Inf lation picks up in July

THE overall year-on-year increase in prices of widely used goods quickened slightly in July, the fastest in six months, the Philippine Statistics Authority (PSA) reported on Wednesday.

Preliminary data from the PSA showed headline inflation at 2.7% last month, picking up from the 2.5% pace in June and the 2.4% rate in July 2019.

The July figure was a tad higher than the 2.6% median in a BusinessWorld poll conducted late last week and fell within the 2.2%-3% estimate given by the Bangko Sentral ng Pilipinas (BSP) for that month.

Year to date, inflation settled at 2.5%, still within the BSP’s 2%-4% target band and above the 2.3% forecast for the entire 2020.

Core inflation, which discounted volatile prices of food and fuel, stood at 3.3% in July, accelerating from 3% the previous month and 3.2% logged last year.

Food-alone inflation eased to 2.5% from 2.7% the previous month, but faster than 1.7% a year ago.

The PSA attributed the July result mostly to the transport index, which recorded a faster inflation rate of 6.3% during the month from 2.4% in June.

The PSA also noted annual increments in the following commodity groups: alcoholic beverages and tobacco (19.3% from 18.5% in June); housing, water, electricity, gas and other fuels (0.8% from 0.3%); restaurant and miscellaneous goods and services (2.5% from 2.3%).

Moreover, the PSA reported preliminary figures for inflation as experienced by low-income households for July. With heavier weights on essentials such as food, the inflation rate for the bottom 30% of income households was 2.9%, slower than June’s three percent, but faster than July 2019’s 2.5%.

“The July 2020 [headline] inflation of 2.7% was within the BSP’s forecast range of 2.2-3.0%. The latest inflation outturn is consistent with the BSP’s prevailing assessment that inflation is expected to remain benign over the policy horizon due largely to the potential adverse impact of COVID-19 on the domestic and global economic prospects,” BSP Governor Benjamin E. Diokno said in a Viber message to reporters.

Mr. Diokno said inflation is likely to settle close to the midpoint of the government’s 2-4% target range for 2020 to 2022, adding the Monetary Board (MB) will consider the latest inflation outlook along with the release of second-quarter gross domestic product (GDP) data today (Aug. 6) when it meets on Aug. 20 to discuss monetary policy.

In a note, HSBC Global economist Noelan Arbis said inflation “remains largely contained” in the country, but noted a “few interesting surprises.”

“Transport costs continued to rise at an above-trend pace sequentially, despite global oil prices remaining relatively steady compared to the previous month. This might be a result of higher demand for transportation services, as the economy emerged out of lockdown. Other discretionary line items, such as restaurants and miscellaneous goods and services, also saw above-trend price increases perhaps due to the economy re-opening,” Mr. Arbis said, who noted these are more likely one-off price increases.

“We expect inflation to remain below midpoint of the BSP’s 2-4% target range for the remainder of the year,” he added.

OUTLOOK

“With moderate inflation, the BSP is likely to focus more closely on growth in its policy rate decisions in the months ahead,” HSBC’s Mr. Arbis said.

“All things considered, we expect the BSP to cut the policy rate by another 25 basis points (bps) to 2.00% by year-end, likely in [the fourth quarter]. Moreover, we forecast an additional 200-bp cut in the RRR (reserve requirement ratio) by year-end to provide another boost to domestic liquidity. This would bring the RRR down to 10% by year-end,” he added.

The BSP has so far shaved rates by a total of 175 bps this year, with the latest easing round in June. This brought the overnight reverse repurchase, lending, and deposit rates to record lows of 2.25%, 2.75%, and 1.75%, respectively.—