The country’s headline inflation has eased from a 32-month high, but the central bank said it still stands ready to adjust policy levers to keep a lid on commodity price increases driven by supply constraints.
The rate of inflation slowed to 4.4 percent in June from 4.5 percent in May, which was the highest since November 2011. But the rise in June this year was still significantly higher than the 2.7 percent recorded in June 2013, data from the Philippine Statistics Authority (PSA) showed on Friday.
Behind the month-on-month slowdown was an easing in the prices of alcoholic beverages and tobacco; housing, water, electricity, gas and other fuels; transport; and recreation and culture.
The easing of inflation in these key indices, however, only had a minor effect in reducing the overall inflation rate, as the PSA acknowledged that prices of the heavily weighted food items such as rice, garlic, sugar, pork, chicken, eggs and ginger continued to rise.
PSA data showed the index for food alone in the National Capital Region jumped to 7.8 percent in June, a sharp increase from 6.9 percent in May, and nearly four times higher than the 2.0 percent recorded a year earlier. In areas outside the NCR, food-alone inflation also hit 7.8 percent in June, up from 7.1 percent the month before and significantly higher than the year-on-year rate of 2.4 percent.
“Tuition fee hikes at the opening of classes for the current school year were also noted in many provinces. These were, however, tempered by the lower charges in electricity rates and price reductions in liquefied petroleum gas, kerosene and firewood in the National Capital Region and in many provinces,” the statement accompanying the data said.
Within target, but risks remain
Year-to-date inflation settled at 4.2 percent, still within the 3-percent to 5-percent full-year target of the government for 2014.
The inflation rate turnout for the month also stayed within the 4.1 percent to 5 percent range the central bank forecast for June, and was closer to the lower boundary of the range, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said on Friday.
“Nevertheless, we continue to be mindful of the risks to achieving the inflation target that remain, including second-round effects that may ensue from supply-driven commodity price increases,” Tetangco said in a text message sent to reporters. Tetangco had earlier partly attributed May’s higher inflation rate rate to supply bottlenecks in some key commodities such as rice.
Tetangco said that the monetary authority will also be watchful for shifts in investor preferences and changes in global growth dynamics due to advanced economies’ monetary policy, which may lead to volatilities in the foreign exchange and other financial markets.
“BSP will adjust policy levers as appropriate to keep a lid on inflation and ensure financial stability pressures are in check,” he said.
At its last policy meeting on June 19 the Monetary Board kept its key interest rates steady, despite expectations by most analysts that benchmark rates will eventually have to be raised to curb inflation.
In a commentary, banking giant HSBC said the latest inflation figure indicated that some negative supply shocks from Typhoon Haiyan (Yolanda) are dissipating, including housing prices.
According to the PSA data, the housing, water, electricity, gas and other fuels index recorded an inflation of 2.3 percent in June from 3.7 percent in May.
“Headline inflation for June decelerated slightly on lower housing costs. But food prices remained elevated, reflecting supply-side constraints,” Trinh Nguyen, HSBC Asian economist said. Nguyen added that food inflation is still elevated as it rose a staggering 7.4 percent year-on-year in June, and will continue to increase in the coming months.
Closing in on upper range
“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-percent to 5-percent target range,” the economist said.
Meanwhile, Bank of the Philippine Islands (BPI) said prices of rice, garlic, vegetables and sugar all increased at a faster pace as persistent higher prices of food commodities have fed inflation expectations.
BPI’s lead economist Emilio Neri Jr. said the month of June also saw the first salvo of second-round effects in the form of a 50-centavo increase in jeepney fares and the Commission on Higher Education-approved tuition hikes for more than 200 educational institutions.
He added that the sharp fall in electricity prices, however, was enough to counter persistent food price pressures (rice, garlic and sugar) and slow the overall pace of price increases.
“The 4.4 percent year-on-year inflation print, while lower than consensus estimates, will continue to tilt the inflation path towards a higher trajectory for 2015 and may still threaten the BSP’s inflation target of 2 percent to 4 percent in the coming year,” Neri said.
On the other hand, the National Economic and Development Authority (NEDA) said that the inflation rate of 4.4 percent in June supported a manageable and within-target outlook for the year.
“NEDA expects that the country’s headline inflation rate for full-year 2014 will
average around 4.4 percent, still within the Development Budget Coordination Committee’s target of 3 percent to 5 percent,” Economic Planning Secretary Arsenio Balisacan said in a statement on Friday.
But despite the outlook of manageable and within-target inflation growth for 2014, Balisacan said there are risks along the way such as weather disturbances, pests and diseases affecting agricultural output, pending petitions for adjustments in utility rates, and the still-elevated growth of domestic liquidity.
‘Truck ban needs review’
“In the short term, interventions can focus on ensuring supply adequacy by allowing sufficient levels of imports to augment local production of rice and other key commodities. The truck ban policy also needs to be reviewed, along with other measures needed to improve the efficiency of distribution systems,” said Balisacan, who is also NEDA Director-General.
Also, given the increasing probability of El Niño beginning the third quarter of 2014, Balisacan reiterated the need to intensify government programs to curb the adverse impact of a prolonged dry spell.
“In the medium term, implementation of programs to increase the productivity of agriculture and the food processing industries need to be accelerated. The wider use of appropriate technology, especially in production areas vulnerable to drought and floods, also needs to be encouraged,” he said.