BSP brushes off August inflation spike, sees prices normalizing in 2022

MANILA, Philippines—The central bank on Tuesday (Sept. 7) brushed off the unexpected spike in the inflation rate for August, saying the pace of price increases for basic goods and services will normalize soon.

In a statement, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the latest outturn is “consistent with the BSP’s assessment that inflation could settle close to the high end of the target range in the near term before decelerating back to within the target range by year end.”

“In 2022-2023, inflation will likely fall towards the midpoint of the target, supported by the continued and timely implementation of non-monetary measures and reforms to address directly supply-side pressures on key food items,” he said in a mobile phone message to reporters.

The government announced that consumer price index for August stood at 4.9 percent, which was the upper end of the central bank’s 4.1-4.9 percent forecast range for the month.

The surprise surge was driven largely by a 6.5 percent spike in food cost due to crop damage from recent storms, since food component accounts for roughly 32 percent of the inflation basket, and contributed more than 53 percent of the headline number.

Despite this, Diokno said the risks to the inflation outlook remain “broadly balanced” over the policy horizon.

“The uptick in international commodity prices due to supply-chain bottlenecks and the recovery in global demand could lend upside pressures on inflation,” he warned, adding that the emergence of new coronavirus variants, leading to stricter lockdown measures and delayed reopening of the economy, is seen to pose downside risks to both aggregate demand and inflation.

ING Bank Manila senior economist Nicholas Mapa said the monetary regulator will likely look past this price spike as it continues to vow support for the fledgling economic recovery.

“Elevated inflation will likely sap some momentum from household consumption in the near term,” he said. “Consumption drives roughly 70 percent of total economic activity in the Philippines.”

He explained that a BSP rate hike will not likely be able to address the current food price spike or make imported energy cheaper.

“Thus, we fully expect BSP to retain its accommodative stance all the more with the economy still in the midst of a recession,” Mapa said. “Furthermore, we doubt that BSP will continue to craft policy that benefits the Philippines and refrain from conducting monetary policy via proxy that would entail mimicking rate hikes of other nations around the world.”

The ING economist said he expected elevated inflation and the recently recorded 6.9 percent unemployment level to weigh on Philippine economic recovery. He also expects full year gross domestic product growth to slide to 3.8 percent, below the official government estimate of 4-5 percent.

“Meanwhile, the peso will likely remain pressured in the near term as BSP signals it will not likely adjust policy rates to combat this current spike in prices,” he added.

TSB