Inflation to ease below 4% as oil prices fall

MANILA, Philippines — Rising prices of goods and services will likely drop below four percent the upper end of the government’s target toward the end of the year as global oil costs are seen falling sharply in the coming months.

In its latest Market Call report, First Metro Investment Corp. (FMIC) and University of Asia and the Pacific (UA&P) Capital Markets Research said inflation would ease below four percent by the fourth quarter.

“Headline inflation may not drop below four percent in the third quarter because of the low base a year ago,” FMIC said.

“But with crude oil prices sharply falling in August and food prices stabilizing, it will likely go below that threshold early in the fourth quarter,” it said.

Inflation in July cooled to a seven-month low at four percent, falling back within government targets for the first time this year as transport prices decelerated.

“The OPEC (Organization of Petroleum Exporting Countries) agreed to raise output, while oil rig count in the US improved. Thus, we think that price movements will trend more softly as we expect crude oil prices to further decline in anticipation of higher supply,” FMIC said.

However, it noted that the low index base in the third quarter of last year would slightly delay the further easing of inflation in the fourth quarter.

In the July to September 2020 period, inflation averaged at 2.5 percent. To date, inflation is already at 4.4 percent.

The rising cost of some food items may also delay the easing of inflation even as the government has moved to boost pork supply through imports.

Socioeconomic Planning Secretary Karl Chua earlier admitted that pork inflation “has not been fully addressed” four months after President Duterte ordered the reduction of duties and the increase in import volume.

The elevated pork inflation since the start of the year has been keeping the overall headline rate from falling within the government’s target band.

Meanwhile, FMIC said hopes for a faster economic recovery got a boost following the nearly 12 percent jump in gross domestic product in the second quarter but the extent of the impact of the new lockdowns due to the new variants may hamper such optimism.

“Employment gains receded in June and may further get smaller in July as the government imposed tighter quarantine restrictions in Metro Manila citing a sharp rise in infections of COVID-19 Delta variant,” FMIC said.

FMIC is also seeing a space for a possible easing of monetary policy via reduction in reserve requirement or lower policy rate due to the latest round of lockdown measures.