Inflation likely picked up in January

Pork prices have soared amid a shortage due to the outbreak of African Swine Fever (ASF). — PHILIPPINE STAR/MICHAEL VARCAS

By Luz Wendy T. Noble, Reporter

HEADLINE INFLATION likely quickened for the fourth straight month in January amid rising prices of food and oil products, a BusinessWorld poll of economists showed.

A poll of 16 economists last week yielded a median estimate of 3.6%, within the 3.3-4.1% estimate by the Bangko Sentral ng Pilipinas (BSP) for the month but near the upper end of the 2-4% annual target.

If realized, January inflation will be the fastest since 3.8% in February 2019 and will mark the fourth consecutive monthly rise since October. It will also be quicker than 3.5% in December and 2.9% a year ago.

The Philippine Statistics Authority will report the official January inflation data on Feb. 5.

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As inflation nears the higher end of the central bank’s annual target, analysts said there may be less wiggle room for another rate cut. Instead, policies should be put in place to help households struggling to cope with soaring prices of basic goods, they said

Food prices have skyrocketed due to supply-side disruptions caused by lockdowns, agriculture damage caused by typhoons and the African Swine Fever (ASF) outbreak.

A supply shortage caused by typhoons in the last two months of 2020 continued to push food prices up, with conditions only likely to normalize after the next harvest, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said.

“It would help if government agencies identify any signs of collusion among manufacturers and suppliers. A proposal to remove import duties on imported meat products is suggested to help address the shortage of local pork meat due to the ASF,” De La Salle University Economist Mitzie Anne P. Conchada said.

Transport costs may have also contributed to a faster rise in the consumer price index (CPI).

“There had been back-to-back hikes in pump prices, likely on the back of higher global crude oil prices after the OPEC+ (Organization of the Petroleum Exporting Countries) actions at the start of the year,” Security Bank Corp. Chief Economist Robert Dan J. Roces said.

In January, oil-exporting countries agreed to an output cut of one million barrels a day for Saudi Arabia in February and March.

At the same time, the gradual reopening of more industries drove up consumer spending and production costs, which may have led to quicker inflation in January, said Colegio de San Juan de Letran Graduate School Dean Emmanuel J. Lopez.

“However, it should not be misconstrued as detrimental to the economy, considering that it is an indication that the recession has eased because of increased consumer confidence as manifested by increased spending,” he said.

The central bank expects inflation increase to average 3.2% this year, faster than 2.6% last year as it factors in the rise in food and oil prices.

Analysts said the central bank would keep an accommodative policy but might avoid a rate cut in the first quarter.

“With the BSP governor clearly keeping an eye on the growth objective throughout 2020, it would be difficult to expect Mr. Diokno to hike policy rates in the face of the still very fragile economic recovery,” Mr. Mapa said.

The country is experiencing a negative real interest rate environment given that December inflation was at 3.5%, while the key policy rate is at 2%.

“There is very little room for the BSP to cut policy rates further. This is because even though inflation is currently within the comfortable 2-4% target, upside risks can no longer be ignored,” said Alvin Joseph A. Arogo, vice-president and head of equity research division at Philippine National Bank.

The BSP slashed rates by 200 basis points (bps) last year to support the economy during the pandemic. This reduced the reverse repurchase, lending and deposit facilities to record lows of 2%, 2.5% and 1.5%, respectively.

In previous policy meetings where it slashed rates, the central bank said the benign inflation environment supported the decision for further easing.

Inflation rate started to hover around 3% in November. By December, even rice prices rose 0.1%, the first time it posted an increase after 19 months of deflation due to the Rice Tariffication Law (Republic Act No. 11203).

Central bank officials have said earlier they view the faster inflation as “transitory.” BSP Deputy Governor Francisco G. Dakila, Jr. said in January that short-term considerations such as weather disruptions caused the uptick and would still have happened anyway, whether or not there was aggressive rate easing last year.

On the other hand, ANZ Research analyst Kanika Bhatnagar said they are still expecting a 25-bp cut from the BSP within the first quarter “to support growth.”

For Mr. Arogo, fiscal policies will be more effective to bolster recovery instead of monetary easing at this point.

“We believe that the government should focus on fiscal policy, such as higher public spending on infrastructure projects, healthcare capacity, and COVID-19 vaccination,” Mr. Arogo said.

The Monetary Board has two policy-setting meetings falling within the first quarter — the first on Feb. 11 and another on Mar. 25.

Analysts' January inflation estimates (2021)

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