Inflation seen rising as oil prices spike

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may be underestimating the country’s inflation risks as high oil prices will soon be the problem, prompting consumer prices to surpass government targets.

In its latest economic monitor, UK-based Pantheon Macroeconomics said the BSP is very slowly taking near-term inflation risks seriously, evident in its modest hike in inflation forecast for the year.

Last week, the BSP maintained key interest rates, but it raised its inflation forecast to 4.2 percent from the original target of four percent for 2021.

“BSP is caught between a rock and a hard place, with the economy now facing a real risk of a double-dip recession due to rapidly intensifying COVID-19 headwinds,” Pantheon Macroeconomics senior Asia economist Miguel Chanco said.

“At the very least, BSP now concedes that inflation will remain stubbornly high through most of this year, implicit in its assumption that the headline rate will decelerate only toward the fourth quarter,” he said.

The BSP earlier said it does not expect inflation to surpass five percent, but Pantheon Macroeconomics maintained it will likely peak at a high of around seven percent by August.

This brings the global think tank’s full-year average forecast to six percent, well above the government’s target of 4.2 percent.

“We agree that food price pressures will be transitory, given their largely supply-side nature. But this downplays the big boost oil prices have already given to headline inflation and most of the latter’s additional rise will stem from the former,” Chanco said.

Since inflation bottomed-out in May at 2.1 percent, Chanco argued that the contribution from transport prices has surged from -0.4 percentage points to 0.8 as of last month.

The BSP upgraded its forecast of Dubai crude oil to $61 per barrel, from $55 previously.

“In our view, this does not go far enough, partly because it implies that the recovery is over, the average so far this year already stands at $60. Recovery has much further to run, going by the signal from Chinese demand with a barrel of Brent crude likely to average at $75 this year, up from $43 in 2020,” Chanco said.

“Domestically, the pass-through in oil price effects will lift housing and utilities inflation the most from the February rates,” he said.

Inflation in the Philippines quickened for the fifth straight month in February to a new two-year high of 4.7 percent as prices of meat and oil products continue to rise.