Inflation tops estimates at 2-year high

THE GENERAL HIKE in prices of basic goods and services clocked its fastest pace in nearly two years last month, breaching central bank and market estimates but still in line with official expectations for the medium term.

The Philippine Statistics Authority (PSA) said November inflation hit 2.5%, picking up from October’s 2.3% and soaring from the year- ago 1.1%, driven particularly by alcoholic beverages and tobacco; transport; as well as housing, water, electricity, gas and other fuels.

Last month’s print was the highest reading since December 2014’s 2.7% and matched last February 2015’s 2.5%, according to PSA data.

The actual rate breached the 1.6-2.4% estimate range given last week by the Bangko Sentral ng Pilipinas (BSP) as well as the 2.2% median of a Businessworld poll of 16 economists.

The alcoholic beverages and tobacco index — which has the biggest contribution of 38.98% to the theoretical basket of widely used goods and services on which inflation is based — picked up 6.5% last month from October’s 6.1% and 3.9% in November 2015.

The housing, water, electricity, gas and other fuels index — which has the second-biggest contribution of 22.46% — increased to 1.3% in November from 0.9% in October, and reversed from a 1.2% drop in November last year.

The increase in transport index — which has the fourth- biggest contribution of 7.81% — climbed to 0.5% from October’s 0.2% but slowed from November 2015’s 0.6%.

The food- alone index grew 3.5% last month, unchanged from October’s 3.5% and jumping from 1.7% in November last year.

“The decrease in rice prices signals the recovery of the rice sector from the devastation of typhoons Karen and Lawin. We must foster technological advances in agriculture to decrease the susceptibility of our crops to natural calamities,” National Economic and Development Authority Director- General Ernesto M. Pernia said in a separate statement.

Although November’s inflation breached estimates, BSP Governor Amando M. Tetangco, Jr. said price increases remain on track to trend higher over the next two years.

“While higher than last October and slightly above the upper end of our forecast range for the month, the November figure brings year- to- date average to 1.7%, still slightly below the lower bound of the national government’s target range of 2-4%,” Mr. Tetangco told reporters in a text message. “Nevertheless the trend is consistent with our expectation that for 2017-18, full year inflation would be within target.”

The 1.7% 11- month average hovers just below the BSP’s 1.8% forecast and 2-4% target range for the full year.

Sought for comment, Bank of the Philippine Islands (BPI) lead economist Emilio S. Neri, Jr. said in an e-mail that November’s inflation was “due largely to upticks in food items namely: vegetables, rice and fish.”

“The rise in petroleum products also contributed to the surprise acceleration,” Mr. Neri added. “The decline in electricity prices was not big enough to offset the rise in the aforementioned items.”

Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines ( Landbank), said separately that “[ h] ousing prices might have accelerated due to strong demand amid the country’s low interest rate environment and a change in lifestyle which saw more people owning condominiums in the city.”

“While the prices of some utilities decreased last month, the downside pressure might have been offset by the peso’s depreciation, which propelled the cost of imported products,” Mr. Dumalagan said.

“While, food prices grew at a slower pace in November, its dampening impact on inflation could have been more pronounced if it were not for Typhoon Lawin, which devastated farm lands in Northern Luzon, especially Cagayan Valley. The storm in October, I believe, caused the prices of rice, corn, fish, meat, vegetables and fruits to rise a faster pace last month in some regions of Northern Luzon. In part, this also contributed to last month’s higher inflation.”

OUTLOOK

Analyses issued yesterday noted that inflation is expected to settle below 2% this year — although faster than the 1.4% average posted in 2015 — and remains on track to pick up to above the 3% level by 2017.

“With strong growth in household spending and robust private investment, we expect inflation to average at 3.1% year-on-year in 2017. If the government is successful in raising excise taxes on oil by mid-2017, the central bank estimates a 0.6 percentage point additional increase in average inflation over a 12-month period,” said Eugenia Victorino, economist at ANZ Research.

Nomura Global Markets Research, meanwhile, pegged this year’s average at 1.7%, and is expected to rise to 3.3% next year.

“Given that BSP remains firmly [on ] inflation-targeting [mode], we continue to expect a cumulative 50 basis points of rate hikes in H1 2017 — the only central bank in Asia to raise rates next year,” the Nomura economists added in a separate research note.

Expecting inflation this month to range from two to three percent, Security Bank economist Angelo B. Taningco said he expects that “2016 headline inflation will fall slightly below 2%, which is the low end of the official target range for the year.”

“For 2017, I expect annual headline inflation to be slightly above 3% amid relatively strong upward price pressures in certain commodity group items such as transport and utilities.”

Sought for his projection, BPI’s Mr. Neri replied that he has “a sub-2.0% final inflation print in 2016.”

“We think 2016 will be the second year in a row BSP will be missing its inflation target,” he added.

For his part, Landbank’s Mr. Dumalagan said that “[ g]iven November’s higher- than- expected inflation, the BSP remains on track to reaching its inflation forecast of 1.8% this year.”

“This estimate might be the highest achievable average inflation for 2016 due to subdued price increases at the start of the year,” Mr. Dumalagan said.

“While average inflation might not reach the BSP’s minimum target of 2%, current price pressures suggest that mean inflation next year might already fall within the BSP’s target range.”

The Landbank economist said that inflation could “at least” steady or even pick up further this month.

“Increased buying activity in December might boost prices even more,” Mr. Dumalagan said, adding that “[a]bsent any devastating storms this month, food prices might probably grow at a slower pace in December due to the waning impact of El Niño on farm production.”

“In December inflation could be at least 2.5%.”

In an e- mail sent to reporters, Chidu Narayanan, Standard Chartered’s economist for Asia, said: “While the higher- thanexpected number [in November] is a surprise, one high print is not automatically a concern.”

“We do expect inflation to edge up further in the near term, but remaining within the central bank’s 2-4% target range in 2017, and to remain unconcerning,” he added, saying he expects inflation to average 1.7% in 2016.

Looking ahead, BSP’s Mr. Tetangco said the central bank will remain on the lookout for petitions for transport fare adjustments and global developments, that may “affect domestic inflation dynamics over the policy horizon.”

The BSP’s policy-setting Monetary Board kept the benchmark rates unchanged during its Nov. 10 meeting, citing firm domestic demand and manageable inflation.

The central bank will hold its eighth and last policy review for the year on Dec. 22.