Consumer prices, which grew 4.5 percent in May are now seen almost certain to hit the upper boundary of the government’s 3-percent to 5-percent target band, despite central bank reassurances that recent spikes in food and transport costs were due to temporary rather than systemic factors.
A number of analysts surveyed by The Manila Times forecast that inflation in the third quarter will be near the 5 percent upper limit set for this year, largely driven by those same food price pressures.
No inflationary cycle – BSP
Systemic factors, or second-round effects, are cyclic increases in wages and prices caused by an initial higher-than-expected inflation rate, were noted as a concern by the Bangko Sentral ng Pilipinas (BSP) in the wake of the May inflation print, but so far the central bank does not see them happening.
“We have not observed widespread second-round effects from the recent price pressures.
The observed increases in the prices of some food items of late have been due largely to supply disruptions,” BSP Governor Amando Tetangco Jr. said in a text message to reporters late Thursday.
Tetangco assured that relevant government agencies are addressing supply bottlenecks and this effort is expected to help moderate the upward pull on prices.
“Meanwhile, the jeepney fare hike is limited to a few regions,” he said, discounting the impact of the recent fare hike to inflation. On May 30, the Land Transportation Franchising and Regulatory Board decided to raise the P8 standard public utility jeepneys fare by 50 centavos, which took effect on June 14.
Food, housing lead drivers
Despite the BSP’s cautious optimism in dismissing food price rises as largely temporary, the analysts polled by the Times believe inflation will be largely driven by higher food, oil and housing prices.
“Negative supply shocks from Typhoon Haiyan (Yolanda) are still lingering, causing food and housing prices to increase. Coupled with this, higher temperatures caused land-grown vegetable prices to rise, pushing food prices even higher. With the impact of the positive output gap still filtering through and food and energy prices expected to spike over the summer, headline inflation will approach the upper end of the BSP’s 2014 3-5 percent target range,” HSBC Global Research said in a research note.
Accord Capital Equities’ Justino Calaycay aired a similar view: “As for inflation, we thought at the beginning of the year that it would stay close to the lower end of the 3 percent to 5 percent band defined by the government. With current levels still within the band, but admittedly closer to the upper end, and given the recent increases in transportation fares, vegetables and other consumer staples (including rice) plus the brewing tensions in Iraq which may cause a supply squeeze, ergo higher oil prices and more inflation, we think the lower end of the band should be raised to around 4 percent while keeping the upper limit steady.”
BSP holds course, cautiously
For its part, the BSP said that current inflation expectations remain within the 3 percent to 5 percent target but increasing global oil prices remain a threat as tensions in Iraq, one of the top oil-exporting country, escalates.
“This is as a key source of risk to inflation as oil represents a major input cost in the production of most commodities,” BSP’s Tetangco said.
Following May’s unexpected higher inflation result, the BSP revised its full-year inflation target for 2014 upward from 4.3 percent to 4.4 percent, taking into consideration possible weather conditions that could push food prices still higher later in the year, and several pending petitions for upward adjustments in power rates.
WITH BEN D. KRITZ