HIGHER prices of Liquefied Petroleum Gas (LPG) and food may have driven inflation to breach 9 percent in February, according to the Bangko Sentral ng Pilipinas (BSP).
In its month-ahead inflation forecast, BSP said inflation in February may fall within the range of 8.5 to 9.3 percent. LPG and food items, such as pork, fish, egg, and sugar would be the main driver of inflation.
In a hearing at the House of Representatives (HOR) on Tuesday, BSP Governor Felipe M. Medalla said price pressures are broadening as 196 items of the over 300 items being monitored to compute inflation have already registered price increases of above 4 percent.
“[Some] 123 of those [items] are food and beverages, so quite a bit. [Another is that] 66 of those are not, meaning inflation is beginning to spread to the rest of the economy. To put it bluntly, higher prices beget higher prices,” Medalla said in his speech in Congress on Tuesday.
Medalla said given what is happening to the economy, it is possible for inflation to remain elevated for 19 to 20 months, starting April of 2022.
Based on this, the 19th or 20th month would mean inflation is expected to remain elevated until May or June this year. Medalla earlier said inflation will slow to below 4 percent in the last quarter of the year.
Medalla said what the BSP is trying to prevent are second-round effects, especially the wage-price spiral which means if prices are high, wages are also high. This could also lead to a weaker peso, he added.
However, the BSP has been raising interest rates to prevent inflation from spreading further and causing second round effects from making inflation more permanent.
“We have to some extent been preventing what we call knock-on effects, second-order effects of the supply shocks on inflation,” Medalla said.
2nd-round effects felt
However, in a forum on Tuesday, IMF Resident Representative to the Philippines Ragnar Gudmundsson said signs of second-round effects have already been observed.
Gudmundsson also noted that increases in the minimum wage and fare hikes are already becoming imminent, causing inflation expectations to “edge up.”
He said one of the reasons inflation has been rising faster in the Philippines than in other economies is that the government did not regulate energy prices or lower taxes on fuel.
The government, he said, chose to implement targeted cash transfers, which Gudmundsson said was “a move that we fully support.”
He noted that inflation risks remain and they expect inflation to decline modestly in 2023 and reach the midpoint of the target band of the BSP of 3 percent in 2024.
“The risks to inflation exist and they could stem from higher commodity prices following China’s reopening Russia’s war in Ukraine, whether disturbances or higher increases in the context of wage bargaining discussions,” Gudmundsson said.
With this, the IMF still expects the BSP to continue tightening monetary policy this year. Nonetheless, Gudmundsson said the BSP has made a clear communication policy by providing forward guidance to all stakeholders.
This communicates the reasons for the tightening as well as the expectations on inflation through the BSP’s monetary policy report.
Image credits: Junpinzon | Dreamstime.com