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Thursday, August 17, 2017 | MANILA, PHILIPPINES
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   economic indicators

Date posted: Wednesday, January 11, 2017 | Manila, Philippines

BY Leo Jaymar G. Uy, Senior Researcher

Inflation surges, but within expectation

PRICE INCREASES quickened at a nearly two-and-a-half-year high in March on account of base effects, a weak peso and the temporary disruption in the Malampaya natural gas supply, the government’s statistical agency reported yesterday.

The Philippine Statistics Authority (PSA) said headline inflation picked up to 3.4% last month from 3.3% in February and the 1.1% recorded in March last year.

The preliminary result fell within the Bangko Sentral ng Pilipinas’ (BSP) inflation estimate range for the month of 3-3.8% and matched its full-year forecast of 3.4%. The March headline figure also matched the 3.4% median forecast in a poll of 13 economists BusinessWorld conducted last week.

The inflation rate recorded in March marked its highest since the 3.7% recorded in November 2014. With the March result, the year-to-date inflation settled at 3.2%, still within the central bank’s 2-4% target band but below the official 3.4% forecast for the entire 2017.

“The first three months of 2017 saw the Philippines’ inflation rate trending upwards, partly due to recent hikes in food and oil prices and also owing to a generally low base in 2016,” Socioeconomic Planning Secretary Ernesto M. Pernia said in a statement.

Excluding volatile food and energy prices, core inflation similarly picked up to 2.9% from February’s 2.7% and March 2016’s 1.5%.

According to PSA, higher increments were posted in the indices of alcoholic beverages and tobacco (6.4% from the previous month’s 6%); clothing and footwear (2.9% from 2.8%); housing, water, electricity gas and other fuels (4% from 2.9%); furnishing, household equipment and routine maintenance of the house (2.5% from 2.3%); and health (2.8% from 2.6%).


“Inflation picked up last month primarily because of the peso’s depreciation and higher electricity rates as a result of the Malampaya maintenance shutdown,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (Landbank).

“The imposition of higher ‘sin’ taxes on cigarettes starting January this year also pushed headline inflation higher.”

In its statement, the National Economic and Development Authority (NEDA), which Mr. Pernia heads, said non-food subgroup inflation accelerated to 2.8% from February’s 2.5% and March 2016’s 0.4% because of faster price increases seen in electricity, gas and other fuels. This in turn was partly a consequence of the 20-day maintenance shutdown in the Malampaya facility.

Manila Electric Co. (Meralco), the country’s biggest power distributor, announced that its base rate rose by P0.67 per kilowatt-hour (/kWh) in March on a higher generation charge due to Malampaya’s shutdown. The natural gas facility’s Jan. 28-Feb. 16 shutdown prompted power plants that run on natural gas to shift to more expensive fuel. The climb to a P9.67/kWh base rate included the first of three equal monthly rate increase installments of P0.2211/kWh approved by the Energy Regulatory Commission (ERC) on March 6. Subsequent increases will be included in Meralco customers’ April and May electricity bills.

For the food group, price increases were seen in rice and meat to 2.3% (from February’s 2%) and 3.2% (from 2.3%), respectively, with the upticks ascribed to the government’s importation constraints on these food items.

“Inflationary pressure may ease following the removal of quantitative restrictions (QR) on rice importation, and the timely augmentation of supplies. However, the likely recovery of international and petroleum prices in 2017 may keep consumer prices afloat,” NEDA’s Mr. Pernia said.

Rice makes up 8.92% of the theoretical basket of goods and services consumed by a typical household that, in turn, is used to compute inflation. Quantitative restrictions on rice imports -- involving tariffs of 35% on imports within quota and 50% on those outside -- are due to lapse in July. In its place, a uniform 35% tariff will be imposed on individuals and businesses that want to import rice.

RISKS
Mr. Pernia said potential hikes in transportation fares and electricity rates and the continued depreciation of the Philippine peso against the US dollar could exert upward inflationary pressures in the coming months.

“Upward risks to inflation remain, but the overall outlook continues to be within government’s 2-4% target range for this year and next,” Mr. Pernia said.

“Higher electricity rates are expected to persist in the next two months as the [ERC] will spread the additional cost from the use of liquid fuel, which is more expensive than natural gas, until May 2017.”

Central bank Governor Amando M. Tetangco, Jr. said last week that he expects inflation to peak in the third quarter, but is unlikely to breach 4%. The central bank expects 2017 inflation to average 3.4%, higher than last year’s 1.8%.

Economists from the private sector shared this near-term outlook.

Angelo B. Taningco, economist at Security Bank Corp., said higher excise taxes on alcoholic beverages and tobacco as well as increasing prices of gasoline and fuel would contribute to rising prices.

Other factors that could affect inflation in the short and long run are movements in global oil production, coal prices, the peso-dollar exchange rate and US trade policy, Mr. Taningco said, adding that “protectionist policies can spark higher inflation both globally and domestically.”

Landbank’s Mr. Dumalagan said the “recovery of the US economy might influence inflation indirectly by affecting the strength of the peso against the dollar.”

“In the long run, the infrastructure plans of the government might dictate future inflation by affecting the country’s productive capacity,” he added.

ANZ Research analyst Eugenia Fabon Victorino said she expected “headline inflation to top out this quarter but, at the same time, remain in the upper half of the 2-4% target range of the BSP in both 2017 and 2018.”

“Moreover, core inflation, which has been continuously increasing over the last 12 months, is, however, unlikely to see any let-up,” Ms. Victorino added.

“Above-trend growth in household spending coupled with the government’s renewed push to deliver infrastructure projects imply a continuation of strong domestic demand and upward price pressures, by implication.”

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