FILIPINOS will continue to suffer under the weight of high commodity prices, especially if no measures to address supply-side issues are undertaken to cool down inflation, according to local economists.
On Tuesday, the Philippine Statistics Authority (PSA) reported that inflation averaged 8 percent in November on the back of expensive food and non-alcoholic beverages as well as furnishings, household equipment and routine household maintenance.
Inflation in November was the highest since November 2008, during the Global Financial Crisis, when commodity prices increased 9.1 percent. The highest inflation in the latest data series was in January 1999 at 10.7 percent.
“The inflation right now is not at its peak yet. Global conditions remain in flux, but more importantly, we don’t have an inflation plan apart from the BSP’s [Bangko Sentral ng Pilipinas] interest rate policy. Unfortunately, this is not enough since the inflation is caused by supply-side factors,” Ateneo de Manila University economist Leonardo Lanzona Jr. told the BusinessMirror.
Ateneo de Manila University
Department of Economics Chairperson Alvin P. Ang said the country’s inflation rate will remain above 5 percent the whole year of 2023 and will mainly be driven by supply-side constraints.
Efforts to address supply-side constraints, Lanzona said, should include government investments in developing a productivity program to increase exports and domestic products.
“These can include productive employment programs and skill development. Without these programs, high inflation will be the norm for the whole year,” Lanzona added.
The higher expectations for inflation are also shared by University of the Philippines School of Economics head of research Renato E. Reside Jr. who said inflation will likely continue to be slightly above the BSP’s targets.
To temper inflation, Reside also recommended that supply side improvements be implemented such as “openness to imports of food and agriculture products. This can have a good short term impact keeping prices stable.”
Heavy lifting
Managing Director of eManagement for Business and Marketing Services, Jonathan Ravelas, also said the BSP has done the “heavy lifting” during the pandemic and until now when inflation is rising.
The BSP efforts to increase interest rates to temper demand may only offer consumers “temporary reprieve” from high prices as supply-side constraints have not been addressed.
Ravelas told this newspaper that without any measures to address supply side constraints, inflation could average 5.6 percent next year. Inflation may peak at around 8 or 9 percent at the start of next year.
One reason inflation is expected to continue is the sharp increase in core inflation, which excludes selected food and energy items in the headline inflation.
The PSA data showed core inflation increased to 6.5 percent in November 2022 from 5.9 percent in October 2022. In November 2021, core inflation was also lower at 2.4 percent.
“Inflation is expected to be high because commodities are elevated and have not been addressed,” Ravelas said in a phone interview. “With core inflation at 6.5 percent, its also possible to see it hit 7 to 7.5 percent.”
The latest data, especially on core inflation, has prompted Unionbank Chief Economist Ruben Carlo Asuncion to revise their inflation expectations.
Asuncion said they now expect inflation to average 5.8 percent in 2022, with December inflation likely posting an inflation rate of 8.3 percent. For 2023, inflation may average 5.2.
“What’s important to note in November’s CPI (Consumer Price Index) print is the rise of core inflation of 6.5 percent and this is telling us that inflation pass-through is still in play. Annualized rates for areas outside of the NCR, particularly for non-food inflation, still rose despite national and NCR prints declined,” Asuncion said.
In its latest commentary, the Bank of the Philippine Islands (BPI) has also adjusted its inflation expectations to 5.8 percent in 2022; 4.3 percent in 2023; and 3.1 percent in 2024.
BPI expects inflation to near its peak due to the stabilization of oil prices. Nonetheless, it still expects inflation to be above the BSP’s targets for 2023.
“Given the outlook for inflation, there is a compelling reason for the BSP to continue hiking interest rates. To add to this, the Federal Reserve may continue to hike, although at a slower pace. The policy rate of the BSP may touch the 6 percent level in the first half of the year in this scenario,” BPI said.
If the US Federal Reserve brings down its rates closer to 3 percent, BSP policy rate might peak at 6.5 percent in 2023.
BPI still expects the BSP to follow the US Federal Reserve but maintain a 100 to 200 basis point differential with US interest rates. Should this happen, BPI said the BSP’s rates may go down to around 4 percent toward end-2023.
World Bank Senior Economist Ralph van Doorn also told reporters in a briefing on Tuesday that inflation in the Philippines is expected to continue until 2023. This will leave room for the BSP to continue raising interest rates.
Meanwhile, the BSP said the risks for inflation are tilted to the upside next year but would “be broadly balanced for 2024.”
The upside risks, BSP said, include the impact on international food prices of higher fertilizer prices, trade restrictions and adverse global weather conditions.
Other risks: higher food prices from further domestic weather-related disturbances and supply disruptions in key food commodities such as sugar and meat, as well as pending petitions for transport fare hikes.
Cooling inflation
Reside said one thing that could cool down inflation is the expected slowdown in the increase in oil prices as well as the expected recession overseas.
“Oil prices are already going down and the peso also appears to be stabilizing, so perhaps max 6 months. Appreciation of the peso and higher policy rates on our end will only help bring down inflation,” Reside told BusinessMirror.
The BSP also expects that “inflation is projected to decelerate in the subsequent months due to easing global oil and non-oil prices, negative base effects.”
It said its recent decisions to temper demand through higher interest rates will also help slow down inflation in the coming months.
“The impact of a weaker-than-expected global economic recovery is the primary downside risk to the outlook,” BSP said in a statement on Tuesday.
For its part, the National Economic and Development Authority (Neda) said the Department of Agriculture has expanded the Kadiwa Program, which aims to connect producers to consumers, giving local farmers a higher profit share and consumers, more affordable prices.
The government is also supporting the agriculture sector by implementing programs to lower costs of inputs, provide financial assistance in the form of fuel discounts to farmers and fisherfolks, develop innovations, and strengthen the agricultural value chain.
Meanwhile, Socioeconomic Planning Secretary Arsenio M. Balisacan also highlighted the importance of the government’s digital transformation for a more efficient and faster delivery of services to the people.
“The government is continuously implementing targeted subsidies and discounts to allay the impact of the higher prices of essential goods, especially for the vulnerable sectors and low-income earners of our society,” Balisacan said.
The Department of Budget and Management released P5.2 billion last week to cover the third tranche of the Targeted Cash Transfer (TCT) program of the Department of Social Welfare and Development.
Neda said this covers a total of 9.8 million identified beneficiaries who are most affected by the continuous rise in commodity prices.
The TCT Program grants unconditional cash transfers of P500 per month, for six months, to the most affected households to mitigate the effects of the increase in the prices of fuel and other non-fuel commodities on vulnerable populations.