Inflation stays at 4.5% in May

BSP sees slowdown in H2

MANILA, Philippines — Inflation steadied for the third straight month in May, but economists warned of lingering risks as global oil prices continue to soar and easing restrictions at the local level may put pressure on business activities.

The Philippine Statistics Authority (PSA) yesterday reported that headline inflation – the rate of increase in the consumer price index – remained at 4.5 percent in May, in line with market expectations.

However, it is much quicker than the 2.1 percent recorded in the same period last year.

While the May inflation was well within the 4.2 to 4.8 percent forecast of the Bangko Sentral ng Pilipinas (BSP) for the month, it breached the two to four percent target for 2021. Average inflation in the first five months stood at 4.4 percent.

But BSP Governor Benjamin Diokno said inflation may ease to within the two to four percent target in the second half on continued non-monetary measures to address supply constraints.

While inflation is seen remaining above the high end of the BSP target range in the second quarter on elevated meat and oil prices, he said the temporary reduction in tariffs on imported pork would address supply constraints and ease price pressures on meat products going forward.

“The BSP expects inflation to decelerate to within the target range by the second half of 2021 to 2022 as domestic supply bottlenecks are addressed,” Diokno said.

The BSP chief said the projected decline of inflation would depend crucially on the timely arrival of pork to help stabilize domestic prices.

“Meanwhile, the BSP is of the view that risks to the inflation outlook are broadly balanced. The risks relate to the arrival of pork imports at lower tariffs, the successful reopening of the domestic economy, and the pace of the global economic recovery,” he said.

In a virtual press briefing, PSA head Dennis Mapa said the steady inflation was due to the varying movement across commodity groups. For one, the heavily weighted food and non-alcoholic beverages posted lower annual increment at 4.6 percent from 4.8 percent in the previous month.

Meat inflation, which is a major contributor in the food category, remained at 22.1 percent. Meat has been registering double-digit increases since December 2020.

Pork inflation, in particular, went up to 58.4 percent from 57.7 percent as pork prices remain high due to tight supply in the local market. While the government has already greenlighted tariff cuts and higher volume on pork imports, these have yet to take effect.

“I think it is only when supply comes in that we can see the effect of pork in inflation. Only then can we see the direction for pork,” Mapa said.

The lower prices of rice, vegetables, fruits and corn also offset the increments in pork prices.

Aside from food, transportation costs, which had a 29.8 percent share to the headline rate, decelerated to 16.5 percent as the huge decline in transport fares managed to offset the increase in petroleum and fuels.

The move to increase the carrying capacity in public transport contributed to the decline in fares even as oil prices remain elevated.

Also contributing to inflation were increases in the prices in restaurants and miscellaneous goods and services, which had a 10.7 percent share to the headline rate. This was driven by meals, articles for personal hygiene and barbershop services.

While inflation is unchanged, Rizal Commercial Banking Corp. chief economist Michael Ricafort said risks remain in the coming months especially as global oil prices show no signs of going down as the world economy is off to a massive rebound.

He said  any acceleration in global economic activity would impact on domestic price levels particularly  oil, which the Philippines heavily relies on in the world market, and in turn impact on the rest of the commodity groups.

Monetary authorities have been closely monitoring the impact of rising global oil prices, driven by improved prospects of global demand amid the gradual recovery from the COVID-19 pandemic.

“The BSP will continue to monitor and update the oil price outlook as it remains highly uncertain given evolving developments related to the pandemic and the uneven global recovery,” Diokno said.

The spot price of Dubai crude oil, a benchmark for Asian countries like the Philippines more than doubled to $62.32 per barrel in April relative to the same period last year as many countries recover from the global health crisis and amid the ongoing production limits from the Organization of Petroleum Countries (OPEC).

As a net oil importer, the BSP chief said the Philippines closely monitors global oil price movements as a rising trend tends to be associated particularly with higher transport inflation rates.

Ricafort also said the downgrade of quarantine status in Metro Manila and nearby provinces can also contribute to the upward movement of inflation rate.

“Easing of lockdowns would result in some pickup in economic activities that could lead to some upward normalization in prices. But, still could be offset by relatively slower economic recovery amid higher COVID-19 cases and variants and delay in vaccine arrivals,” he said.

Nicholas Mapa, senior economist at ING Bank, said inflation may   decelerate in the coming months as supply conditions ease with inflation set to return within target by July.

Ricafort, on the other hand, expects inflation to ease below four percent around September and hit two to three percent by November largely due to base effects fading by then.

With the steady inflation rate, Mapa and Ricafort said the BSP is expected to extend its pause for the rest of the year with a possible rate hike only by the third quarter of 2022 as economic conditions improve.

But for Alex Holmes of Capital Economics, the BSP would not wait for next year as it would likely cut rates again before the year ends. Holmes said the May inflation rate is seen to further calm worries about price pressures.

“We have two 25- basis- point rate cuts penciled in for the second half of this year which would take the main policy rate down to 1.5 percent,” he said.

The BSP has been keeping interest rates at record lows for the past six months as it aids the economy to recover following a record 9.6 percent economic slump in 2020, the worst in several decades.

Diokno said the   Monetary Board would consider the latest price developments during its policy rate setting meeting on June 24.

“The BSP remains watchful over the evolving economic conditions and challenges brought about by the pandemic to ensure that the monetary policy stance remains consistent with its price and financial stability objectives,” he said. – Lawrence Agcaoili