Philippines: No respite from inflation as typhoons affect prices

Price index seen spiking up to 9.3% in December

MANILA, Philippines — Inflation may hit up to 9.3 percent in December and remain elevated until the first quarter of next year given high global commodity prices and the lingering impact of recent typhoons, economists said.

In an interview with ‘The Chiefs’ on One News, Jonathan Ravelas, managing director of eManagement for Business and Marketing Services, said he expects inflation to peak at around 9.1 to 9.3 percent next month.

For this month, he said inflation could reach around 8.4 percent.

“Sad to say that inflation will remain elevated until the global commodity prices have eventually started to peak. That is our challenge,” he said.

“Plus the impact of recent calamities. It will probably be until the first quarter of 2023 that we’ll see elevated inflation,” he added.

The forecast assumes there would be no more disasters similar to those which recently hit the country this year.

Latest data from the Philippine Statistics Authority showed headline inflation accelerated to 7.7 percent in October, the highest in almost 14 years.

This brought the average inflation from January to October at 5.4 percent, higher than the government’s two to four percent target band for the year.

National Statistician Dennis Mapa said that “there is a substantial probability of an increase” in inflation in November with data showing upward movement in food prices and impact of the recent Typhoon Paeng.

With inflation staying elevated, Ravelas said consumers are expected to tighten their belts over the next one to three months.

“This is really a challenge. So, the government might have to raise revenues or new taxes to be able to deliver infra spending and sustaining the potential support to the most vulnerable sectors in aid,” he said.

Ravelas said he also expects the Bangko Sentral ng Pilipinas (BSP) to take a more aggressive stance by hiking rates by a total of 150 basis points in the last two policy meetings for the year.

“So I’m expecting that between now and December, they’ll raise the interest rates to 5.75 percent,” he said.

Earlier, BSP Governor Felipe Medalla said the central bank would raise key policy rates by 75 basis points at the Nov.17 rate-setting meeting to match the recent rate hike by the US Federal Reserve and prevent further depreciation of the peso.

The BSP has so far hiked the benchmark rate by a total of 225 basis points to 4.25 percent to rein in inflation and stabilize the peso.

For his part, ING Bank senior economist Nicholas Mapa said inflation may quicken to eight percent by December as price pressures would remain potent, especially after the country was hit by another storm last week.

“The confluence of supply and demand side pressures should push headline inflation close to eight by December before drifting slowly lower in the first half of 2023, as second-round effects are likely to linger,” Mapa said.

He said the BSP should remain hawkish even after their recent pre-announced 75-basis-point rate increase to match the aggressive rate hikes by the US Federal Reserve point by point.

“We expect the central bank to hike again in December, likely matching any move from the Fed to close out the year,” he said.

Former finance undersecretary Romeo Bernardo, country analyst for the Philippines at GlobalSource Partners, said the headline inflation rate is likely to stay above the BSP’s upper end four percent target longer.

“The BSP’s job just became even harder,” he said.

The New York-based think tank raised its 2022 inflation forecast to 5.8 percent from the original target of 5.6 percent.

Bernardo said inflation is expected to remain elevated above the central bank’s two to four percent target and average closer to five percent next year.

He said the inflation surprise, alongside more recent damages to agricultural output due to typhoons, as well as net upside risks from global and local factors, could further feed into inflation expectations.

Bernardo said Medalla’s announcement that the Monetary Board would hike key policy rates by another huge 75 basis points on Nov. 17 to match the jumbo 75-basis-point increase recently delivered by the US Federal Reserve was aimed at preempting another bout of peso selling.

“This will bring the key local policy rate to five percent, a level last seen in early 2009,” he said.

Jun Neri, lead economist at the Bank of the Philippine Islands, said the latest inflation figure also continues to reflect the continued rise in global commodity prices, particularly oil.

Even if the prices have stabilized recently, Neri explained that the effect on inflation may not be immediate as the full impact on inflation is expected to materialize only in the second half of 2023.

“We continue to see price pressures that could prevent inflation from going back to the target of the BSP in the coming year, with inflation prints likely to remain above seven percent for the remainder of the year,” Neri said.

Given the absence of structural reforms in the agriculture industry, the BPI economist said supply constraints would likely persist as the importation of food products may not provide enough relief since global prices of food are also high.

To add to this, Neri pointed out that the peso may continue to depreciate in the coming months as the country becomes more and more reliant on imports with the outflows of   dollars significantly exceeding inflows.

Even if the US Fed stops hiking in 2023, Neri explained it may not necessarily lead to a huge appreciation of the peso given the country’s fundamentals.

“The peso may even continue to weaken in this scenario if the trade deficit remains sizeable, although at a slower pace compared to this year. Demand recovery and the surge in commodity prices continue to drive the growth of imports,” he said.

The peso depreciated by as much as 15.7 percent to hit an all-time low of 59 to $1 several times last month before momentarily bouncing back to the 57 to $1 by closing at 57.97 to $1.

The local currency has weakened back to the 58 to $1 level, closing at 58.55 last Friday, 25 centavos stronger than Thursday’s 58.80.

Armed with its thinning gross international reserves (GIR), the BSP has been very active in the foreign exchange market.

A substantial peso depreciation due to import expansion and hawkish Fed policy might force the BSP to make more adjustments in their policy settings.

“We expect RRP (reverse repurchase rate) to settle well above five percent by end-2022,” Neri said.

The Department of Finance, meanwhile, said government’s top priority right now is addressing the skyrocketing commodity prices even as it admitted Filipinos have yet to see inflation cooling down, at least for the rest of the year,

“Inflation is expected to remain elevated for the rest of the year with the impact of severe Typhoon Paeng on food supply and persistent global supply chain issues,” Finance Secretary Benjamin Diokno said.

Nonetheless, Diokno said the government is moving to ensure that inflation would be target-consistent over the medium term.

Diokno argued that addressing high inflation is the number one priority of the economic team.

“The government will help ensure that inflation will be on a target-consistent path over the medium term with the implementation of direct measures to address supply shocks,” he said.

Such measures include improving local production, ensuring the timely importation of key commodities including fertilizers and raw materials, improving distribution efficiency and ensuring energy security.

Further, the economic team is pushing for the extension of Executive Order (EO)171 to aid in taming food and energy inflation.

EO 171 effectively slashes the tariff rates on pork, corn, rice and coal but the measure will expire by the end of the year.

The EO, which was implemented by the previous administration, was aimed at addressing inflationary concerns amid high oil prices that already trickled down to food items.

The finance chief said the government has implemented a series of targeted support programs to allay the immediate effects of rising food insecurity on vulnerable sectors.

Existing subsidy programs include fuel subsidies for transport workers, fuel discounts for farmers and fisherfolk, and social pension for indigent senior citizens.

For the October inflation print of 7.7 percent, transport fare hikes, higher domestic fuel pump prices, and increased food and commodity prices due to the typhoons drove inflation to its fastest pace in 14 years.

“Demand-side dynamics have also partly placed upward pressure on inflation following increased economic activity,” Diokno said. – Louise Maureen Simeon