Inflation seen easing to 6.1% in May

Inflation likely slowed for a fourth straight month in May due to favorable base effects and a decline in prices of energy and some food items, analysts said.

A BusinessWorld poll of 15 analysts last week yielded a median estimate of 6.1% for May inflation, settling near the lower end of the 5.8-6.6% forecast range by the Bangko Sentral ng Pilipinas (BSP).

If realized, the May inflation rate would be slower than 6.6% in April but quicker than the 5.4% print in the same month a year earlier. Inflation has been on a downtrend since the 8.7% print seen in January.

The consumer price index (CPI) in May would also exceed the BSP’s annual 2-4% target range for the 14^th consecutive month. The BSP sees inflation averaging 5.5% for the full year.

The Philippine Statistics Authority will release inflation data on June 6.

“Favorable base effects coupled with moderating prices for select food and energy items should push headline inflation closer towards target,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

Philippine National Bank economist Alvin Joseph A. Arogo said in an e-mail that the lower Manila Electric Co. (Meralco) electricity rates would also be a dominant factor in the slower inflation in May.

Meralco raised the overall rate for a typical household by PHP 0.1761 to PHP 11.4929 per kilowatt-hour in May.

Lower prices of some food items like fish and poultry may have contributed to the decelerating inflation in May, Hongkong and Shanghai Banking Corp. (HSBC) economist for the Association of Southeast Asian Nations (ASEAN) Aris Dacanay said.

“(This,) as the government’s efforts to augment the food supply through imports continued to work their way through the economy, and ultimately, to prices,” Mr. Dacanay said.

The average price of bangus fell to PHP 120-PHP 240 per kilogram by end-May from P150-P240 by end-April, while the price of tilapia ranged at PHP 100-PHP 200 per kilogram during the month, data from the Department of Agriculture (DA) showed.

However, China Banking Corp. Chief Economist Domini S. Velasquez noted that rice, meat, and vegetable prices in May were higher compared with the previous month.

“This was somewhat offset by lower prices of fish, chicken, and eggs. Additionally, it looks like price increases in regions increased much more than in Metro Manila,” she said.

Based on data from the DA, the price of a whole chicken fell to as low as PHP 150 per kilo as of end-May, while prices of medium eggs were also around PHP 6 to PHP 8.8 per piece. 

“Diesel prices, too, saw a gradual decline, which likely helped to keep transport CPI negative on an annual basis,” Mr. Dacanay said.

In May, pump price adjustments stood at a net decrease of PHP 1.45 a liter for gasoline, PHP 2 a liter for diesel, and PHP 3.2 a liter for kerosene.   

“The fall in food and energy CPI then likely dragged core CPI, and as a result, we expect year-on-year core inflation to begin showing signs of easing,” Mr. Dacanay said.

Core inflation, which excludes volatile prices of food and fuel, slowed to 7.9% in April from 8% in March. March saw the highest core inflation print since December 2000.

However, Mr. Dacanay noted upside risks remain as imports likely became more expensive as the peso weakened against the US dollar.

In May, the peso depreciated by 77 centavos or 1.37% to PHP 56.15 on May 31 from its April 28 close of PHP 55.38.

Outlook
Inflation may continue to tread lower for the rest of the year until it reaches the BSP’S 2-4% target range by the fourth quarter, analysts said.

“We expect inflation to sustain its downward trend as favorable base effects and improved supply chains take hold,” ING’s Mr. Mapa said. 

However, food inflation faces upside risks due to the El Niño weather event and shortages in food items, Ms. Velasquez said.

According to the state weather agency, El Niño has an 80% chance to emerge in June, July and August, and would likely persist until first quarter next year.

“We also expect minimum wage hikes this year due to elevated inflation in the past two years,” Ms. Velasquez added.

The Senate Committee on Labor and Employment last month approved “in principle” Senate Bill No. 2002 which proposes an across-the-board daily minimum wage hike of PHP 150.

Analysts expect the BSP to maintain its current monetary stance as inflation continues to slow.

“I don’t think the coming inflation report will have any bearing on the BSP’s meeting next month, assuming it shows a continued slowdown. The prints will only really start to matter for monetary policy once they return to the 2-4% target range,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

The BSP paused its aggressive monetary policy tightening campaign last month. Since May 2022, the Monetary Board has raised key rates by 425 basis points (bps) to 6.25%.

BSP Governor Felipe M. Medalla earlier said the central bank is prepared to keep the benchmark interest rate unchanged for two to three meetings if inflation continues to ease.

“Inflation trends will figure into the BSP decision on (June) 22nd, which could be the final meeting for Governor Medalla’s stellar tenure. One additional input would be the Fed’s decision a week earlier with some investors pricing in a policy rate hike by the Federal Open Market Committee (FOMC),” Mr. Mapa said.

The US central bank, which has raised borrowing costs by a total of 500 bps since March last year, is set to meet next on June 13-14. 

“With latest data on first-quarter GDP growth at 6.4% (higher than expected) and May PMI (Manufacturing Purchasing Managers’ Index) rising to 52.2 (previous period at 51.4), we are inclined to expect the BSP to pause until may be the next two meetings,” Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said.

He noted the BSP may also cut the big banks’ reserve requirement ratio (RRR) and release more liquidity as the aggressive rate hikes stifle bank loan growth.

The RRR for big banks is currently at 12%, one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively.

The central bank targets to cut the RRR to single-digit levels by the end of the year.

“Nevertheless, we may see a rate cut toward the end of 2023 as more disinflation happens in the next months,” Mr. Asuncion added. 

The BSP’s next three policy meetings are scheduled on June 22, August 17, and September 21. — By Keisha B. Ta-asan, Reporter