Inflation seen below 9% in February

MANILA, Philippines — Most economists believe inflation remained elevated, but stayed below nine percent in February after accelerating to a fresh 14-year high of 8.7 percent in January.

According to ING Bank senior economist Nicholas Mapa, inflation likely settled at 8.7 percent in February.

“We expect headline inflation to be 8.7 percent year-on-year or higher as food inflation is still expected to be substantial,” Mapa said.

He pointed out that food, transport and utilities are still the main drivers, with spotlight on food inflation given its heft in the consumer price index (CPI) basket.

China Bank chief economist Domini Velasquez expects inflation to remain steady at 8.7 percent, but with a slowdown in seasonally adjusted basis to 0.3 percent from one percent in January.

“We saw substantial declines in vegetable prices, which could temper food inflation. Rollbacks in pump prices and electricity rates in Meralco-serviced areas will offset the rise in LPG prices. On the other hand, core inflation likely rose to eight percent given more commodities being affected by persistently high inflation. Service activities such as restaurants and accommodation and recreation will likely exhibit higher prices,” Velasquez said.

In February, Velasquez said the risk of peak inflation remains due to low base effects.

“However, by March, we expect inflation to be firmly on a downtrend sans any additional outside shocks. The government seems to be more pro-active in addressing supply shortages and this should benefit Filipinos’ cost-of-living, moving forward,” Velasquez said.

Velasquez warned that higher inflation would push Filipinos to clamor for higher wages, subsidies and transport fare hikes, resulting in a possible wage-price spiral that could lead to runaway inflation.

She said pro-active and pre-emptive non-monetary measures are needed to prevent another round of inflationary pressure, while sufficient food supply, improvements in domestic logistics chain and storage could help bring down food prices.

Security Bank chief economist Robert Dan Roces said inflation likely quickened further to 8.9 percent with a range of 8.7 to 9.1 percent in February.

Roces said food and utilities would remain the contributors, but he expects broader importations of food items plus subsidies to PUV drivers, farmers and fisherfolk to help temper inflation’s effects.

“As such, there is a good probability that the February print could be toppish, but of course significant upside risks remain for the year,” Roces said.

Nonetheless, Roces pointed out that current estimates show price pressures should begin tempering by the second quarter.

“With the peso relatively confined to a range, we think the BSP can opt to slow the size of hikes by 25 basis points at the next policy meeting,” Roces said.

Jun Neri, lead economist at Ayala-led Bank of the Philippine Islands, said inflation likely accelerated to 8.9 percent in February.

“This means BSP might hike by as much as 50 basis points again in its March 23 meeting to demonstrate its determination to rein in inflation expectations,” Neri said.

Alvin Arogo, economist at Lucio Tan’s Philippine National Bank, also believes that inflation last month accelerated to 8.9 percent as the lagged and second-round effects of the commodities and foreign exchange spike from last year have generally not started to wear off.

For his part, UnionBank chief economist Carlo Asuncion said inflation likely breached nine percent at 9.3 percent in February with core inflation still showing momentum.

“Core inflation, as we all know, is stripped of the more volatile items in the inflation basket suggesting the longer-run trend of inflation and expectations.

Asuncion pointed out that the expected strong demand backdrop for first quarter and the ensuing inflation surge only calls for the Bangko Sentral ng Pilipinas (BSP) to either accelerate its terminal policy rate at a range of between 6.25 and 6.50 percent.

Earlier, BSP Governor Felipe Medalla said an inflation outturn of above nine percent for February could prompt the Monetary Board to deliver another 50-basis-point hike in its next meeting scheduled on March 23.

The BSP said inflation likely settled within a range of 8.5 to 9.3 percent in February. The last time inflation was above nine percent was in November 2008 at 9.1 percent.

If the BSP opts for an aggressive 50-basis-point hike, Asuncion said the BSP would disengage from the US Federal Reserve and raise the risk of a terminal rate exceeding six percent, especially if faster disinflation in succeeding months is nowhere to be seen.

“The BSP is likely to hike by 25 basis points given mostly supply side nature of price spikes but inflation above nine percent could prompt a 50-basis-point increase,” Mapa said.

Likewise, Velasquez added that the BSP could deliver one more small rate hike this month followed by a post to let front-loaded rate hikes work their way through the economy if February inflation remains relatively flat from January.

“On the other hand, a higher-than-expected inflation print in February may continue to de-anchor inflationary expectations, tying the hand of the BSP into raising rates more despite slowing growth momentum,” Velasquez said.

Arogo also expects a smaller 25-basis-point hike this month but a higher-than-expected inflation last month could force the central bank to be more aggressive with a 50-basis-point increase.