January inflation spike catches market off guard, but it’s temporary, says BSP

MANILA, Philippines—The unexpected spike in January’s inflation rate, which was higher than government and private sector projections, was a temporary phenomenon which would not push the annual average past the official target, according to the central bank.

In a statement, the Bangko Sentral ng Pilipinas (BSP) said last month’s consumer price index of 4.2 percent was largely caused by supply-side pressures related to the African swine fever outbreak that pushed local pork prices higher.

Also contributing to the faster price increases were weather-related disturbances, higher global oil prices and the base effect of having come from a low inflation rate in the same period last year.

The regulator, which had relaxed monetary policy aggressively in 2020 in response to the pandemic-induced economic contraction, had expected a January inflation rate of 3.3–4.1 percent.

“The latest outturn is consistent with the BSP’s prevailing assessment of a transitory uptick in inflation in the first half of 2021,” the central bank said. “Average inflation is still seen to settle within the 2-4 percent target range over the policy horizon.”

“The projected uptrend in inflation is seen to be temporary,” it added, explaining that the sources of near-term price pressures are supply-side shocks that “should not require a monetary policy response unless they lead to further second-round effects.”

At the same time, supply-side shocks are best addressed by non-monetary interventions that ease domestic supply constraints, the central bank said, as it pointed to direct measures being undertaken by the national government to enhance the availability of affected commodities.

Even private sector economists who were expecting faster price increases were caught off guard by the January data.

“We had signalled the possibility of ‘slowflation’—a period of fragile economic growth in an environment of accelerating prices—but we had not expected it to show up this quickly,” ING Bank Manila senior economist Nicholas Mapa said.

He noted that last month’s inflation rate marked the first time the consumer price index exceeded the central bank’s forecast since 2018 when inflation surged to 6.7%, “with the usual suspects of food and transport inflation striking again.”

“Governor Diokno is aware that monetary policy is almost powerless to address supply side shocks such as shortages of pork in the market,” he said.

“Thus, it looks like BSP is willing to accommodate the so-called first round effects and only look to act should signs of second round effects such as wage or transport fare adjustments become apparent,” Mapa said.

Mapa added that the BSP will likely opt to exhaust its energies in dealing with matters on the monetary front while exhorting fiscal authorities to carry out measures to mitigate price spikes, such as Duterte’s price caps and meat importation, and bolster economic momentum via target stimulus spending.

The Monetary Board will consider recent price developments, particularly in global commodity markets, along with the fourth quarter 2020 gross domestic product outturn in its assessment of the monetary policy stance at its meeting Feb. 11, 2020.

“The BSP stands ready to deploy its full arsenal of instruments as needed in fulfillment of its mandate to maintain price and financial stability conducive to sustainable economic growth,” the agency said.

TSB