Drilling down price trends: Are we seeing all the dynamics?
Published Jul 8, 2021 12:11 am
OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
As expected, many economists and analysts missed on their forecasts of the Philippine inflation rate of 4.1 percent for June 2021.
Public announcement of the monthly inflation rate is highly awaited by the market because it is both a history of price dynamics and a marker of future action by the BSP.
June inflation narrates that the price pressures in June were stronger compared to what we experienced during the peak of the pandemic in 2020. At the time, the economy was in double-digit recession so domestic demand was lowest even as the BSP pumped in tremendous amount of money and reduced interest rates to one of the lowest in history.
Yet relative to January-May 2021, June inflation was of weaker momentum.
By commodity, transport was most dominant in achieving lower inflation, weakening from 16.5 percent a month earlier to only 9.6 percent. The absolute level of transport cost remained elevated because of social distancing measures and the rebound in global oil prices now inching upwards of $70 per barrel.
Weaker inflation in alcoholic beverages and tobacco as well as in other commodities also provided additional buffer.
Food inflation was steady at 4.9 percent in June reflecting the increase in fish prices but lower inflation in rice, vegetables and meat. The mitigating impact of higher imports of meat via the increase in the minimum access volume for meat imports and the temporary lowering of pork tariffs was apparent.
While the BSP trains its gun on the headline inflation, both past and projected, it is equally attentive to core inflation. Core inflation is an indicator of long-term inflation trend which is prone to demand conditions. Monetary policy can influence its dynamics.
Core inflation decelerated from May’s 3.3 percent to 3.0 percent, stable at the same level as June of last year. Six-month average stands at 3.3 percent.
For the bottom 30 percent of our income households, the computed June inflation slowed down to 4.3 percent from May’s 4.5 percent and the peak of 5.5 percent for both February and March.
This latest inflation report can assist our economists and analysts in discerning the future moves of the BSP.
But everything is relative and contextual.
For instance, it will be more analytical to also consider month-on-month price movements. Based on this, the June inflation represents a build-up in price momentum,from 0.1 percent in May to 0.2 percent. Removing seasonality, both May and June were more inflationary.
It is also true that inflation today is driven by supply shocks. Normally, monetary policy is not expected to respond; BSP can very well decide to accommodate them. Given the weak economic prospects and transitory supply shocks, the BSP may likely keep its easy monetary policy to support economic activities. However, if price spiral is more entrenched, the market could perceive this to be durable. Inflation expectation may be disanchored.
The signs are already showing. Oil prices are firming up at elevated levels. Latest business expectations surveys for Q2 and Q3 2021 both indicate weaker sentiment due to, among other factors, “elevated inflation rate due to supply constraints.”Higher inflation expectations apply to both quarters as well as the next 12 months.
Within the framework of flexible inflation targeting, monetary policy is driven by forward-looking indicators particularly inflation forecasts given the lag in the impact of monetary policy actions.
If such forecasts breach the target, BSP can start moving the policy levers northward. But based on the latest BSP forecasts, we might be seeing within-target inflation forecasts. This should strengthen the BSP’s resolve to sustain its support of government pump-priming activities even as financial stability concerns have emerged.
Global price prospects are critical factors, and they are quite ominous.
In a June 24 blog, IMF economists Christian Bogmans, Andrea Pescatori and Ervin Prifti, highlighted four facts about soaring consumer food prices. Today’s moderation in food prices could reverse and soar again. Higher food prices could likely hit hard on emerging markets like the Philippines.
First, the IMF argues that higher food prices reflect the tight hog supply from China due to the African swine flu. Half of the world’s supply of hogs comes from China. Second, early lockdown measures and supply chains disruptions led to a spike in consumer prices. The shift from face-to-face food services and consumer stockpiling resulted in price surge. Third, rising shipping and transport costs could be very inflationary. Ocean freight rates have climbed around 2-3 times in the last 12 months, reflecting elevated petroleum prices. Last, global food producer prices are showing multi-year highs following higher demand and supply disruption due to La Niña.
International food prices are expected to rise by 25 percent in 2021. With pass-through of 13 percent in year one and 7 percent in year 2, additional inflation of 3.2 percentage points and 1.75 percentage points are likely. Higher freight charges may add 1 percentage point.
Smaller markets are vulnerable to this future shock from higher global prices because food accounts for a large share in the consumer basket. Possible currency depreciation, something we are seeing already in the peso, could generate additional inflation.
Our monetary authorities, together with third-party economists and analysts, should acknowledge this possibility in the calculus of inflation this year and the next. Omission bias could be costly in deciding on monetary policy.
Diwa C. Guinigundo
As expected, many economists and analysts missed on their forecasts of the Philippine inflation rate of 4.1 percent for June 2021.
Public announcement of the monthly inflation rate is highly awaited by the market because it is both a history of price dynamics and a marker of future action by the BSP.
June inflation narrates that the price pressures in June were stronger compared to what we experienced during the peak of the pandemic in 2020. At the time, the economy was in double-digit recession so domestic demand was lowest even as the BSP pumped in tremendous amount of money and reduced interest rates to one of the lowest in history.
Yet relative to January-May 2021, June inflation was of weaker momentum.
By commodity, transport was most dominant in achieving lower inflation, weakening from 16.5 percent a month earlier to only 9.6 percent. The absolute level of transport cost remained elevated because of social distancing measures and the rebound in global oil prices now inching upwards of $70 per barrel.
Weaker inflation in alcoholic beverages and tobacco as well as in other commodities also provided additional buffer.
Food inflation was steady at 4.9 percent in June reflecting the increase in fish prices but lower inflation in rice, vegetables and meat. The mitigating impact of higher imports of meat via the increase in the minimum access volume for meat imports and the temporary lowering of pork tariffs was apparent.
While the BSP trains its gun on the headline inflation, both past and projected, it is equally attentive to core inflation. Core inflation is an indicator of long-term inflation trend which is prone to demand conditions. Monetary policy can influence its dynamics.
Core inflation decelerated from May’s 3.3 percent to 3.0 percent, stable at the same level as June of last year. Six-month average stands at 3.3 percent.
For the bottom 30 percent of our income households, the computed June inflation slowed down to 4.3 percent from May’s 4.5 percent and the peak of 5.5 percent for both February and March.
This latest inflation report can assist our economists and analysts in discerning the future moves of the BSP.
But everything is relative and contextual.
For instance, it will be more analytical to also consider month-on-month price movements. Based on this, the June inflation represents a build-up in price momentum,from 0.1 percent in May to 0.2 percent. Removing seasonality, both May and June were more inflationary.
It is also true that inflation today is driven by supply shocks. Normally, monetary policy is not expected to respond; BSP can very well decide to accommodate them. Given the weak economic prospects and transitory supply shocks, the BSP may likely keep its easy monetary policy to support economic activities. However, if price spiral is more entrenched, the market could perceive this to be durable. Inflation expectation may be disanchored.
The signs are already showing. Oil prices are firming up at elevated levels. Latest business expectations surveys for Q2 and Q3 2021 both indicate weaker sentiment due to, among other factors, “elevated inflation rate due to supply constraints.”Higher inflation expectations apply to both quarters as well as the next 12 months.
Within the framework of flexible inflation targeting, monetary policy is driven by forward-looking indicators particularly inflation forecasts given the lag in the impact of monetary policy actions.
If such forecasts breach the target, BSP can start moving the policy levers northward. But based on the latest BSP forecasts, we might be seeing within-target inflation forecasts. This should strengthen the BSP’s resolve to sustain its support of government pump-priming activities even as financial stability concerns have emerged.
Global price prospects are critical factors, and they are quite ominous.
In a June 24 blog, IMF economists Christian Bogmans, Andrea Pescatori and Ervin Prifti, highlighted four facts about soaring consumer food prices. Today’s moderation in food prices could reverse and soar again. Higher food prices could likely hit hard on emerging markets like the Philippines.
First, the IMF argues that higher food prices reflect the tight hog supply from China due to the African swine flu. Half of the world’s supply of hogs comes from China. Second, early lockdown measures and supply chains disruptions led to a spike in consumer prices. The shift from face-to-face food services and consumer stockpiling resulted in price surge. Third, rising shipping and transport costs could be very inflationary. Ocean freight rates have climbed around 2-3 times in the last 12 months, reflecting elevated petroleum prices. Last, global food producer prices are showing multi-year highs following higher demand and supply disruption due to La Niña.
International food prices are expected to rise by 25 percent in 2021. With pass-through of 13 percent in year one and 7 percent in year 2, additional inflation of 3.2 percentage points and 1.75 percentage points are likely. Higher freight charges may add 1 percentage point.
Smaller markets are vulnerable to this future shock from higher global prices because food accounts for a large share in the consumer basket. Possible currency depreciation, something we are seeing already in the peso, could generate additional inflation.
Our monetary authorities, together with third-party economists and analysts, should acknowledge this possibility in the calculus of inflation this year and the next. Omission bias could be costly in deciding on monetary policy.