Q4 inflation picks up to 2.5% – BSP

0

Price pressures ahead to stay manageable

Advertisements

Headline inflation accelerated in the fourth quarter of 2016 to 2.5 percent from 2 percent in the third quarter, the central bank said on Friday, warning that the rate faced further upward pressures from pending adjustments to electricity rates and tax reform measures.

Despite the pick-up in pace and inflationary pressures ahead, however, the rise in prices will remain manageable over its policy horizon, the Bangko Sentral ng Pilipinas (BPS) said in its Fourth Quarter 2016 Inflation Report.

While the average inflation rate settled at 1.8 percent from the whole of 2016 from 1.4 percent in 2015, it was below the government target of 3.0 percent ± 1.0 percentage point.

“Both food and non-food commodities registered higher price increases during the quarter, driven by seasonal demand, uptick in domestic petroleum prices and weather-related supply disruptions,” the BSP report said.

Food inflation was higher by 3.6 percent in the fourth quarter from 2.8 percent in the third quarter as prices of most food items increased with the onset of the holiday season.

“Furthermore, recent weather disturbances (including typhoons) that visited the country continued to have an adverse impact on the supply of certain food products. In particular, price markups were noted for food commodities such as, fish, fruits, vegetables as well as oils and fats,” the BSP noted.

Rice prices also increased during the quarter due mainly to the decline in supply from the major rice-producing regions towards the end of harvest season, it added.

Non-food inflation was faster at 1.5 percent in the fourth quarter from 1.2 percent in the previous quarter owing to price increases in oil-related commodity groups.

In particular, transport inflation went up mainly on increases in domestic prices of petroleum products—influenced largely by rising imported crude oil prices.

“At the same time, transport services increased due to higher air and sea travel fares especially during the holiday season. Meanwhile, electricity, gas, and other fuels inflation remained negative in Q4 2016, albeit less negative compared to the previous quarter,” the central bank noted.

Outlook

The latest BSP baseline forecast shows inflation is likely to return to a path consistent with the 2-percent to 4-percent target in 2017 to 2018.

“While inflation is expected to continue to gather momentum in the year ahead, inflationary pressures are seen [remaining]manageable over the policy horizon given well-contained inflation expectations,” according to the report.

The central bank said the balance of risks surrounding the inflation outlook remains tilted to the upside, owing in part to pending petitions for adjustments in electricity rates and the initial impact of the national government’s broad fiscal reform program.

“The pending petitions of Meralco [Manila Electric Co.] and PSALM [Power Sector Assets and Liabilities Management Corp.] continue to represent upside risks to inflation. Included in the Meralco petitions are the December 2013 rate adjustment, which is still under the temporary restraining order of the Supreme Court, and the P0.65 per kWh adjustment for the January 2014 billing period that is subject to the Energy Regulatory Commission’s (ERC) approval. PSALM’s petitions meanwhile cover adjustments for fuel and foreign exchange costs,” the report noted.

The fiscal reforms such as the lower personal income tax except for the highest income earners, the expansion of the value-added tax (VAT) base, the increase in excise taxes of petroleum products, and higher excise tax on automobiles also represent upside risk to inflation, it added.

“With respect to the impact of the possible tax reform package we should recall that the package will be done in six stages. And I think for the first package, the two important initiatives there would be excise tax on fuel and excise tax on automobile. Definitely there will be impact on inflation,” BSP Deputy Governor Diwa Guinigundo said in a press briefing on Friday.

Preliminary estimates by the BSP indicate that first package of reforms—once implemented—would contribute 0.4 to 0.5 percentage points for 2017 and 1 percentage point for 2018.

“So basically if that’s the case then we will be close to the upper end of the target. And therefore we need to assess how monetary policy can respond to these changes,” he said.

“But remember this is a one-off development. That’s one. And two, unless we see some signs, particularly on petroleum products, moving on into inflation expectations or second round effects monetary policy will not be commissioned to deal with this inflation pressure coming from the tax reform package,” he said.

The report said, however, that lingering uncertainty in global economic prospects continues to pose a key downside risk to the inflation outlook.

“Despite the continued strength of the domestic economy, the impact of US President-elect Donald Trump’s proposed policies on global trade, the uncertainties over Brexit negotiations, and the continued fragility in the EU [European Union]’s banking system as well as the potentially disruptive rebalancing in China due to its property sector could lead to more volatile financial markets and slower world economic growth,” it said.

Sluggish world economic activity could put additional downward pressures on international commodity prices, it added.

Share.
loading...
Loading...

Please follow our commenting guidelines.

Comments are closed.