The above-target inflation rate, which has been in the four-percent level for the last 10 months, is expected to drop to within the government target range of two-four percent by end-2021 after October’s lower-than-expected consumer price index (CPI).
“The latest CPI outturn is consistent with BSP (Bangko Sentral ng Pilipinas) projections that inflation could remain elevated in the near term before decelerating within the target range by the end of the year,” said BSP Governor Benjamin E. Diokno in a business forum.
The October inflation was lower than most projected, with the consensus pegged at 4.9 percent versus the actual rate of 4.6 percent, according to ING Bank economist Nicholas Mapa. There was slower-than-expected food inflation as meat prices were tempered by the government’s pork importation. “The expected spike in transport inflation due to pricey crude oil was (also) contained after base effects from last year’s public transport fare hikes faded,” said Mapa.
The inflation rate in October declined to 4.6 percent from September’s 4.8 percent and from August’s 4.9 percent. It was in the lower band of the BSP’s October inflation forecast range of 4.5 percent to 5.3 percent. The year-to-date inflation average stood at 4.5 percent.
Some analysts thought inflation will even exceed five percent such as First Metro Investment Corp. (FMIC) and its research partner, University of Asia and Pacific (UA&P). Robert Dan Roces of Security Bank Corp., similar with other economists, predicted a 4.9 percent inflation for October too.
According to FMIC-UA&P, inflation will remain elevated “(but we) still see headline inflation to go below four percent starting December since the huge uptick in November-December 2020 wouldn’t repeat.”
As of its September 23 monetary policy meeting wherein the BSP decided to keep the policy rate unchanged at two percent, the BSP’s projected 2021 inflation average is 4.4 percent and 3.3 percent for 2022. The forecasts are aligned with private sector economists' 4.3 percent projection for 2021 which is similar with the International Monetary Fund's own forecast for local inflation. The World Bank forecasts a flat four percent local inflation while the Asian Development Bank expects 4.1 percent.
Since inflation remains transitory and supply-driven, Diokno said there was no reason for monetary intervention and will likely keep key rates on hold when the Monetary Board meets on Nov. 18 and on Dec. 16 for the last two scheduled policy meetings. He also noted that there is no pressure on the demand side such as increases in wages, transport costs, and housing.
During his weekly press briefing, Diokno reiterated that inflation will start to come down with the effective implementation of non-monetary measures to deal with supply-side pressures.
“All forward-looking information on the inflation environment continues to suggest an eventual deceleration to target over the policy horizon, with the greater part of ongoing price pressures concentrated in a limited set of CPI components,” he explained.
In the near term, the balance of risks to the inflation outlook is still tilted to the upside but continue to be broadly balanced for next year and in 2023.
“This outlook provides the BSP with ample room to keep the monetary stance sufficiently accommodative to support the full recovery of the economy,” said Diokno.
He added that since inflation targeting is a key mandate, the “BSP opts to look through the initial effects of the supply shocks, as the recent uptick in commodity prices are deemed transitory, and the capacity of monetary policy to effectively lower inflation is limited when price spikes are driven by cost-push factors.”
Bank of the Philippine Islands (BPI) research group, in the meantime, noted that inflation has settled above-target for 10 months in a row mainly due to both demand and supply side, and that oil prices will likely stay elevated in the coming months.
“The retail price of oil has already exceeded its level in 2018. The transport sector has started to demand fare adjustments because of this,” said BPI.
Diokno however said that the BSP does not anticipate or see any emerging second-round effects to inflation since the economy is still struggling to recoup five quarters of pandemic-induced contractions.