Headline inflation climbed to 4.9 percent year-on-year in July, hitting its highest rate since October 2011 in an acceleration that is expected to spark another tightening move by the central bank.
The new rate nearly doubled its 2.5 percent pace recorded in July 2013 and regained pace after slowing to 4.4 percent in June from 4.5 percent in May, data from the Philippine Statistics Authority (PSA) showed on Tuesday. The latest inflation figure was the highest since nearly three years ago, when it stood at 5.2 percent in October 2011.
Prices of heavily weighted food and non-alcoholic beverages jumped and fueled the rise in the benchmark consumer price index (CPI) in the month under review.
Inflation in the year-to-date reached 4.3 percent, still within the government’s 3 percent to 5 percent full-year target range for 2014. But even when the rate eased in June from May, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) hiked its benchmark interest rates—the overnight borrowing and lending facilities— by 25 basis points each.
BSP Governor Amando Tetangco Jr. said the monetary authority will continue to monitor developments and calibrate monetary policy, as needed, to help guide inflation expectations and address second-round effects that may develop.
“Even as we have already taken a series of policy actions to address liquidity growth and its attendant financial stability risks and to temper inflation expectations, we will not hesitate to use any of our tools to help guide the market to keep inflation within the target range over the policy horizon,” he said in a text message sent to reporters.
Food prices to rise further
The food index in Metro Manila rose to 8.2 percent in July from 7.8 percent in June, and rallied five times the 1.6 percent pace recorded a year earlier.
“This confirms our assessment that the economy could see more near-term increases in select food prices, partly due to weather-related supply concerns,” Tetangco said.
The BSP Governor stressed that the central bank is closely coordinating with other government agencies to develop solutions to the supply constraints.
In areas outside Metro Manila, food-alone inflation hit 8.8 percent in July, up from 7.8 percent the month before and significantly higher than the year-on-year rate of 2.4 percent.
“This was primarily brought about by the upward price adjustments in the heavily weighted food items such as rice, fruits, vegetables, meat, fish, milk and eggs. Price mark-ups in gasoline nationwide and higher prices in medicines and selected items for personal care in many regions were also recorded during the month,” the statement accompanying the data said.
Faster annual hikes in the indices of housing, water, electricity, gas and other fuels; health; transport; recreation and culture; and education were also noted by the PSA.
New interest rate hikes expected
Analysts believe the spike in inflation would trigger another round of interest rate hikes by the central bank as part of its policy measures to manage the risks of rising prices.
“The [July] result means that there is more impetus for additional rate hikes going forward,” Jeff Ng, economist at Standard Chartered Bank, said.
Economists at the Bank of the Philippine Islands (BPI) see it likely that the surprise headline number for July will lead to an even faster pace of 5 percent in August.
“These higher-than-expected prints for July and August will be compelling for the monetary authorities, which likely lead them to hike policy rates even more aggressively on their 11 September [meeting],” the economists said in a commentary after the official data’s release.
“Our team is convinced that the BSP will continue to give more importance to meeting its primary objective of price stability over developments in the growth front,” they said. Banking giant HSBC also expects the BSP to take a more aggressive stance when it meets next on September 11.
Before the Monetary Board holds its last meeting for the third quarter of this year, “August inflation data will be released on 5 September, which we believe will stay elevated,” it said in a note to clients.
Govt confident of full-year target
Despite the higher rate of inflation in July, the National Economic and Development Authority (NEDA) said headline inflation for the full year will still average about 4.4 percent.
Economic Planning Secretary and NEDA Director General Arsenio Balisacan attributed the July inflation print on rice prices, which remained at high levels during the month as “supply tightness continued to persist in the market.”
NEDA data showed that rice prices increased year-on-year by 14.4 percent in July, accelerating from 13.6 percent posted the previous month, while corn prices rose by 7.8 percent in the same period compared with the 7.6 percent registered a month earlier.
But Balisacan said the tightness in rice supply, which has been driving up rice prices, is expected to come to an end soon as supply has already been augmented by rice imports.
Precisely the Monetary Board’s recent move to raise its key policy rates is expected to put a brake on potential price pressures, he added.
Balisacan reiterated the importance of ensuring that the necessary policies that are supportive of manageable inflation are in place.
“Given the potential upside pressures linked to possible increases in food and oil prices and pending petitions for adjustments in utility rates, short-term interventions may focus on ensuring supply adequacy by allowing sufficient levels of imports to augment local production of rice and other key commodities,” he said.
Balisacan highlighted the government’s efforts to speed up the implementation of programs intended to increase the productivity of agriculture and food processing industries.
The NEDA chief said improving agricultural productivity is needed to ensure adequate local supply of food, bringing down prices and increasing farmers’ incomes.