Inflation unlikely to overshoot target in Q1

Inflation is on track to return to the central bank’s 2-4% target range in the fourth quarter, but unlikely to overshoot the target in the first quarter of 2024, Finance Secretary Benjamin E. Diokno said.

“By the first quarter of next year, instead of overshooting — because we expect overshooting before — we will be right smack in the middle of the 2-4% range,” he told reporters on Friday.

Inflation unexpectedly quickened for the first time in seven months in August, as food and transport costs jumped. Headline inflation accelerated to 5.3% in August from 4.7% in July, ending six months of decline.

For the first eight months of the year, inflation averaged 6.6%. This is still higher than the central bank’s revised 5.6% inflation forecast for this year.

Despite the faster August inflation, Mr. Diokno noted that the Bangko Sentral ng Pilipinas (BSP) still sees inflation falling within the 2-4% target range by the fourth quarter.

“While there was a spike in the inflation rate for (August), the continued decline in the year-to-date inflation rate suggests our (Development Budget Coordination Committee) full-year 2023 inflation rate assumption of 5-6% remains doable,” he said.

BSP Governor Eli M. Remolona, Jr. last week said the central bank will likely revise its full-year inflation forecast for 2023 at its Sept. 21 policy meeting.

Mr. Remolona has also said that inflation will likely return to the 2-4% target in the first quarter of 2024.

Meanwhile, former BSP Governor Felipe M. Medalla said inflation is now likely to remain above the target band for up to 22 straight months or until January 2024.

August marked the 17^th consecutive month that inflation went above the BSP’s 2-4% target range.

“My original forecast was that inflation will be higher than target in 20 consecutive months (or November 2023) — the previous longest period wherein that was the case was 15 months. With the global rice price shocks, we could end up with 22 consecutive months of higher-than-target inflation,” he said in a text message.

Global rice prices soared after India banned the export on non-basmati white rice in July. India accounts for over 40% of global trade.

Even as inflation remains above the target range, Mr. Medalla said the BSP’s credibility will not be at risk.

“We have always said that the forecast of when inflation will be back within target was based on the assumption that there will be no new major shock. And clearly what happened to global rice prices was a surprise to anyone without a crystal ball,” he said. 

University of Asia and the Pacific (UA&P) Senior Economist Cid L. Terosa in an e-mail said that it will be difficult for inflation to ease to the 2-4% target in the fourth quarter due to supply-side constraints. 

Supply constraints contribute significantly to inflation, but “are not susceptible to change in monetary policy,” he noted.

“Moreover, the BSP does not have direct control over the actions of wholesalers and retailers, who are critical conduits of increases in prices,” he said.

Mr. Terosa also noted that the August headline inflation rate of 5.3% was expected due to high food and energy prices.

August inflation was mainly driven by the faster annual increase in the heavily weighted index for food and nonalcoholic beverages, which rose to 8.1% in August from 6.3% in the previous month.

Rice inflation surged to 8.7% in August from 4.2% in July due to tight supply, marking the fastest pace since the 9% print in November 2018.

Transport inflation quickened to 0.2% in August from -4.7% in July, ending three months of decline.

China Banking Corp. Chief Economist Domini S. Velasquez said the price cap on rice imposed by the government may cause inflation to ease in September, and return to within the 2-4% target in November.

The government on Sept. 5 began implementing a price ceiling on rice at PHP 41 per kilogram for regular milled rice and PHP 45 per kilogram for well-milled rice.

“The reaction of traders to the rice price ceiling merits close attention and monitoring,” Mr. Terosa said.

The Foundation for Economic Freedom earlier said the rice price cap may cause harm to retailers, farmers, and even consumers, as it will only “aggravate the current tight rice supply situation into a full-blown rice crisis.”

Meanwhile, Ms. Velasquez noted that upside risks to inflation have emerged in recent months.

“Vegetable prices are at risk due to consecutive typhoons, sometimes hitting northern Luzon. Oil prices will likely stay elevated especially with the recent production cuts of Saudi Arabia and Russia,” she said.

“Lastly, this month we expect the regional wage board decisions that could fan demand-side inflation.

Last week, the Regional Tripartite Wages and Productivity Board in Region IV-A (Calabarzon) issued a wage order which provides a 9-11% increase from the current daily minimum wage rates, ranging from PHP 35 to PHP 50 depending on the geographical area and labor sector. The higher daily minimum wage for the region, which is considered a manufacturing hub, will take effect on September 24.

For his part, Mr. Terosa said supply shortages in agricultural products, higher fuel prices and the start of holiday-related spending may stoke inflation in the coming months.

“Nonetheless, I believe the BSP is still on top of things since it continues to mindfully address what it can control,” he said.

“Unfortunately, there are several external conditions that the BSP cannot influence or control such as weather disturbances, supply chain disruptions, policy actions of foreign governments, and geopolitical events, which have tightened supply of various commodities considerably,” he added. 

To tame inflation, the Monetary Board has raised borrowing costs by 425 basis points, bringing the benchmark interest rate to a near 16-year high of 6.25%.

Ms. Velasquez said the BSP may not respond with another rate hike in September. “For now, we expect BSP to stand pat at 6.25% but remain hawkish if inflationary expectations become de-anchored.”

Mr. Medalla also said that the BSP is unlikely to cut policy rates this year. 

“It is also worth noting that the current policy rate will be higher than the forecasted monthly headline inflation rates in the last four months of 2023 and average inflation in 2024,” he said. — Keisha B. Ta-asan with inputs from Luisa Maria Jacinta C. Jocson