Higher food, fuel, transport and utility prices drove inflation to 3.1 percent in August, still within target but raising expectations of a policy response by monetary authorities.
The August result was up from 2.8 percent in July and the 1.8 percent recorded a year earlier. It brought year-to-date inflation to 3.1 percent, just above the midpoint of the government’s 2-4 percent target.
The Bangko Sentral ng Pilipinas (BSP) had 2.6-3.4 percent estimate for the month while the Department of Finance was spot on with a 3.1 percent projection.
Analysts polled by The Manila Times expected August inflation to average 2.9 percent.
Food a primary factor
The rise “was mainly due to the 3.5 percent growth of the heavily-weighted food and non-alcoholic beverages index,” the Philippine Statistics Authority (PSA) said in a statement.
Also contributing were higher annual increases for alcoholic beverages and tobacco (6.3 percent); housing, water, electricity, gas and other fuels (2.8 percent); transport (4.4 percent); communication (0.3 percent); recreation and culture (1.4 percent); and restaurant and miscellaneous goods and services (2.2 percent).
Core inflation was also higher, climbing to 3.0 percent from 2.8 percent in July and 2.0 percent in August last year.
Year-to-date core inflation settled at 2.8 percent.
The National Economic and Development Authority (NEDA) said food inflation rose to 3.7 percent from 3.4 percent in July, mainly due to faster price increases in vegetables, fish, corn, flour, bread, and other cereals.
“One cause was Typhoon Jolina last month, which affected agriculture in Central Luzon, particularly in Aurora,” Socioeconomic Planning Secretary Ernesto Pernia said.
Non-food inflation, meanwhile, rose to 2.7 percent from 2.4 due to faster price adjustments in transport, housing, recreation and culture, communication, restaurants, water, and electricity and gas.
Higher domestic petrol prices, particularly unleaded gasoline, diesel, kerosene, and liquefied petroleum gas, mainly caused higher inflation in the transport sector, it added.
The BSP said it was maintaining a manageable inflation outlook after taking the latest reading into consideration.
“Inflation is projected to remain close to the midpoint of the national government’s range target of 3.0 percent plus or minus 1.0 percentage point in 2017 to 2019,” central bank Governor Nestor Espenilla Jr. said.
At its August 10 monetary policy meeting, the Monetary Board revised its inflation forecast for 2017 to 3.2 percent from the previous outlook of 3.1 percent.
Espenilla said the inflation path would be supported by favorable outlook for domestic economic activity.
“The within-target path of inflation over the policy horizon provides the BSP with the flexibility to assess our monetary tools to enhance further our responsiveness to the evolving requirements of the economy,” he said.
Some international financial institutions see a fourth-quarter tightening in terms of key interest rates.
Singapore’s DBS said that without a surge in demand-pull inflationary pressures, full-year inflation will remain at about 3 percent and is likely to remain thereabouts in 2018 as well.
“That CPI (consumer price index) inflation is set to remain well within target does not necessarily mean that Bangko Sentral ng Pilipinas will continue to keep rates steady at current level,” it said.
DBS said two considerations would dominate the rate debate going forward. One is the strength of domestic demand and whether this can tolerate a slightly higher interest rate, and the other is how tolerant the central bank would be to a weaker currency given how the peso has been underperforming its regional counterparts this year.
“As the second-quarter 2017 GDP (gross domestic product) data has shown, however, the economy is still doing well even if a normalization is underway. With investment growth close to the double- digit, the central bank is likely to have few concerns about tightening at this juncture,” it said.
“That the BSP has been tolerant of a softer peso is presumably the main reason why the central bank has held back from raising rates so far this year. At this juncture, there is still a good chance to see a 25bps [basis points]rate hike by the year-end,” it added.
Australia’s ANZ Research, meanwhile, continues to expect upside risks to future inflation from pending tax reforms.
“However, with limited visibility on its final form and timing of implementation, we have yet to factor in the effects on our inflation forecasts. Even so, the intensifying imbalances due to rising credit growth, excessive activity in real estate and deterioration in the external balance require a tighter monetary policy stance,” ANZ Research economist Eugenia Victorino said.
ANZ still expects a 25bps hike by the end of 2017, she added.
Standard Chartered Bank’s Economist for Asia Chidu Narayanan agreed with the central bank that inflation would be edging up in 2018 on the government’s proposed tax increases.
Still, “we think that BSP should still be comfortable enough with inflation, to keep rates on hold through this year,” he said
While inflation is expected to remain within target despite a continuing acceleration, Pernia said “we should continue to closely monitor upside and downside risks.”
“The continuing surge in domestic petrol prices, coupled with depreciation in the peso-dollar rate, may exert upward pressures on inflation, leading to increases in the cost of electricity, gas, and other fuels in the near term,” he noted.
Externally, the disruption caused by hurricane Harvey in the United States might also temporarily impact global economic activity, dampen supplies of energy and push world oil prices up.
“The impact of hurricane Harvey on US oil production could exert upward pressures on world oil prices and could translate to higher domestic prices of petroleum. Any significant increases in domestic oil prices could push up transport and electricity inflation in the country in the near term,” Pernia said.
Nevertheless, he maintained that this could be offset by higher domestic productivity in agriculture and stable commodity prices with favorable weather conditions.