Near 6% inflation seen in Aug

British banking giant Standard Chartered Bank (Stanchart) sees inflation edging close to six percent in August as the second-round impact of the new tax reform law may start kicking in by the second half.

Chidu Narayanan, economist for Asia at Stanchart, said in a report the investment bank has revised upward its inflation forecast to 5.2 from the original target of 4.5 percent for 2018 and to 4.9 instead of 3.9 percent for 2019.

“We believe inflation will continue to rise through 2018, edging close to six percent in August, before moderating. We now forecast inflation to average 5.2 percent in 2018 and 4.9 percent in 2019, up from 4.5 percent and 4.3 percent, respectively, under the 2012 series,” he said.

Inflation kicked up to a fresh five-year high of 4.5 percent in April from 4.3 percent in March, bringing the average inflation in the first four months to 4.1 percent and exceeding the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

Stanchart sees inflation further rising to 5.1 percent in May.

Inflation has been on the rise due to higher oil prices and the first round impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law that lowered personal income tax rates, but raised excise taxes on fuel products, motor vehicles, sweetened beverages, among others.

Narayanan said the increase in inflation is partly due to the increase in value added tax (VAT) rates.

“The VAT hike on fuel has only just been transmitted to transport prices. We expect the second-round impact to kick in only in the second half, as higher transport prices pushing up supply chain costs will take longer,” he said.

He added higher fuel costs would be transferred to the supply chain with a lag of six months as transportation contracts in the supply chain industry are typically fixed semi-annually.

Furthermore, the economist said food inflation would likely remain high despite efforts by the government to reduce supply side pressures on high rice and fish inflation.

“Risks to inflation are to the upside, on higher oil prices and a weaker currency,” Narayanan said.