall headline inflation, accounting for 56.6% or 2.2 percentage points (ppts).

The food index rose to 5.8% in May, slowing from 6% a month ago and 7.4% in May 2023. The cereals and cereal products index, which includes rice, eased to 16.6% from 16.9% in April.

Rice inflation eased to 23% from 23.9% a month earlier. May marked the second straight month of slower rice inflation.

PSA data showed that the average price of a kilo of well-milled rice declined to PHP 56.06 in May from PHP 56.42 in April while special rice dropped to PHP 64.41 from PHP 64.68 per kilo.

Mr. Mapa noted that rice prices continue to see “incremental decreases” as global rice prices are also going down.

He also cited faster inflation in the ready-made and other food products, particularly ginger. The average price of a kilo of ginger rose to PHP 148.72 in May from PHP 127.66 in April.

Meanwhile, the inflation rate for the bottom 30% of income households settled at 5.3% in May, the same as a month ago but slower than 6.7% a year earlier.

In the first five months, the inflation rate averaged 4.6% for the bottom 30%.

In the National Capital Region (NCR), inflation quickened to 3.1% from 2.8% in April. Inflation in areas outside NCR averaged 4.1%, unchanged from the previous month.

RISKS TO INFLATION
Meanwhile, the BSP said that risks to the inflation outlook continue to tilt toward the upside.

“Possible further price pressures are linked mainly to higher transport charges, elevated food prices, higher electricity rates, and increase in global oil prices,” it said.

However, the central bank said it still expects average inflation to return to the target range for both 2024 and 2025.

PSA’s Mr. Mapa said that inflation could ease further after the National Economic and Development Authority (NEDA) Board recently approved a medium-term plan to reduce tariffs on key agricultural and industrial products. Tariffs for rice imports will be slashed to 15% from 35% previously until 2028.

“Our inflation of rice has a very substantial contribution to overall inflation. It’s even bigger for the bottom 30% income households… It would reduce the overall inflation, given the contribution of rice to the overall inflation, all things being the same,” Mr. Mapa said.

NEDA Secretary Arsenio M. Balisacan said in a statement on Wednesday that the tariff reduction will “help manage food inflation, promote policy stability and investment planning, and enhance food security.”

POLICY IMPLICATIONS
The central bank said it will consider the latest inflation data in its next policy review on June 27.

“The BSP also continues to support the National Government’s nonmonetary measures to address supply-side pressures on prices and sustain the disinflation process,” it added.

Chinabank Research said in an e-mail note that recent nonmonetary measures could result in a lower inflation path and ensure that full-year inflation falls within the BSP’s target.

“While unfavorable base effects will continue to help drive up inflation until July and upside risks persist, recent nonmonetary interventions such as tariff cuts on key commodities and the exemption of agri-trucks from toll fee hikes starting this month brought positive developments to the inflation outlook,” it said.

The BSP earlier said that inflation could overshoot the 2-4% target band from May to July amid base effects.

“The monthly year-on-year inflation is expected to peak in July and anticipated to begin its downward trend in August,” Metrobank Research and Market Strategy Department said in a report.

Pantheon Macroeconomics in an e-mail note said that it expects inflation to average 3.3% this year, below the BSP’s full-year target.

Chinabank Research said that latest inflation data may also prompt the BSP to begin policy easing earlier than expected.

“(This) could support possible local policy rate cuts as early as the latter part of 2024 especially if the Fed starts cutting rates,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

Pantheon said it expects the BSP to cut by a total of 75 basis points (bps) this year, beginning in August.

The Monetary Board last month kept its benchmark steady at a 17-year high of 6.5%. The central bank raised borrowing costs by 450 bps from May 2022 to October 2023.

BSP Governor Eli M. Remolona, Jr. earlier said that the Monetary Board can begin policy easing as early as August.

Metrobank Research said it expects the BSP to begin its easing cycle in the fourth quarter should the US Federal Reserve start cutting in September.

Mr. Remolona earlier said that the BSP does not need to wait for the Fed and can cut ahead of the US central bank. — By Luisa Maria Jacinta C. Jocson, Reporter