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Economists: Brace for faster price increases in 2018 due to tax reform law

By: - Reporter / @bendeveraINQ
/ 10:58 AM January 04, 2018

Most economists expect inflation in December to have risen at the same rate as November last year’s 3.3 percent, and would go on an upward trend this year as a result of the new or higher taxes to be slapped on a number of goods under the government’s first tax reform package.

IHS Markit Asia-Pacific chief economist Rajiv Biswas, DBS Bank Ltd. economist Gundy Cahyadi, and ANZ Research economist for South and Southeast Asia Eugenia F. Victorino projected a 3.3-percent year-on-year rise in the prices of basic goods last month.

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Biswas said his forecast reflected “the impact of higher world oil prices in the second half of December.”

Moving forward, Biswas said “the outlook for 2018 is for some increase in the headline CPI [consumer price index] inflation rate due to the impact of the implementation of the first stage of the TRAIN tax reform package signed into law by President Duterte in December,” referring to the Tax Reform for Acceleration and Inclusion Act.

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The President last Dec. 19 signed into law package 1A of the TRAIN, which starting Jan. 1 this year, slashed and restructured personal income tax rates that stayed the same for two decades, while also jacking up or slapping new taxes on the consumption of oil, cigarettes, sugary drinks and vehicles.

“As a result of the higher indirect taxes, the headline CPI inflation rate is expected to reach the top of the Bangko Sentral ng Pilipinas’ target range of 2-4 percent by mid-2018. However, since the increases in indirect taxes will have a temporary impact on the headline inflation rate and drop out of the CPI calculation after 12 months, the BSP is expected to look through this temporary factor when assessing the inflation outlook its monetary policy decision,” Biswas said.

For Victorino, a “tighter monetary policy is necessary to keep inflation expectations anchored to the central bank’s target range,” citing that “the recent passage of the first phase of tax reform would put further upside pressure to headline prices.”

During its last meeting on monetary policy for 2017 last Dec. 14, the BSP’s policy-making Monetary Board kept key interest rates steady on expectations of manageable inflation in the near term.

The BSP had also maintained its inflation forecasts of 3.2 percent for 2017, 3.4 percent for 2018, and 3.2 percent for 2019.

Meanwhile, the December headline inflation forecasts of Nomura economist Euben Paracuelles as well as University of Asia and the Pacific economics professor Victor A. Abola were both a slightly higher 3.4 percent.

“The uptick in food prices during the Christmas season should be offset by lower electricity charges and relatively stable fuel prices,” Abola explained.

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As for Ateneo de Manila University economics professor Alvin P. Ang and Land Bank of the Philippines market economist Guian Angelo S. Dumalagan, they projected a slightly lower 3.2-percent hike in consumer prices last month.

“Headline inflation likely fell to 3.2 percent [in December] mainly due to slower annual increases in oil prices, food costs, and government spending. The unexpected appreciation of the local currency might have also contributed to lower inflation by making imported goods more affordable in local currency terms,” Dumalagan said.

The peso closed 2017 at six-month high levels, returning to the 49:$1 level during the last week of the year.

“The rate of increase in consumer prices might pick up in January because of the newly approved tax bill. Weaker inflation gives the BSP more room to keep policy rates steady even as a rate hike this year is still generally expected amid the persistent monetary tightening of the US Fed and the inflationary impact of the country’s tax bill,” according to Dumalagan.

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TAGS: economy, Gundy Cahyadi, Inflation, monetary policy, outlook, Prices, Rajiv Biswas, tax reform law
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