All eyes (again) on inflation

The inflation rate for the month of September will be announced on Friday, Oct. 5.

The Department of Finance expects it to hit 6.4 percent, in line with the rate in August, anticipating the faster increase in food prices will be offset by the slower increase in prices of other items.

However, the private sector is not as optimistic. According to Bloomberg, consensus forecast for September inflation is 6.9 percent.

All eyes will be on inflation as it will determine whether or not interest rates will continue to go up and if the stock market will continue to go down.

The best scenario is September inflation at 5.7 percent or below, indicating inflation has already peaked in August. A September inflation of 5.7 percent or below implies that prices that month were flat or lower on a month-on-month basis.

Assuming this is the case, the 10-year bond rate would most likely stabilize at 7.4 percent while the stock market would most likely perform strongly, led by banks and property stocks that have been performing poorly the past month being the most sensitive to rising inflation and interest rates.

Although the Bangko Sentral ng Pilipinas might continue to raise rates, it will most likely do so on a more graduated basis. Instead of 50 basis points, which it has done in the last two sessions, the BSP might increase rates by only 25 basis points for the rest of the year, which is also in line with the anticipated action of the US Fed. The BSP might also resume cutting banks’ reserve requirements, easing liquidity constraints facing banks today.

However, an inflation rate that is above 5.7 percent will not be good. This would imply that inflation remains a problem and the stock market would most likely stay depressed.

Nevertheless, I don’t think the stock market will perform significantly worse unless inflation exceeds 6.9 percent. While a 6.9-percent inflation for the month of September is not good, at least the bad news has already been priced in. Anything above 6.9 percent implies a significant acceleration on a month-on-month basis, which in turn would signal a further increase in interest rates.

Persistently high inflation and interest rates are not good as these increase the cost of doing business and hurt the profits of companies that have significant borrowings. The availability of higher yielding fixed income instruments also makes investments in the stock market less attractive.

Hopefully, a continuous acceleration in inflation would increase the sense of urgency among government officials to help address the problem through nonmonetary measures such as the passage of the rice tariffication bill and the importation of more agricultural products. It would also hopefully encourage government officials to think of ways on how to boost production and improve the competitiveness of our agricultural sector, which in turn should help the country avoid a similar problem over the long term.