Inflation vaults to 3-year high 4.5% in February

Early impact of tax reform law

MANILA, Philippines — The consumer price index rose at its fastest pace in over three years in February due to the early effects of the newly implemented tax reform law.

In a  report, the Philippine Statistics Agency (PSA) said the nationwide inflation rate, or the increase in the price level of basic goods and services, rose to 4.5 percent in February from four percent in January. The 4.5 percent rate was based on the old series using the 2006 base year.

This was the highest inflation rate since the 4.9 percent recorded in August 2014, bringing the average inflation in the first two months to 4.2 percent from three percent in the same period last year.

Based on the new series using the 2012 base year, inflation kicked up to 3.9 percent in February from 3.4 percent in January.

The PSA will continue to release two series until June after which it will only use the 2012 base year starting July.

According to  Socioeconomic Planning Secretary Ernesto Pernia, the initial impact of the Tax Reform for Acceleration and Inclusion (TRAIN) law and the continued depreciation of the peso against the dollar would continue to fuel inflation in the coming months.

“The transitory impact of the TRAIN law and the continued depreciation of the Philippine peso will mainly influence price movements in the coming months, and we must ensure that mitigating measures should be in place,” he said.

As such, Pernia said  there is a need to expand the Pantawid Pamilyang Pilipino Program (4Ps) and to fast-track the distribution of unconditional cash transfers (UCT) to the poor to blunt the negative impacts of the tax reform.

  He also reiterated the call to liberalize rice trade through tariffication to lower the price of the staple and raise revenue for agricultural programs such as crop diversification and disaster risk resiliency.

“These measures will ensure better stability in the prices of food items and maintain or raise the purchasing power of the bottom 30 percent of households,” Pernia said.

He also said the government, through the  Department of Trade and Industry, needs to strengthen the surveillance of businesses’ compliance with the country’s laws and regulations on fair consumer goods pricing to prevent the occurrence of profiteering.

“We must enforce fair consumer pricing among businesses. In January, there were anecdotal reports that some of them are taking advantage of the TRAIN law by prematurely increasing their selling prices despite no additional input costs to their production and services brought about by the law,” Pernia said.

BSP Governor Nestor Espenilla Jr. also attributed the rapid rise in inflation to transitory factors brought about by the implementation of the new tax reform law.

President Duterte signed the first package of the comprehensive tax reform program (CTRP) on Dec. 19,  slashing personal income tax rates but raising the taxes on fuel products, motor vehicles and sweetened beverages starting January.

“The elevated February inflation figure is in line with our updated forecast for a temporarily higher inflation than target range in 2018 due to transitory factors,” he said.

The BSP has set a medium term inflation target of two to four percent between 2018 and 2020. Based on the latest assessment of the Monetary Board, inflation may overshoot the target at  4.3 instead of 3.4 percent this year before easing to 3.5 instead of 3.2 percent for 2019.

“Our forecasts remains that inflation will decelerate back to well within target in 2019 whether based on 2006 or 2012 index,” he said.

The Philippine last exceeded its inflation goal of three to five percent in 2008 when the rate averaged 9.3 percent due to elevated oil and food prices.

Based on the rebased 2012 index, Espenilla said inflation remains within target for both February and for the rest of 2018.

The PSA said the uptrend was due to the  faster annual gain recorded in the heavily-weighted food and non-alcoholic at 4.8 percent and the double-digit 16.9 percent increment in alcoholic beverages and tobacco index. A faster annual mark-up was also noted in the food index alone index at 4.8 percent.

Despite the uptick in inflation in January, the central bank decided to keep interest rates unchanged during its first rate-setting meeting for the year last Feb. 8. However, it decided to trim the level of deposits banks are required to keep with the central bank to 19 percent from 20 percent effective March 2.

The BSP explained  the decision to release P90 billion in  additional liquidity into the financial system is not a change in policy stance as the amount would be absorbed by the term auction deposit facility (TDF) after its volume was raised to P110 billion from P40 billion at the start of the year.

The BSP chief explained monetary policy operates with a long lag and whatever action it takes now would most likely be felt in 2019 and beyond rather than 2018.

“That is why we don’t necessarily react to February 2018 but must look much further ahead and rely on forecasts,” he said adding authorities would closely monitor the developments and factor in all relevant data in the coming reviews of monetary policy stance. – With Czeriza Valencia