Inflation rose to a five-month high of 3.4 percent in September, the government reported on Thursday, again raising expectations of monetary policy tightening before the end of the year.

The result, attributed to higher food prices, picked up from August’s 3.1 percent and the 2.3 percent recorded a year earlier. It brought year-to-date inflation to 3.1 percent, just above the midpoint of the government’s 2.0 percent to 4.0 percent target.

The Finance department accurately predicted the outcome while the Bangko Sentral ng Pilipinas (BSP) had a 2.8-percent to 3.6 percent estimate for the month.

The last time the country’s inflation rate exceeded 3.4 percent was in November 2014 when it hit 3.7 percent.

Food prices

Food inflation rose to 3.6 percent from the previous month’s 3.5 percent, the National Economic and Development Authority (NEDA) noted, particularly for corn, fish, vegetables, cereals, flour, bread, pasta, and oils and fats.

“The accelerated adjustments in food … can be partly traced to the lingering effects of typhoon Jolina and tropical depression Maring, which caused damage to agriculture and fisheries in the CALABARZON region, particularly Quezon province,” Socioeconomic Planning Secretary Ernesto Pernia said in a statement.

The Philippine Statistics Authority (PSA) said faster price growth for alcoholic beverages and tobacco; clothing and footwear; housing, water, electricity, gas and other fuels; transport; and restaurants and miscellaneous goods and services also contributed higher inflation.

Core inflation, which strips out volatile food and fuel prices, was also higher in September, climbing to 3.3 percent from 3 percent the previous month and 2.3 percent a year earlier.

Year-to-date core inflation settled at 2.9 percent, the PSA said.

Still manageable

Commenting on the news, the Bangko Sentral said it was maintaining its view that inflation remained manageable.

“Inflation is projected to settle within the national government’s target range of 3 percent plus or minus one percentage point in 2017 to 2019,” central bank Governor Nestor Espenilla Jr. said.

The BSP’s policymaking Monetary Board last month retained its 2017 inflation forecast at 3.2 percent.

Domestic economic activity, sufficient liquidity and well-anchored inflation expectations continue to support current policy settings, Espenilla said.

“However, BSP will continue to closely monitor emerging economic and financial developments to determine scope for further refinement of policy instruments,” he added.

Pernia concurred with the BSP’s assessment, saying “We are still positive that inflation for full year 2017 will settle within the government’s target … However, we still face several risks to inflation such as higher domestic fuel prices, weaker peso, and a minimum wage hike that will be effective today (Thursday) in the National Capital Region.”

“The government needs to closely monitor movements in domestic fuel prices and utility rates. Faster inflation in these sectors will negatively impact the spending capacity of lower-income households for basic necessities like food and important services such as health and education,” he added.

Tightening possible

Some international financial institutions said monetary authorities could tighten key interest rates by the fourth quarter of the year or early 2018.

Singapore’s DBS said it was starting to see signs that a slight upward bias had resurfaced.

“How fast and how much higher inflation will go depends on food prices going forward. As previously discussed, food inflation has moderated to the current 3.5 percent pace, down from 4 percent at the start of the year.

Another turn in food prices will definitely mean higher CPI (consumer price index) inflation ahead,” it said.

Overall inflation, however, is unlikely to go anywhere near 4 percent.

“Price expectations are likely to continue inching higher going into 2018, particularly as sentiment on the peso remaining weak,” DBS said.

While softer than expected inflation in the middle of the year had provided some room for keeping rates steady, upward risks could now prompt the BSP to turn hawkish, the bank said, adding that a 25 basis points rate hike is likely either in November or December.

Australia’s ANZ Research also said that upside risks to its 2017 and 2018 inflation forecasts remained.

“On top of the rise in fuel costs and the expected knock on effect of the tax reform, the government recently approved taxi fare hikes which will take effect as soon as all taxi meters have transitioned to the new fare formula,” ANZ Research economist Eugenia Victorino said.

Alongside higher inflation, the combined imbalances of elevated credit growth, excessive real estate activity and a deterioration in the current account are deepening, she said.

“Overall, this strengthens the case for a tighter monetary policy and our conviction around policy rate hikes of 50bps (cumulative) in first-quarter 2018,” Victorino said.

ING Bank Manila, meanwhile, raised its 2017 inflation forecast to 3.2 percent, also on the basis of upside risks.

“The upside inflation surprise may lead to BSP’s need to turn more cautious if inflation reports for October and November remain on an uptrend,” senior economist Joey Cuyegkeng said.

Cuyegkeng said September inflation, together with acceleration in other monetary indicators, may presage overheating.

With this, he said the Monetary Board could need to implement pre-emptive tightening during its December policy meeting.

“This would also address the need to possibly re-anchor inflation expectations while preserving interest rate differentials (in the wake of a likely Fed rate hike),” the economist added.