Inflation accelerates to 2.5% in December

MANILA, Philippines — Consumer prices rose at a faster pace in December 2019, driven by brisk holiday spending and supply constraints caused by recent typhoons, the Philippine Statistics Authority (PSA) said yesterday.

In its report, PSA said headline inflation – the rate of change in the average prices of goods and services typically purchased by consumers – quickened to 2.5 percent in December from 1.3 percent in November and a higher base of 5.1 percent in December 2018.

This brought the 2019 average inflation to 2.5 percent, falling within the government’s target of two to four percent.

Driving the rise in prices were the uptrend in the indexes of transport (petroleum, jeepney fare, ship fare), food and non-alcoholic beverages (vegetables, fish, and unclassified food products), as well as alcoholic beverages and tobacco. 

“Seasonal factors like higher demand for selected goods and services during the Christmas season pushed up the indexes of food and non-alcoholic beverages, and recreation and culture,” Deputy National Statistician Rosalinda Bautista said in a briefing.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno said inflation eased to 2.5 percent last year after accelerating to 5.2 percent in 2018 amid cheaper oil and rice prices as well as the strong peso.

“The low and stable inflation ensured the strong purchasing power of our countrymen and afforded them a sense of security in making other economic decisions such as saving and investing,” he said.

Diokno added that inflation is seen settling within the mid-point of the two to four percent target over the next two years, allowing authorities to further ease the country’s monetary policy stance to boost economic growth.

He noted that the volatility in global oil prices, the potential impact of the African swine fever outbreak, global trade and policy uncertainties as well as geopolitical tensions remain as the main risks to inflation.

“The BSP will consider all the latest economic developments here and abroad in the Monetary Board’s assessment to ensure that the monetary policy stance remains consistent with the BSP’s price stability objective while being supportive of economic growth,” he added.

Rice prices, meanwhile, remained on the decline in December although at a softer pace. From an 8.3 percent contraction in November, it improved to 6.8 percent decline in December.

Consumer prices rose faster in the National Capital Region where the headline inflation in December 2019 settled at 2.8 percent from 1.5 percent in November 2019.

This was driven by strong growth in the indexes of food and non-alcoholic beverages, alcoholic beverages and tobacco, housing and utilities, as well as furnishing and household maintenance.

Among food groups, price increases were seen in vegetables like onion and mustard; fish like galunggong and tulingan; and other commodities like calamansi.

In areas outside NCR, headline inflation settled at 2.4 percent in December from 1.2 percent in November.

The highest inflation of 3.3 percent was seen in the Bicol region while the lowest was registered in Bangsamoro Autonomous Region in Muslim Mindanao (BARMM).

Bautista said the faster growth in consumer prices in Bicol can be attributed to the onslaught of typhoons Tisoy and Ursula last month that affected the supply of fruits, vegetables and fish in the region.

She said the inflation trend at the national level indicates the headline rate usually falls in January.

This month, however, marks the start of the implementation of the third tranche of fuel excise tax hike as part of the administration’s tax reform agenda.

Bautista said that owing to the minimal weight of petroleum in the household consumption basket used as measurement for inflation, the latest tax hike on fuel will have little effect on inflation.

As such, any further growth in the heavily weighted food index will produce greater inflationary pressure in the coming months.

“It’s more likely that the heavily weighted food index will cause an increase (in the headline rate) in January,” said Bautista, noting  that prices of rice, meat and fish are closely monitored.

The food index alone has a 38.34 percent weight in the consumption basket of goods, whereas the transportation index in which petroleum is folded into has a weight of 8.06 percent. Petroleum alone has a 2.02 percent weight.

“Because this is based on household consumption,” said Bautista.

Socioeconomic Planning Secretary Ernesto Pernia said the government has to remain vigilant on the potential sources of price pressures this year such as typhoons, the continuing presence of ASF, and the heightened conflict in the Middle East that can put pressure on oil prices.

“The government should effectively manage expectations at the domestic front and be vigilant against any unwarranted increase in pump prices considering that the last tranche of excise tax increase on fuel products will be implemented this month,” he added.

Pernia said that in the short term, demand management and alternative sources of petroleum products should be explored, and over the medium to long-term, shifting away from fossil fuel and import dependence should be encouraged.

He added that the recovery and rehabilitation plans for the typhoon-affected areas must be immediately implemented and the production support programs for the affected farmers and fisherfolk must be fast-tracked to resume economic activities in these areas.

The BSP chief pointed out the implementation of Republic Act 11203 or the Rice Tariffication Law as well as the tightening cycle by the BSP in 2018 emerged as major contributors to the easing inflation last year.

The benign inflation environment and slower than expected gross domestic product (GDP) growth allowed the central bank’s Monetary Board to slash interest rates by 75 basis points, partially unwinding the tightening episode that saw rates rise by 175 basis points.

After bottoming out at a 43-month low of 0.8 percent in October last year, inflation picked up to 1.3 percent in November and 2.5 percent in December. It would be recalled inflation peaked at 6.7 percent in September and October of 2018.

For this year, Diokno already signaled the further reduction of benchmark interest rates by another 50 basis points.

With the escalating tension between the US and Iran, Diokno said Dubai oil price would have to hit $90 per barrel to affect the BSP’s inflation target of two to four percent.

“What I can say is let’s not be alarmist here. As you know, what is relevant for us is the Dubai price of oil, which, at the moment is still below $60 to $70. So, plus that to me, what you see now is, is more than what the long term forecast of oil is, which is maybe in the 60s, so let’s not panic with this,” he added.

Mustafa Arif, economist at ANZ Research said an upside breach to the inflation target of two to four percent remain remote despite the uptick in inflation last December as well as the looming geopolitical risks.

“We, therefore, maintain the view that the BSP will resume monetary policy easing in Q1,” Arif said.

ING Bank Manila senior economist Nicholas Mapa said inflation is expected to edge higher in 2020 as “reverse” base effect s kick in while the scheduled excise tax on fuel products take effect some time in early 2020.

“Factoring the reverse base effects, we expect inflation to average 3.2 percent and as high as 3.4 percent should oil prices edge higher due to possible supply side disruptions,” Mapa added.

Mapa said the surprise inflation print in December should keep the BSP on notice as they gauge price developments going into 2020, with the recent escalation in tension between the US and Iran exerting additional inflationary pressure.

“We continue to believe that the BSP will have the scope to ease monetary policy further in 2020 with the first rate cut slated for the February meeting,” Mapa added.