Inflation cooled in March, offering a reprieve

MANILA, Philippines (Updated, 10:39 a.m.) — Inflation decelerated in March, after price growth hit its peak while the economy began absorbing the impact of expensive borrowing costs that were meant to tame robust consumer demand.

In a briefing on Wednesday, the Philippine Statistics Authority reported inflation settled at 7.6% year-on-year in March, slower compared to the 8.6% year-on-year reading in February.

The latest figures fell within the Bangko Sentral ng Pilipinas’ month-ahead forecast of 7.4-8.2% for March. However, this was still above the BSP's 2-4% inflation target.

Iinflation has risen to 14-year highs in past months as supply chain disruptions, expensive fuel prices and a weak peso fanned consumer price growth. This was worsened by an explosion in consumer demand as it reopened in 2022.

The Marcos Jr. administration resorted to importing food products into the country to arrest consumer price growth, but came at the expense of farmers as shipments came in the middle of harvest season. 

Monetary policy has shown its deft hand in combatting inflation, as the BSP hiked its key rate by 425 basis points since May last year. These interest rate hikes take 6-18 months before it seeps into the domestic economy, as expensive borrowing costs discourage consumers and firms from taking out credit. 

Rate hike pause?

In Metro Manila, vegetables, meat, and fish prices are retreating.

Much of the same downward trend in prices was observed in areas outside the National Capital Region as inflation there slowed to 7.5% in March.

Fuel prices, longstanding sources of consumer inflation in recent months, retreated in March as well.

Utility costs for households, which include liquefied petroleum gas, showed signs of softening.

The Marcos Jr. administration’s tactic of resorting to importing food items into the country, which temporarily arrest price growth sometimes at the cost Filipino farmers, supported the decline.

The prices of rice (2.6%), fruits and nuts (13%), and processed food products (10%) are still rising everywhere.

Despite this, core inflation remained to be a persistent headache for consumers and policymakers alike. Computed without volatile items such as fuel, core inflation rose to 8% in March. National statistician Claire Dennis Mapa explained that higher costs of services, such as restaurants and accommodation services, are still going up.

Core inflation stood at its highest level since 1999, as headline inflation then averaged 6.6%.

That said, inflation for the country’s poorest stuck out like a sore thumb. Data provided by the PSA showed it slowed to 8.8% in March, from the 9.7% recorded in the preceding month. Food prices, which account for more than half of the inflation formula for impoverished Filipinos, still need to go down.

“The only way to bring inflation down for the country’s poorest is for food prices to decline,” Mapa said.

The persistent trend of rising core inflation amid lower consumer prices could still compel the Bangko Sentral ng Pilipinas to inject another hike into. But an analyst believes that keeping borrowing costs at 6.25% is enough, for now.

“Keeping rates at restrictive territory, 6.25%, should be enough to weed out festering second-order effects on inflation. Additional rate hikes can only be viewed as overkill as bank lending slows further, weighed down by the follow-through impact from previous hikes,” Nicholas Antonio Mapa, senior economist at ING Bank in Manila, said in a Viber message. 

ING’s Mapa expects that the latest inflation outturn could convince the central bank to pause its aggressive rate hikes.

“We expect inflation to moderate further in April which could open up the door for a BSP pause at the May meeting,” he added.

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