May inflation rate heats up to 42-month high of 5.4%

MANILA, Philippines — Expectations that the Monetary Board will again raise the policy interest rate when it meets on June 23 are firming up as the inflation rate in May accelerated to a 42-month-high of 5.4 percent.

This brought the five-month average to 4.1 percent, breaching the upper end of the government’s 2 to 4 percent target range. And with inflation expected to further heat up instead of cool down in the remainder of this year, analysts expect as much as a 50-basis point (bp) hike.

After keeping the Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing rate at a record low of 2 percent since November 2020, the Monetary Board switched to a tightening cycle with a 25-bps increase in their previous meeting in May.

“Going forward, with inflation pressure to continue in the next couple of months … We expect the BSP to continue its tightening cycle with consecutive 25-bp hikes at each meeting thereafter through the first quarter of 2023, for a cumulative hike of another 125 bps this year, and 50 bps of hikes next year,” investment banking giant GoldmanSachs said in a commentary.

This means that when the Monetary Board meets in March 2023, they would have doubled the policy rate to 4 percent.

No slowing down

Jun Neri, lead economist at the Bank of the Philippine Islands, said inflation was not expected to slow down from this month until February 2023.

Neri said inflation might keep rising considering that global prices of petroleum, fertilizer, and cereals like corn are rising. He said rising inflation will “start to only really kick in [in the second half of 2022] as inventories of importers are already drawn down.”

ING Bank senior Philippines economist Nicholas Mapa said they now expect policy rate hikes this year to reach a cumulative 125 bps, instead of their previous forecast of 75 bps.

“With price pressures likely to persist, expect [the BSP] to retain a hawkish stance for the rest of the year,” Mapa said. He added that while they have penciled in a 25-bps hike this June, a 50-bps hike was also likely.

For Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco, food and transport inflation “will soon peak, if they haven’t done so already, and are likely to see a sustained slowdown in the second half of this year, even if global oil prices remain sticky.”

As such, “we continue to believe that the BSP’s second rate hike this year, which we expect to take place this month, probably will be its last for 2022,” Chanco said.

According to BSP Governor Benjamin Diokno, inflation is projected to settle above the government’s target range this year and next, averaging “near the upper band of the target range for 2023.”

“The upside pressures emanate from the potential impact of higher oil prices, including on transport fares, as well as the continued shortage in domestic pork and fish supply,” Diokno said.

For Socioeconomic Planning Secretary Karl Kendrick Chua, President Duterte’s recent order extending lower tariffs on pork and rice while reducing duties slapped on corn and coal to allow more imports would augment food and energy supply in a bid to ease inflation pressures.

The year-on-year rate of increase in prices of basic commodities last month was the highest since the 6.1 percent posted in November 2018, when the country grappled with high rice prices, the latest Philippine Statistics Authority (PSA) data showed.

Prices of food and non-alcoholic beverages rose 4.9 percent year-on-year last May, faster than the 3.8-percent increase in April. Food inflation alone accelerated to 5.2 percent from April’s 4 percent, due to quicker price increases among fish, meat, as well as vegetables.

Transport costs also jumped 14.6 percent year-on-year, outpacing the 13-percent climb in April. In particular, gasoline prices climbed 47.2 percent year-on-year, while diesel prices soared 86.2 percent last month.

National Statistician Dennis Mapa said rising transport inflation — mainly due to skyrocketing oil prices wrought by Russia’s invasion of Ukraine — had been gradually spilling over to the food basket — by way of delivery and logistics costs — during the past few months.

While there had been ample food supply, Mapa for instance noted that supply-chain disruptions, especially in the case of flour, made bread more costly.

“Corn inflation remained high at 24.4 percent due to limited global supply. In contrast, rice inflation remained stable and decelerated to 1.5 percent amid the implementation of the Rice Tariffication Law and Executive Order (EO) No. 135, which diversified the country’s rice sources,” the state planning agency National Economic and Development Authority (Neda) said in a statement.

“Private transport inflation accelerated to 47.9 percent from 44.4 percent, while public transport remained muted at 1.6 percent due to fare regulation. Household inflation for electricity, gas, and other fuels also remained high even with a slight deceleration at 18.8 percent from 19.9 percent,” Neda added.

Besides food and oil, Mapa also pointed to faster price increases in alcoholic beverages and tobacco, as well as utilities like electricity and LPG costs.

Inflation outside Metro Manila picked up to a faster 5.5 percent last May from April’s 5.1 percent; price hikes in the National Capital Region (NCR) were slower at 4.7 percent year-on-year although also up from 4.4 percent in April.

“The Russia-Ukraine conflict has disrupted the global supply chain and elevated commodity prices, particularly for fuel. We have seen how a single crisis can set us back, so the Duterte administration has pursued both short- and long-term interventions to increase the resilience of our domestic economy against external shocks,” said Neda chief Chua.

“To help cushion the impact of higher fuel prices on the most vulnerable, the government has increased the total budget for targeted subsidies to P6.1 billion. As of June 1, 2022, over 180,000 public utility vehicle (PUV) drivers and operators have received their P6,500 fuel subsidy under the ‘pantawid pasada’ program. At the same time, more than 158,000 farmers and fisherfolk are also set to receive P3,000 as fuel discounts,” Chua said.

“Moreover, to facilitate the entry of more goods at lower prices, President Duterte issued EO 171 to modify tariff rates for pork, corn, rice, and coal. EO 171 extends the validity of EO 134 and 135, which lowered the most favored nation (MFN) tariff rates for the importation of pork and rice. The EO also reduces MFN tariff rates for corn to 5 percent in-quota and 15 percent out-quota, citing that corn accounts for more than 50 percent of the total production cost of large-scale broiler and swine farms,” Chua added.

“To help maintain or lower electricity prices, EO 171 also temporarily eliminates the 7-percent MFN import tariff rate on coal as it is an important raw material in the generation of electricity. These temporary measures are expected to increase our food supply and ease higher electricity costs in the short-term,” according to Chua.

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