Inflation seen to hit 6.2% in 2023

MANILA, Philippines — Inflation is expected to jump to 6.2 percent for 2023 if higher prices of rice and fuel persist in the next few months, with the government likely to overshoot its target and not achieve a sustained downward trend.

In a memorandum for President Marcos’ consideration, House of Representatives committee on ways and means chair Rep. Joey Salceda outlined a framework to address rising fuel prices and its impact on headline inflation.

Based on Salceda’s analy-sis, inflation upside risks will continue to mount if the current price situation for both fuel and rice remains, bringing full-year inflation to 6.2 percent.

Should this happen, the rate will be above the five to six percent assumption of the Cabinet-level Development Budget Coordination Committee (DBCC). This will also be higher than the 5.8 percent inflation print in 2022.

Inflation in August soared to 5.3 percent, snapping six months of decline. Year-to-date average is at 6.6 percent.

Salceda said the global outlook for fuel is for higher demand, with a general expectation of future price increases over the short-term.

This is due to oil producers Saudi Arabia and Russia deciding to extend their production cuts to end-2023, exacerbated by floods in Libya that raised expectations of supply disruptions.

As such, prices could increase to $107 per barrel by yearend from the current range of $90. World oil prices have already jumped by 34.8 percent in a little over two months.

“Should price expectations of $107 per barrel materialize, pump prices could further increase by at least P5.20 per liter for gasoline, and P7.80 per liter for diesel, considering past price behavior,” Salceda said.

In the inflation basket, fuel, light and water have a combined weight of 5.36 percent, which means that further increases would have second-round effects on inflation.

Historically, a P10 increase in fuel prices results in a one percent increase in overall inflation.

Domestic pump prices have increased by 11 percent for gasoline and 26 percent for diesel, equivalent to roughly P6.70 to P13.45 per liter.

Salceda emphasized that recent increases were not driven by abusive firm behavior, but by global conditions.

“The impact of global market conditions, however, has been exacerbated by our increased dependency on imported final petroleum products, with significantly less petroleum refining in the Philippines,” Salceda said.

Amid proposals to suspend the excise tax and value-added tax on fuel, the lawmaker-economist argued that an immediate move to do so is not available as the Tax Reform for Acceleration and Inclusion Law only specified the period of 2018 to 2020 for possible suspension should oil prices reach $80 per barrel.

Suspending fuel excise taxes will require legislation amending the provision to remove the 2018 to 2020 limitation, he said.

A tariff reduction is also not available as rates have already reverted to zero from 10 percent as modified by Executive Order 113 issued in 2020, Salceda said.

With such circumstances, the lawmaker proposed several measures to address the current problem, including the immediate implementation of fuel discounts, relaxation of biofuel requirements on gasoline, increased price monitoring, and review of compliance with minimum inventory requirements.

Salceda is also pushing for a flexible excise tax regime, or an automatic reduction of excise tax by P3 when the three-month average exceeds $80 per barrel, and an increase of P2 when the average goes below $45.