DESPITE headline inflation slowing in March, local economists warned that the rise in core inflation could signal that prices may stay elevated in the coming months and that more interest rate hikes may not be far behind.
On Wednesday, the Philippine Statistics Authority (PSA) reported that headline inflation slowed to 7.6 percent in March 2023 from the 8.6 percent posted in February. However, it remained higher than the 4-percent inflation posted in March 2022. (Full story here: www. businessmirror.com.ph/2023/04/05/march-inflation-slows-to-7-6-as-food-transport-prices-decline/)
Core inflation, which excludes volatile food and energy items which are part of headline inflation, continued to increase to 8 percent in March. The PSA said this is the highest in 24 years or since March 1999 when core inflation reached 8.1 percent.
“We think that there is the element of domestic demand driving core inflation. It’s not just from the re-opening narrative that we have been hearing for quite some time,” Unionbank Chief Economist Ruben Carlo O. Asuncion told BusinessMirror. He added these may include non-essential items in the Consumer Price Index (CPI).
For his part, University of the Philippines Diliman School of Economics Head of Research Renato E. Reside Jr. said core inflation may have increased due to a “lagged feed” from “non-core and volatile food and oil price movements in the recent past.”
“Possibly [due to] expectations by businesses of future prices. So, inflation could still be somewhat persistent in the coming months, and policy interest rates could still be raised,” Reside told this newspaper.
The Bank of the Philippine Islands (BPI) also said with core inflation rising, “second-round inflation is not over yet and inflationary pressure from demand remains significant.”
It also expects the rise in core inflation to justify another rate hike in the next Monetary Board meeting. BPI said additional monetary tightening will also hasten the process of bringing down inflation back to the target of the BSP.
BPI said other risks to inflation exist such as the decision of OPEC Plus to cut their oil production; the reopening of China; and African Swine Fever (ASF) cases recorded in certain parts of the country, particularly in the Visayas.
“The inflation story may become favorable in the second half of the year, barring any global commodity price shocks and provided that non-monetary measures prove effective in normalizing the food supply situation in the country,” BPI said.
Ateneo de Manila University economist Leonardo A. Lanzona Jr. told BusinessMirror that “core inflation is dependent on structural factors that prevent aggregate supply from shifting upwards.”
Though the government has reduced its spending in light of rising inflation and also raised interest rates to reduce public spending, Lanzona said the threat of inflation remained.
This only shows, Lanzona said, that the Philippine economy remains consumption-driven, which is unsustainable in the long-run. He cited an urgent need for the country to shift to an investment-driven economy.
“This means we need to raise investments, expand markets, allow more competition and improve technology. A country that is anchored on holiday economics is only going to experience more inflation and will inevitably fail,” Lanzona told BusinessMirror.
BSP’s take
THE Bangko Sentral ng Pilipinas (BSP) said the latest inflation print is consistent with the overall assessment that inflation will remain elevated over the near term before gradually decelerating back to target range towards end-2023.
BSP said risks to the inflation outlook for 2023 and 2024 continue to tilt significantly towards the upside. Factors that could keep inflation elevated include supply shortages swelling domestic food prices.
Based on the PSA data, food-alone inflation in the first quarter averaged 10.6 percent. In March, food alone posted an inflation rate of 9.5 percent. National Statistician Claire Dennis S. Mapa said food alone contributed 3.3 percentage points to the country’s 7.6-percent inflation rate in March.
Of this 3.3-percentage point share in the inflation rate, vegetables contributed 0.6 percentage points; fish, 0.6 percentage points; sugar, confectionery and deserts, 0.4 percentage points; sugar alone, 0.3 percentage points; and 0.2 percentage points each were onions, rice, and bread.
Rice, PSA said, is a concern given that in March and in the first quarter, it has grown 2.6 percent. In February, rice inflation was only at 2.2 percent.
Mapa admitted in a briefing on Wednesday that rice prices have been steadily increasing in the National Capital Region (NCR) and in Areas Outside NCR (AONCR). The average price of well-milled rice increased to an average of P44.4 per kilo in March from P44.2 per kilo in February and P44.1 per kilo in January.
“[Prices are increasing] slowly, but [they are] increasing and we are obviously monitoring this on a regular basis,” Mapa said during the briefing.
Meanwhile, the BSP also said that factors that could also keep inflation elevated are higher transport fares; the increase in electricity rates; and above-average wage adjustments in 2023 point to the broader-based nature of price pressures. On the downside, BSP said the impact of a weaker-than-expected global economic recovery continues to be the primary factor that could dampen inflation.
“The BSP will continue to adjust its monetary policy stance as necessary to prevent the further broadening of price pressures as well as the emergence of additional second order effects,” BSP said.
“The BSP also continues to call for the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” it added.
Not enough—Neda
WHILE the National Economic and Development Authority (Neda) recognized that the slowdown in headline inflation is good for the economy, much needed to be done to address elevated prices.
Neda Secretary Arsenio M. Balisacan said that while inflation is beginning to slow down, it remains the most pressing issue the government must monitor and urgently address.
“Protecting the purchasing power of Filipinos, especially the most vulnerable sectors of the economy, is one of the top priorities of the administration, which we have also laid out in the Philippine Development Plan 2023-2028. We are committed to provide policy advice and anticipatory recommendations that are supported by data to manage inflation and protect the Filipino families,” he said.
On March 7, 2023, President Ferdinand R. Marcos Jr. approved the creation of the Inter-Agency Committee on Inflation and Market Outlook. The committee is an advisory body on strategies to ease inflation and ensure food and energy security, while balancing the interests of domestic food producers, consumers, and the broader economy.
Balisacan said the inflation outlook remains vulnerable to upward risks due to global supply uncertainties, impending wage adjustments, and increases in service fees.
The Inter-Agency Committee on Inflation and Market Outlook promptly convened to establish coordination mechanisms for data gathering, assessment, and monitoring of supply and demand conditions that exert inflationary pressures.
“By streamlining data collection, the government can share a common understanding, particularly regarding data that can inform public policy and aid in the monitoring and management of inflation,” Balisacan said.
According to Balisacan, the committee’s objective is to offer proactive policy recommendations regarding emerging threats to food supply, such as the potential escalation of ASF and the weather disturbances linked with the El Niño phenomenon.
“We need a robust monitoring system and forecasting tools supported by reliable and timely information that will assist us in offering appropriate recommendations to the President and the Cabinet,” Balisacan said.
“These will help us in developing suitable policies and interventions to achieve food and energy security, while ensuring that our country stays on course to sustained economic transformation and inclusive growth,” he added.