Inflation steadies, averages 3.2% in 2017

MANILA, Philippines — The nationwide inflation rate held steady at 3.3 percent  in December, bringing the average for 2017 at  3.2 percent, well within the target set by the Bangko Sentral ng Pilipinas (BSP), the Philippine Statistics Authority (PSA) reported yesterday.

The full year average was faster than the 1.8 percent inflation rate recorded in 2016 due mainly to higher international crude oil prices. It  was also the highest since inflation averaged 4.1 percent in 2014. The BSP has set an inflation target of two to four percent between 2017 and 2020.

For December, the faster increases in the prices of food, alcoholic beverages and tobacco were offset by slower or stable costs of other commodities, the PSA said. 

Core inflation, which strips out volatile food and fuel items, stood at three percent, slower than November’s 3.3 percent.

BSP Governor Nestor Espenilla Jr. said the BSP would remain vigilant against any risk to the inflation outlook to ensure monetary policy stance remains consistent with the mandate of maintaining price stability conducive to economic growth.

Based on its latest assessment, the central bank sees inflation picking up to 3.4 percent this year due to the implementation of the tax reform law.

The National Economic and Development Authority (NEDA), for its part, expects inflation to remain stable within the near term and well within the government target of two to four percent for  this year.

 “We see inflation over the near-term to remain stable despite pressures that may be brought about by the newly enacted TRAIN program, weather patterns, and uncertainties in international oil markets,” Socioeconomic Planning Secretary Ernesto Pernia said.

He said the moderate full year inflation rate of 3.2 percent in 2017 is “a good basis” for maintaining the government’s inflation target at two to four percent for 2018.

NEDA also said supply conditions, particularly of major agricultural commodities appears favorable within the near term. The crop outlook figures of the  PSA as of October 2017 indicates increases in harvest areas across regions, attributed mainly to sufficient water supply and government interventions such as the continued provision of high- yielding seed varieties and fertilizer support.

To relieve the inflationary effects of TRAIN, Pernia said  the government needs to prioritize the amendment of domestic laws that will end quantitative restrictions on rice and replace these with tariffs.

 “This measure will remove the policy uncertainty in rice trade and thus encourage more investments in production and post-production innovation.  The revenues from the tariff can be used to fund or subsidize such innovations,” he said.

For Espenilla, the increases in global crude oil prices could result in inflation trending in the upper bracket of the two to four percent   range set by the central bank.

“Once the national government’s tax reforms take effect, there could be some transitory pressures on prices. On the whole, these reforms will result in productivity gains over the medium term,” he said.

According to Espenilla, monetary authorities would be on the look out for possible price spirals due to the impact of the first package of the comprehensive tax reform package that took effect last Jan. 1.

 “You can count on us to timely adjust the monetary policy stance to ward off any threat to our inflation target,” Espenilla said.

Inflation last year peaked at a three-year high of 3.5 percent in October but eased to 3.3 percent in November and December.

The benign inflation environment and robust domestic demand have allowed the Monetary Board to keep an accommodative stance to support the country’s expanding economy. The central bank last raised benchmark rates in September 2014.

Data from the Philippine Statistics Authority (PSA) showed higher annual mark-ups were posted by most commodity groups led by food and non-alcoholic beverages with 3.5 percent, alcoholic beverages and tobacco with 6.4 percent, restaurant and miscellaneous goods and services with three percent as well as furnishing, household equipment, and routine maintenance of the house with 1.9 percent.

The annual growth in the country’s food alone index advanced by 3.7 percent last month from 3.3 percent in October, bringing food inflation to 3.8 percent in 2017 from 2.6 percent in 2016.

Last December, higher annual increments were observed in rice with 1.1 percent; corn with 7.2 percent; other cereals, flour, cereal preparation, bread, pasta and other bakery products with 1.9 percent; meat with 5.9 percent; fish with 10 percent; and fruits with 4.2 percent.

Euben Paraceulles, economist at Nomura, expects inflation to hover at    4.3 percent this year  due to higher global oil prices as well as the impact of the implementation of the TRAIN Law.

He said the   Monetary Board would likely jack up rates by 100 basis points through a 25 basis point rate hike every quarter as it would not be able to look through the risk of headline inflation breaching its target.

 “We believe demand-side pressures are even stronger today than in 2014, and thus inflation expectations are also likely to accelerate amid supply-side increases from oil prices and tax reforms,” he added.

For her part, ANZ Group economist for ASEAN Eugenia Fabon Victorino said the tax adjustments would likely push inflation above the central bank’s target prompting the BSP to raise rates by 50 basis points this year.

 “We flag upside risks to our 2018 inflation forecasts due to the implementation of the first package of tax reforms.  We stand by our view that tighter credit conditions are warranted and expect two rate hikes of 25 basis points each in March and May, respectively,” she added. – With Czeriza Valencia