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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   economic indicators

Date posted: Wednesday, June 07, 2017 | Manila, Philippines

BY Lourdes O. Pilar Researcher and Melissa Luz T. Lopez Senior Reporter

May data show price hikes manageable

INFLATION eased in May due to slower price adjustments in both food and non-food commodities, the government reported yesterday.

The Philippine Statistics Authority (PSA) said headline inflation eased to 3.1% last month from April’s 3.4% but was faster than the 1.6% in May last year.

The preliminary result fell within the Bangko Sentral ng Pilipinas’ (BSP) 2.9-3.7% range for May but was lower than the 3.3% median estimate in a poll of 10 economists which BusinessWorld conducted last week.

“Slower inflation rate in May 2017 bodes well for the country’s economy in the near term,” Socioeconomic Planning Secretary Ernesto M. Pernia said in a statement, while BSP Governor Amando M. Tetangco, Jr. told reporters via text that “[t]he actual May inflation rate was within the BSP forecast range for the month.”

Mr. Tetangco said last month’s milder price increase helps ensure that inflation rate should remain within target until 2018. “The inflation print further supports our view of manageable inflation that is expected to fall within the target range for this year and next.”

The outgoing central bank chief said monetary authorities will watch domestic and global developments for their impact on price movements, and that this will be a key discussion point during their policy review scheduled on June 22.

With the May result, year-to-date inflation settled at 3.1%, still within the central bank’s 2-4% target band but below the official 3.4% forecast for the entire 2017.

Excluding volatile food and energy prices, core inflation slowed to 2.9% from April’s 3.0% but was nearly double the 1.5% recorded in May last year.

In its statement, the National Economic and Development Authority (NEDA), which Mr. Pernia heads, said inflation for the food and non-alcoholic beverages subgroup eased to 3.8% from the previous month’s 4.2%.

This was due to slower price hikes in vegetables, fish, oils and fats, as well as sugar, jam, honey, chocolate and confectionery.

Non-food inflation slowed to 2.5% from 2.7% in April due to softer price adjustments for clothing and footwear, furnishing, household equipment, health, transport, communication, as well as recreation and culture.

Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines, said in an e-mail that inflation came out softer than expected, as the slowdown in oil prices and better fish and vegetable production more than offset the impact of a weaker peso.

“Average food prices increased at a slower rate, as better weather conditions improved vegetable and fish output, tempering the rise in their costs,” he said.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said via e-mail that prices of almost all commodity groups either steadied or decelerated.

“The usual food and energy items that are more volatile either eased or remained the same. Core inflation, that determines the longer-run movement of inflation rates, has also decelerated,” Mr. Asuncion said.

“Looking at the factors that usually move inflation levels, one can see that there has not been a lot of movement. The peso has remained between P49.50-50 that can influence imported inputs and other imported finished goods. Although fuel prices have generally increased in May, electricity prices are generally lower.”

ANZ Research analyst Eugenia Fabon Victorino said the pullback in inflation for utilities and transport “dampened the overall increase in consumer prices,” adding that “inflation expectations are still likely to rise despite the modifications in the proposed tax reform package.”

Angelo B. Taningco, economist at Security Bank Corp., said that the slight drop in core inflation could be attributed to a deceleration in the price hikes for certain non-food and non-energy items such as clothing and footwear, health, education, and recreation and culture.

According to PSA, slower annual increments were posted in the indices of food and non-alcoholic beverages (3.8% from previous month’s 4.2% ); alcoholic beverages and tobacco (6.1% from 6.3%); clothing and footwear (2.2% from 2.7%); furnishing, household equipment and routine maintenance of the house (2.3% from 2.4%); health (2.4% from 2.5%); transport (2.7% from 3.2%); communication (0.2% from 0.3%), and recreation and culture (1.4% from 1.5%).

Landbank’s Mr. Dumalagan said oil prices generally dipped in the first half of the month due to higher US inventory and increased production from Libya. There was also caution in the market ahead of the May 25 meeting of the Organization of Petroleum Exporting Countries (OPEC).

“The slowdown in the price increase of food and non-alcoholic beverages may be induced largely by a moderation in the price increase for vegetables. Meanwhile, the easing of transport prices could largely come from lower price hikes in transport services,” Security Bank’s Mr. Taningco said.

UnionBank’s Mr. Asuncion said that “although rice prices may have risen in May, other food items’ level of prices have trended the same or even lower.”

“This might be the effect of the lesser volatile exchange rate especially for goods that need imported inputs,” he said, adding “this might also be because of lower prices of petroleum products such as LPG, kerosene, gasoline and diesel that were noted in many provinces. Downward adjustments in charges of electricity rates in NCR (National Capital Region, or Metro Manila) and in many other provinces might also have influenced the noted declines in inflation rates.”

For the food group, price decreases were seen in fish (from 8.8% the month before to 8.0% last month); milk, cheese and egg (from 2.6% to 2.5%); oil and fats (from 7.1% to 6.6%); vegetables (from 8.1% to 4.0%); sugar, jam, honey, chocolate and confectionery (from -0.8% to -1.4%).

NEDA said other food commodities like fruits, meat and rice recorded faster price increases, with rice inflation alone accelerating to 2.4%. “These trends bear watching, given the significant impact of food prices on the poor,” said NEDA’s Mr. Pernia.

One of the world’s top rice importers, the Philippines was supposed to lift the import restriction by July 1 this year under an agreement with the World Trade Organization.

President Rodrigo R. Duterte last Apr. 27 extended rice quantitative restrictions by issuing Executive Order No. 23 which, among others, maintained the 805,200 metric ton minimum access volume for the grain until June 30, 2020. Rice brought in within that threshold faces a lower 35% duty, while imports that exceed that amount face 40%.

Landbank’s Mr. Dumalagan said inflation might bounce back to more than 3.1%, driven by higher oil prices following the extension of output cuts by OPEC members.

“Inflation, however, might not exceed 3.5% due to improving agricultural production in the country, which could potentially curtail the rise in food costs,” he said.

The rebound in inflation might be limited by a slower depreciation of the peso following a string of weak US economic data, which increases the chance of a more gradual pace of US interest rate normalization.

Security Bank’s Mr. Taningco expects inflation to stay within the government’s 2-4% inflation target range and hover slightly above the 3.0% midpoint.

“[W]ith the new crisis brewing in the Middle East, inflation may be higher this June,” UnionBank’s Mr. Asuncion said.

“Fuel prices may notably increase and directly impact the production of goods and its prices,” he added.

“However, the uncertainty of the Chinese credit situation and the anticipation US Fed rate increases, which may not be forthcoming and not happen as expected, may dampen investor sentiment and push them to look for solid macroeconomic growth stories like the Philippines. So, it may be a mixed bag that can go either way this coming June for Philippine inflation.”

Still, Mr. Pernia noted that “growth prospects for the global economy have improved and the expected recovery of international trade should provide ample supply of commodities to support domestic production.”

Noting that “[u]nderlying price pressures remain in the Philippines on the back of strong economic growth,” ANZ Research’s Ms. Victorino said: “... [W]e still expect the central bank to commence its tightening cycle in Q3 and raise its policy rate by a cumulative 50 bps (basis points) in 2017 and 75 bps in 2018.”

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