Economists warn vs upside risks despite benign inflation

ECONOMISTS employed by private banks agree that inflation will likely stay benign for this year, but warned of upside risks or a recovering and reopening economy after the peak of the pandemic.

In a recent survey conducted by the Bangko Sentral ng Pilipinas (BSP), bank economists’ average inflation forecast for 2021 hit 2.9 percent, slightly higher from their 2.8 percent forecast last year. Their inflation forecast, meanwhile, for 2022 was unchanged at 3 percent.

The BSP survey consists of 24 bank economists. Broken down, their average forecast for inflation in the first three months of 2021 is at 2.7 percent, before accelerating to an average of 3 percent in the second quarter of the year.

The economists’ forecast is still below the BSP expectation of 3.2 percent for 2021, which was revised from an earlier expectation of 2.7 percent. Meanwhile, the private bank analysts’ 2022 inflation draws near the 2.9 percent BSP inflation forecast for 2022.

All BSP and private economists’ forecasts are within government’s 2-percent to 4-percent target range for the next two years.

While analysts agree that inflation will remain benign in the near term, they warned that risks to the inflation outlook remain tilted to the upside as the economy gradually reopens.

Economists identified food supply disruptions due to the recent typhoons and the likely occurrence of weather disturbances in the near term given the La Nina condition as among the upside risks to inflation.

They also said the rebound in oil prices on the possible recovery of demand, higher consumer spending and the impact of the BSP’S monetary policy actions could all lead to higher inflation down the line.

On the other hand, there are still downside risks to the growth of consumer prices in the country. They largely emanate from a potential muted domestic demand if consumer confidence remains low and purchasing power remains weak due to a high employment rate. Economists said a strong peso against the US dollar is also a downside risk to inflation.

Earlier this month, the Philippine Statistics Authority’s (PSA) announced that inflation hit a 22-month high level of 3.5 percent in December. BSP Governor Benjamin Diokno told reporters that this level of acceleration is still wellwithin their expectations for monetary policy.

“The December 2020 inflation of 3.5 percent was within the BSP’S forecast range of 2.9 to 3.7 percent,” Diokno said. “The BSP continues to expect inflation to settle within the target range over the policy horizon.”

The governor also said the recent uptrend in inflation is largely “transitory”, reflecting the short term impact of weather disturbances.

The Philippines’s inflation numbers have been consistently rising towards the latter part of 2020. From 2.3 percent in September, it accelerated to 2.5 percent in October, 3.3 percent in November and up to 3.5 percent in December.