Government policies touted for slowing inflation

FOOD prices will continue to stabilize in the coming months due to policies of the Duterte administration, the National Economic and Development Authority (Neda) said on Tuesday. This, after the statistics agency reported slowing inflation in June—development that the central bank deemed within the range of their expectations that inflation will eventually move back to within target range toward year-end.

Socioeconomic Planning Secretary Karl Kendrick T. Chua issued a statement after the Philippine Statistics Authority (PSA) reported that inflation slowed to 4.1 percent in June 2021.

This was slower than the 4.5 percent inflation recorded in May 2021 but still higher than the 2.5 percent posted in June 2020.

“Recent policies to increase food supply are beginning to bring down inflation. Rest assured that the government will continue to address constraints in the availability and movement of goods amid quarantine restrictions to ensure that households have access to affordable food,” Chua said.

In particular, the Neda sees meat and rice prices further declining in the second half even as the rainy season has started.

The country is usually visited by strong typhoons in the second semester, causing supply bottlenecks. Last month, the Philippine Atmospheric, Geophysical and Astronomical Services Administration (Pagasa) said the rainy season officially began when tropical cyclone Dante entered the Philippine Area of Responsibility.

Chua said Executive Orders (EO) 133 and 134 helped slow the increase in meat prices to 19.2 percent in June 2021 from 22.1 percent in April and May.

EO 133 increased the minimum access volume (MAV) for imported pork while EO 134 imposed a temporary reduction of pork tariffs.

“The declining meat inflation points to the positive effects of Executive Orders [EO] 133 and 134.   These are expected to further bring down meat prices during the second half of the year,” Chua said.

On rice prices, Chua said the issuance of EO 135 to temporarily reduce the most favored nation (MFN) tariff rates on imported rice to 35 percent from 40-50 percent helped keep rice prices low.

PSA data showed rice prices contracted 1.1 percent in June 2021, a sharper decline compared to the contraction of 0.8 percent in May 2021.

Chua said EO 135 allowed the country to diversify its market sources, expand rice supply, and further bring down rice prices.

“In managing inflation, our priority will be to continue improving our domestic production and providing needed support to our farmers and producers. When necessary, we will augment supply with importation to keep prices stable and to guarantee food security. This balancing act will help us better manage the impact of inflation on the people and the economy,” Chua said.

BSP’s take

According to BSP Governor Benjamin Diokno risks to inflation remain broadly balanced in the policy horizon.

“The latest inflation number is consistent with expectations that inflation could remain above target in the near-term as meat and oil prices remain elevated…However, price pressures are seen to abate leading to the reversion of average inflation near the midpoint of the target in 2022 and 2023,” Diokno said in a message to reporters.

In the latest monetary policy meeting, the BSP announced their expectation of a 4-percent average inflation for the entire year, hitting the ceiling of their 2 to 4 percent target range for the year.

Inflation has now reached an average of 4.4 percent in the first half of the year. This means that inflation should reach an average of 3.6 percent in the second half to meet the BSP’s projection.

Diokno sought the implementation of policies to bring down price pressures and said pressures on prices in the future remain supply-side driven.

“The effective implementation of direct non-monetary measures will be crucial in mitigating further supply-side pressures…The uptick in international commodity prices owing to supply chain bottlenecks and the recovery in global demand could lend to upward pressures on inflation,” Diokno said.

“However, downside risks to the inflation outlook continue to emanate from the emergence of new coronavirus variants which could delay the easing of lockdown measures and temper prospects for domestic growth,” he added.

Accommodative monetary policy

In terms of monetary policy, Diokno said they will remain “watchful” over evolving pandemic-induced economic conditions and challenges to ensure that the monetary policy stance remains consistent with price and financial stability objectives.

Local economists, meanwhile, said the slower inflation in June will not likely change the BSP’s monetary policy path.

ING Bank economist Nicholas Mapa said BSP is not likely to alter their course anytime soon to continue providing monetary support for the economic recovery.

“The BSP has looked past the 6-month inflation target breach, citing the need to deliver stimulus at a time of economic struggle and stalling inflation will relieve some pressure on the Central Bank to hike policy rates to combat inflation.   With price pressures fading, we expect inflation to decelerate in the second half of the year as meat prices normalize with authorities allowing higher import volume for the commodity,” Mapa said.

“With inflation set to glide back within target, we expect BSP to retain policy rates at 2 percent for the balance of 2021 and only consider adjusting policy by mid-2022,” he added.

Rizal Commercial Banking Corporation (RCBC) economist Michael Ricafort also saw monetary policy remaining accommodative “in the foreseeable future.”

Ricafort, however, cited possible cuts in large banks’ reserve requirement ratio (RRR) from the current 12 percent, especially if inflation stabilizes further in the coming months.

“More accommodative monetary policy would still do more of the heavy lifting for the economy amid lack of funds for any additional economic stimulus, and as the economy still needs all the support measures that it could get to help sustain recovery from Covid-19 pandemic,” the economist said.

Economists’ outlook

Meanwhile, local economists said inflation would likely remain at present levels, if not be lower in the coming months on the back of weak consumption.

In an e-mail to the BusinessMirror on Tuesday, Unionbank Chief Economist Ruben Carlo O. Asuncion said the weakness in consumption may remain as the country struggles to get more vaccine supplies.

Asuncion said the longer route to herd immunity will lead to a “slower-than-expected” domestic demand and overall consumption. As a result, this will lead to slower inflation.

“We think that amid subdued broad-based demand—in other words, weak consumption brought about by the coronavirus pandemic—has something to do with the weakened effect. The June 2021 inflation print is indeed a symptom of a weak consumption base overall,” Asuncion said.

Meanwhile, BPI Chief Economist Emilio S. Neri Jr. told the BusinessMirror inflation could stay close to 4 percent in the coming months or slightly higher.

Neri said global commodity prices, particularly crude oil, remain elevated and the peso is seen to continue depreciating for the rest of the year.

“The deceleration was largely a result of lower transport prices due largely to decline in the tricycle fares compared to the same time last year. While transport demand remains below pre-pandemic, they are much stronger than the second quarter of 2020,” Neri said.

“Electricity and other utilities demand have actually continued to exceed pre pandemic in the second quarter and an indication of strong demand despite malls and schools still not being able to fully reopen,” he added.

Pinoy vices

The PSA data showed inflation for alcoholic beverages and tobacco products for all income households was at 11.2 percent in June 2021, slower than the 11.8 percent posted in May 2021 and 18.5 percent posted in June 2020.

The trend is the same for the poorest households which recorded an inflation of 11.5 percent for alcoholic beverages and tobacco products in June 2021. This is also slower than the 12.7 percent in May 2021 and 21.2 percent in June 2020.
In terms of cost, consumers need to pay an additional P172.1 today for P100 worth of alcoholic beverages and tobacco products they used to buy in 2012.

The bottom 30 percent of households need to pay P186.3 more in June 2021 to buy P100 worth of these products in 2012.

“The increase in CPI for Alcoholic Beverages and Tobacco from its initial CPI of 100 in 2012, which is the current base year, reflects the increase in the prices of goods in this commodity group,” PSA, however, told the BusinessMirror in an e-mail.

“Though consumption in terms of expenditure is part of the index computation through the weights, it does not affect the changes in the estimates of CPI since weights are fixed until the next rebasing. Rebasing from 2012 to 2018 is currently being done,” it explained.

PSA noted that the double-digit increases in the prices of these commodities began in 2013 due to the Sin Tax Law (STL) which took effect on January 1, 2013.

The prices rose anew with the implementation of RA 10963 or the TRAIN Law on January 1, 2018 increasing the tax rates on cigarettes.

The poorest Filipinos, meanwhile, saw inflation average 28.7 percent in 2013 and 20.4 percent in 2018. This reflected the two highest inflation rates recorded for this commodity between 2012 and 2021.

The third highest rate was recorded in 2020 at 16.1 percent for all households and 18.8 percent for the bottom 30 percent of households nationwide.

Based on the weights of the Consumer Price Index, alcoholic beverages and tobacco products had a weight of 1.58 percent for all income households while the weight is 2.45 percent for the poorest households.

Image courtesy of Nonie Reyes

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