February inflation 2.6 percent but PH braces for price spikes due to COVID-19

Inflation eased to 2.6 percent in February even as the economy braces for possibly faster-than-expected increases in consumer prices as China’s manufacturing sector reels from the impact of the COVID-19 outbreak.

The Philippine Statistics Authority’s (PSA) deputy national statistician, Lourdines C. dela Cruz, told a press briefing on Thursday (March 5) that headline inflation rate last month slowed from 3.8 percent in 2019 and 2.9 percent last January, bringing the two-month average to 2.8 percent or well-within the government’s 2-4 percent target range for 2020.

Dela Cruz attributed the lower rate of increase in prices of basic commodities last month to slower increases in costs of transport, alcoholic beverages and tobacco, as well as housing, water, electricity, gas and other fuels.

On a month-on-month basis, average consumer prices declined 0.2 percent in February, reversing the 0.5-percent increase last January, when higher taxes on alcoholic drinks, cigarettes, e-cigarettes and oil products took effect.

In a statement, the PSA said the slower increase in the overall prices of goods — compared to January’s 2.9 percent inflation rate — can be attributed to the gradual increase in prices of food and non-alcoholic beverages.

“The downtrend in the inflation was mainly brought about by the slower annual increase in the heavily-weighted food and non-alcoholic beverages index at 2.1 percent during the month,” PSA said in its report.

“In addition, annual increments decelerated in the indices of alcoholic beverages and tobacco at 18.2 percent; housing, water, electricity, gas, and other fuels, 1.7 percent; and transport, 1.8 percent,” it added.

But despite the slower increase in prices, higher annual growth rates were observed by PSA in the following food groups:

• Other cereals, flour, cereal preparation, bread, pasta and other bakery products, 2.7 percent;
• Milk, cheese, and eggs, 3.4 percent;
• Oils and fats, 1.0 percent;
• Fruits, 8.5 percent.

The same is true in the furniture and household industry.

“On the other hand, a higher annual mark-up of 3.5 percent was noted in the index of furnishing, household equipment and routine maintenance of the house. The rest of the commodity groups retained their previous month’s annual growth rates,” the PSA said.

The Department of Finance (DOF) said lower inflation is attributable to the continuous decline in the prices of rice, brought about by the Rice Tariffication law.

“The continuous decrease in the price of rice is a great relief for Filipinos, with its inflation rate of negative 6.26 percent, and a negative 0.60 percentage points contribution since the Rice Tariffication Law was signed in March 2019,” said the DOF in a statement in Filipino.

In the case of rice, PSA Assistant National Statistician Divina Gracia L. del Prado said the Filipino staple food posted its 10th straight month of deflation as prices fell 7.3 percent year-on-year even as February prices inched up 0.3 percent compared to January.

While COVID-19 continued to spread in and out of China last month, Del Prado said the outbreak did not significantly jack up prices of health supplies like rubbing alcohol, whose 2.5-percent inflation in February was the same as the previous month.

In the case of soap, prices rose 1.8 percent last month, slightly faster than the 1.7-percent increase last January.

However, last month’s lower transportation costs and fuel prices came on the back of declining global oil prices due to slower demand for international travel as well as supply chain disruptions in China, which affected manufacturing sectors across the globe.

The Philippines’ top source of imported capital and consumer goods last year was China, whose purchasing managers’ index (PMI)—a proxy for manufacturing growth—fell to a record-low 35.7 last month.

A March 4 report of the United Nations Conference on Trade and Development (Unctad) titled “Global trade impact of the Coronavirus (COVID-19) Epidemic” showed that the Philippines would be the 18th most affected economy by disruptions in Chinese production. It said at least 13 Philippine industries, with total worth of $300.4 million, could face export declines.

In case a shortage in supply of products happened alongside slower consumer spending on goods and services, prices would go up faster than usual.

“China’s PMI dive will mean lower supply of some goods, which could turn inflationary for select baskets, more notably the core,” said Security Bank chief economist Robert Dan J. Roces.

“Overall price growth can be offset if we consider non-core where we see lower fuel prices and ample supply of food. In sum, there could be inflationary tendencies but not too drastic as we saw in 2018,” he said.

Socioeconomic Planning Secretary Ernesto M. Pernia said the disruption in global supply chain amid China’s COVID-19 woes “will drive producers to raise local supply with fuel prices dropping and, hence, cost of production.”

“On the other hand, with Chinese supply scarcer, consumers will tend to shift to locally produced goods,” Pernia, who heads the state planning agency National Economic and Development Authority (Neda), told the Inquirer.

But Rizal Commercial Banking Corp. (RCBC) chief economist Michael L. Ricafort warned that “shift to higher-priced alternatives could either be passed on to consumers/end users that lead to higher prices and lead to some uptick in inflation, or absorbed by local companies/businesses that result in lower profits/narrower profit margins especially if the market is competitive.”

To address any inflationary risk, Pernia said “there’s need for better policy coordination between government and business sector” as “the ‘invisible hand’ of the market won’t be enough.”

Finance Undersecretary Gil S. Beltran told the Inquirer that “diversification is the solution to reduce risks and expand alternatives—diversifying products, sources of inputs, and market outlets so that you are not tied to just a few.”

Beltran, who is the Department of Finance’s (DOF) chief economist, said the Departments of Agriculture (DA) and of Trade and Industry (DTI) already have programs aimed at diversifying the Philippines’ trade partners.

“A policy mix is an option to temper the COVID-19 threat,” he said. “The government should be able to go for a two-pronged fiscal action with government able to accelerate its spending capability,” he added.

“Prudent monetary actions should also come into play,” Roces said.

Ricafort noted that “over the past year or so amid the lingering and escalating US-China trade war” some US firms had already reduced reliance on Chinese imports.

Edited by TSB