Feb. inflation scrapes top of 2018 target

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Ernesto M. Pernia
Socioeconomic Planning Secretary Ernesto M. Pernia believes that measures to cushion inflation’s impact on the poor ‘are urgently needed’.

By Ranier Olson R. Reusora

THE INCREASE of prices of widely used goods quickened further in February on account largely of the heavily weighted food and non-beverage sector, the government reported yesterday.

Reflecting the new rebased index under 2012 prices, the Philippine Statistics Authority (PSA) said that headline inflation picked up to 3.9% last month, up from 3.4% in January and the 3.1% clip a year ago. The inflation reading was fastest in more than three years since September 2014’s 3.9%.

February’s pace brought year-to-date headline inflation to 3.7% against the BSP’s 2-4% target range for the year.

Using the previous 2006-based prices, inflation stood at 4.5% in February, past the midpoint of the 4-4.8% estimate range given by the Bangko Sentral ng Pilipinas (BSP)’s Department of Economic Research for the month. February’s actual 2006-based pace was also above the 4.2% median forecast of 14 economists polled by BusinessWorld last week.

Meanwhile, core inflation (based on 2006 prices) — which excludes volatile food and energy prices — jumped to 4.4% from 3.9% in January.

Inflation Rates

In last week’s press briefing, BSP Deputy Governor Diwa C. Guinigundo said that despite the rebasing of the consumer price index, the central bank’s target range of 2-4% for the year still makes sense and does not need to be changed, citing the economy’s current “stage of development as well as the inflation dynamics.”

The new series puts less weight on food overall in 2012 than in 2006, but assign bigger weights to rice and other cereals, ING Bank senior economist Jose Mario I. Cuyegkeng noted.

“Non-alcoholic beverages weight in 2012 [is] marginally higher. Non-food commodities weight [is] higher due to higher weights for transport, health, education (tertiary), communication and restaurants. Dominated lower weights for housing and utilities, clothing, furnishings and recreation,” he said.

PSA said the acceleration in February (based on 2012 prices) was led by the faster 4.8% annual gain in the heavily weighted food and non-alcoholic beverages index, compared to January’s 4.4% and February 2017’s three percent.

The 16.9% double-digit annual increase in alcoholic beverages and tobacco also contributed to the spike in overall price increases in February, faster than January’s 12.2% increase and more than double February 2017’s 7.2%.

Higher annual price hikes were also noted in the indices of transport (5.8% from the previous month’s 4.5%); furnishing, household equipment and routine maintenance of the house (2.5% from 2.2%); restaurant and miscellaneous goods and services (2.5% from 2.2%); as well as clothing and footwear (2% from 1.9%).

Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines, attributed February’s inflation spike “primarily” to Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) law that cut personal income tax rates but reduced exemptions from the value added tax and added levies on cars, fuel, sugar-sweetened drinks, investment products and a host of other items when it took effect in January.

“Apart from the TRAIN law, other factors such as weather disturbances and the depreciation of the peso also pushed inflation higher by boosting the costs of some agricultural products and increasing the local currency value of imported goods,” he said.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, also attributed the increase to the TRAIN law but also cited higher utility rates (with an 8.6% increase month-on-month), a weaker peso (a 2.5% decline from January) and rice supply shocks.

The overall electricity rate increased to P9.47 per kilowatt-hour (/kWh) in February from P8.72/kWh in January. The Manila Electric Co., the country’s largest electricity distributor, implemented a P1.08/kWh rate hike in two tranches — the first consisting of 0.75/kWh increase in February and the P0.33/kWh balance this month.

The National Economic and Development Authority (NEDA) said in a statement that “[m]easures to curb inflation and cushion its impact on the poor are urgently needed” with February inflation scraping the top of the government’s full-year target.

Socioeconomic Planning Secretary Ernesto M. Pernia, NEDA’s director general, said that while February inflation was “still within the 2-4% target… the government should remain vigilant and prepared to implement measures that will mitigate the upside risks to inflation.”

“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,” Mr. Pernia added.

“[The] government must pay closer attention to the poor.”

Mr. Pernia suggested expansion of the government’s Pantawid Pamilyang Pilipino cash-transfer program, facilitating disbursements of unconditional cash transfers (UCT) for poor households that could be hit most by higher prices due to TRAIN as they do not benefit from the personal income tax cut, and replacing the quantitative restrictions on rice with tariffs, hence, helping the country’s farmers.

Up to 30% of the money collected under TRAIN is allocated to social services like the UCT program. Beneficiaries of the program — around 10 million poor households — will receive P200 monthly (or P2,400 a year) this year and P300 monthly (P3,600 a year) next year.

Mr. Pernia also noted that some businesses have been “prematurely increasing” selling prices even if their input costs have not risen due to TRAIN.

Analysts at Nomura expects headline inflation at 4.3% for this year based on the old series, but noted upside risks “given January and February have already averaged 4.25%.”

“There are also impending increases in electricity rates and further out, we expect coal tax increases mandated in TRAIN to eventually be passed on to consumers, pushing electricity tariffs higher. Importantly, we believe core inflation will also remain under upward pressure as the output gap becomes more positive,” the Nomura report added.

“In terms [of] monetary policy, we reiterate our forecast of a total 100 basis points in policy rate hikes by BSP this year, starting at its 22 March meeting, in response to rising inflation and inflation expectations.”

For his part, Landbank’s Mr. Dumalagan said: “For March, inflation is expected to rise further based on the 2006 base year, as the full effect of the TRAIN law comes into play,” citing Energy department expectations that higher fuel excise taxes will take full effect this month or in April.

“Furthermore, the weakness of the peso will continue to push prices higher by making imported goods more expensive in local currency terms. A weaker peso, coupled with rising oil prices in the international market, could also push inflation higher by further increasing the costs of fuel and other products that use fuel as a raw material.”

Mr. Dumalagan expects inflation to average around 4.3% this year.

On the other hand, UnionBank’s Mr. Asuncion does not think the BSP will pull the trigger next month, saying that the February result is within its estimates.