Inflation seen to get ‘much hotter’ before cooling down by mid-2022

The International Monetary Fund (IMF) has flagged potential “inflation scares” in both developed and developing countries like the Philippines as the global economy recovers.

“Headline inflation is projected to peak in the final months of 2021, with inflation expected back to prepandemic levels by mid-2022 for both advanced economies and emerging markets country groups, and with risks tilted to the upside,” the IMF said in Chapter 2 of its World Economic Outlook (WEO) which was released on Wednesday ahead of the full WEO report’s release next week.

In a curtain-raiser speech ahead of the IMF annual meeting next week, IMF managing director Kristalina Georgieva said inflation was among the “stones in our shoes” or the biggest obstacles to a balanced global economic recovery.

“While we do expect price pressures to subside in most countries in 2022, in some emerging and developing economies, price pressures are expected to persist. One particular concern with inflation is the rise in global food prices—up by more than 30 percent over the past year,” Georgieva said, adding that together with the rising energy prices, this was putting further pressure on poorer families.

Tighter financial condition

Inflation prospects, generally, remain highly uncertain, she said.

“A more sustained increase in inflation expectations could cause a rapid rise in interest rates, and a sharp tightening of financial conditions,” she said, stressing that this would pose a particular challenge for emerging and developing economies with high debt levels.

In an Oct. 5 report, Goldman Sachs Economics Research said it was expecting higher core inflation—price hikes excluding volatile items like food and energy—in the Philippines next year.

“Our recent analysis of risks to core inflation suggests that the balance of risks is skewed in a hawkish direction, as rising import costs could push core inflation toward the upper end of policymaker comfort zones faster than we currently forecast,” Goldman Sachs said.

As for headline inflation, Goldman Sachs expects a “slow return” to the Bangko Sentral ng Pilipinas’ (BSP) 2-4 percent target range from the January to September average of 4.5 percent.

“[With] slow vaccination progress likely to weigh on activity through early next year, we expect the BSP to be patient in normalizing policy settings, keeping the policy rate on hold until late 2022,” it said.

Keeping policy rate on hold

Pantheon Macroeconomics senior Asia economist Miguel Chanco said in a report on Wednesday that inflation in the Philippines “will get much hotter before it starts to cool in a sustainable way, from the middle of next year.”

Chanco said the rate of increase in prices of basic commodities could peak to 6 percent in November, where it was likely to stay until the first few months of 2022.

Despite a slightly lower 4.8 percent inflation rate in September due to slower transport and food price increases, he said a “reacceleration in inflation still seems inevitable as the country continues to import more of the spike in global food inflation earlier this year, with a six-month delay.”

Chanco is projecting an average inflation rate of 4.8 percent this year and 4.2 percent next year.