February inflation seen breaching 4%

Inflation likely rose faster in February than the more than three-year high 4 percent posted on January on higher food and oil prices.

Majority of the economists polled by the Inquirer last week projected headline inflation last month to exceed 4 percent year-on-year.

The highest forecast was a 4.4-percent increase in consumer prices by Nomura economist Euben Paracuelles as well as Land Bank of the Philippines market economist Guian Angelo S. Dumalagan.

“The costs of [food and fuel] likely accelerated because of the continued depreciation of the peso against the greenback and the hike in excise taxes under the TRAIN law. A weaker peso puts upward pressure on prices as it makes imported goods more expensive in local currency terms,” Dumalagan explained.

Signed by President Duterte last December, Republic Act No. 10963 or the TRAIN law jacked up or slapped new excise taxes on oil, cigarettes, sugary drinks and vehicles, among other goods, starting Jan. 1 this year. This was to compensate for the restructured personal income tax regime that raised the tax-exempt cap to an annual salary of P250,000.

But for Dumalagan, “the impact of the TRAIN law on domestic inflation is most likely temporary,” citing that “inflation this year is expected to be elevated because the price level in 2018 will generally be higher than the price level in 2017 by the amount of additional excise taxes, which were not yet implemented last year.”

Maybank Investment Bank group chief economist Suhaimi Ilias expected the rate of increase in prices of basic goods at 4.3 percent last month.

“We see monthly inflation rate staying north of 4 percent year-on-year—potentially as high as 4.7 percent year-on-year at midyear, which is well over the Bangko Sentral ng Pilipinas’ (BSP) inflation target range. So we see the central bank hiking its rate by 25 basis points at the next meeting on March 22,” Ilias said.

The BSP expects headline inflation to average 4.3 percent this year and breach the 2 to 4-percent target range due to the impact on consumer prices of the first tax reform package as well as expected global oil price hikes.

Ateneo de Manila University economics professor Alvin P. Ang and Trinh D. Nguyen, economist at French corporate and investment bank Natixis, projected 4.2 percent.

“We expect inflationary pressures to rise above 4 percent in February, thanks to both strong growth momentum, which results in higher electricity and food prices, as well as pass-through of excise taxes on petroleum and sweetened beverages. These build-up of price pressures will last and cause the BSP to raise rates by 50 bps in 2018, which will support the peso from its recent underperformance,” Nguyen said.

“The Philippines should be one of the few Asian central banks that will follow the Fed with rate hikes in 2018 as both strong growth momentum and higher excise hikes push up price pressures in the archipelago,” Nguyen added.

For his part, Ang said that while his initial estimate was 4.2 percent, last month’s inflation rate “could go as high as 4.5 percent.”

The forecast of both University of Asia and the Pacific economics professor Victor A. Abola and Standard Chartered Bank economist for Asia Chidu Narayanan was 4.1 percent.

“The full effect of TRAIN will be felt over half a year or more. Raising prices in a competitive environment may not happen too fast as players would observe what others are doing. They may decide to postpone some increases for larger ones later when the dust has settled,” Abola said.

For London-based economic research firm Capital Economics, “having risen more sharply than expected in January, we think inflation will drop back slightly to 3.9 percent year-on-year in February” and “give the [BSP] the reassurance it needs to keep policy loose.”

“The BSP is expecting inflation to be 4-4.8 percent in February. The large range reflects the uncertainty surrounding the impact of January’s increase in indirect taxes, which pushed the headline rate up to 4 percent from 3.3 percent [in December]. We suspect the outturn will be at the very bottom of the BSP’s range. Some of January’s rise were down to temporary food shortages, which should unwind. Further ahead, there is likely to be a couple of factors that will offset the upward pressure from tax hikes, namely a pullback in oil price inflation and a gradual slowdown in economic growth,” Capital Economics said.

“If inflation does pick up considerably, the central bank will probably start to tighten policy. For now though, the BSP seems sanguine about the outlook, with its deputy governor recently saying that inflation will come back down without the need for hikes,” Capital Economics added.

HSBC also forecasted 3.9 percent, while DBS Bank Ltd. economist Gundy Cahyadi projected the increase in the consumer price index (CPI) at a lower 3.8 percent year-on-year.

“While the surge in CPI inflation took us by surprise, it remains to be seen how persistent was the impact from the tax reforms on general prices. At this juncture, we think that the impact was more of a knee-jerk, although a more pronounced implication may still be felt through the impact on underlying price expectations. As it is, higher food prices and possibility of higher crude oil prices are enough to drive up price expectations going forward. The upward trend in inflation persist,” Cahyadi said.