FMIC expects inflation to remain above 5% until Sept.; peak in July
INFLATION is expected to stay above 5% until September, with analysts at First Metro Investment Corp. ( FMIC) warning that higher prices will likely dampen consumer sentiment despite robust economic growth.
FMIC economists see prices of widely used goods and services recording a rise of 5.3% in July, possibly the peak for the year. They expect a 5.2% rise in August and 5.1% in September.
“We remain confident that Q2 GDP performance will hit 7% again given outsized gains in infrastructure spending, capital goods imports, and manufacturing. However, consumer confidence may be eroded unless inflation slows down back to below 5% in Q3 as we expect it will,”
analysts said in the July edition of The Market Call.
Inflation averaged 4.3% during the first half, with the June result of 5.2% the highest in nine years. Sustained price spikes will likely weigh on sentiment as consumer optimism turns sour.
The Bangko Sentral ng Pilipinas (BSP) sees inflation peaking between July- September and surpass the 2- 4% target band, but is expected to ease for the last few months of 2018 to average 4.5%.
The central bank has said inflation is likely to rise due to higher taxes on selected goods, rising global oil prices, a weaker peso, and the approval of increased minimum wages, to name a few. Last week, Standard Chartered Bank projected that inflation will peak at 5.8% in August.
Meanwhile, credit analysts at S&P Global Ratings said separately that soaring prices are likely a “one-off ” trend due to the impact
of tax reform, which took effect Jan. 1.
“The main focus on the Philippine economy continues to be inflation. We remain steadfast in our view that runs counter to speculation about overheating and growth running above capacity,” the debt watcher said in a report yesterday.
“Instead, we view the current pace of growth as within the bounds of the economy’s potential, since strong demographic trends have provided a large and educated labor force that generated much stronger capital investment in recent years.”
Economist Bernardo M. Villegas said during last week’s FMIC mid-year economic briefing that the BSP may consider a “more aggressive” monetary response and tighten policy rates by 50 basis points ( bp) in one go next month just to catch up with inflation.
BSP Governor Nestor A. Espenilla, Jr. said on Friday that the central bank is considering a “strong follow-through” policy action for its Aug. 9 rate-setting meeting, as he acknowledged that some demand-side pressures are also feeding into inflation. This will follow back-to-back 25bp increases during its May and June reviews.
Even with rising inflation, FMIC still believes that economic growth will be robust at 7% during the second quarter. If realized, this will be higher than the 6.8% in the first quarter, falling within the government’s 7-8% target.
Analysts said the government “appears successful” in ramping up spending particularly on infrastructure, accompanied by strong growth in factory output. Exports are also expected to recover following a “strong acceleration” of economic activity in the United States during the second quarter.