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  • Writer's pictureZiggurat Realestatecorp

Inflation could resume rising, economists warn

Inflation may have fallen for six straight months, but upside risks have increased, analysts said, raising the possibility of a reversal this August.

Rising risks and base effects, China Banking Corp. chief economist Domini Velasquez said, could lead to August inflation matching or even topping the 4.7 percent recorded in July.

"Headline inflation continued its downward trend [last month]," she said. "However, upside risks have intensified, such as higher rice and oil prices." July's inflation result, the lowest in 16 months, marked a continued slowdown from January's 14-year high of 8.7 percent. It also fell within the Bangko Sentral ng Pilipinas' (BSP) 4.1-4.9 percent forecast for the month.

The drop was said to be due to lower housing, utility and fuel; food and alcoholic beverages; and transport prices.

Velasquez, however, noted that rice prices were increasing both in domestic and international markets, particularly following India's decision to ban exports of non-basmati white rice.

"Emerging El Niño conditions and recent strong typhoons could also drive up domestic food prices," she added.

"Additionally, the expiration of the Black Sea grain deal and Russia's attacks on Ukraine's grain ports could keep global commodity prices elevated."

Bank of the Philippine Islands senior economist Emilio Neri said that while the Philippines sources most of its rice imports from Vietnam, this didn't mean the country would be spared from a surge in global prices.

"This is a major risk to inflation since rice accounts for almost 9.0 percent of the CPI (consumer price index) basket," he said.

Based on Philippine Statistics Authority (PSA) data, rice inflation rose by 0.9 percent month on month in July. Year on year, it was at 4.2 percent.

Neri said it is also vital to recognize that the El Niño weather pattern could impact food production worldwide.

"Importation is usually the immediate solution of the country when there is a shortage of supply, but this might become difficult if other countries are also affected by El Niño," he added.

Neri also noted that restaurants and accommodation inflation remained sticky. This was up 7.9 percent year on year — down from 8.2 percent in June — and 0.3 percent month on month in July.

"Strong demand from consumers is probably preventing this from falling faster as they continue to spend heavily on these services after the pandemic," he said.

"Inflation from services may also remain sticky as consumers continue to focus their spending on these. It may take a longer period for core inflation to return to target given this risk."

Core inflation, which strips out volatile food and energy items, declined to 6.7 percent from 7.4 percent in June.

Year to date, headline inflation stood at 6.8 percent, still well over the BSP's 2.0- to 4.0-percent target. Core inflation, meanwhile, averaged 7.6 percent.

Velasquez said that the still-high prices of restaurant and accommodation services could have reflected a P40 minimum wage hike in the National Capital Region.

"Other regional wage boards are set to come out with their wage hike decisions in September, largely impacting inflation next year," she added.

Still, both analysts said that higher upside risks were unlikely to derail the inflation outlook for the year.

"[W]e still think that inflation will fall within the BSP's target by the fourth quarter," Velasquez said.

"We think the BSP will hold its key policy rate at 6.25 percent in its August meeting as the effect of monetary tightening is yet to be fully felt," she added.

Neri said the probability of the BSP resuming rate hikes was low but added that "it could go up depending on what the Fed (Federal Reserve) will do."

"The US central bank has not given definite guidance on their future moves, but they have kept the door open for additional hikes if the data support this," he added.

"But even if the Fed decides to keep rates steady, it might still be premature to expect rate cuts from the BSP this year," Neri continued.

"There are significant upside risks to inflation, and keeping rates at current levels might be necessary to mitigate the impact of these risks."

Source: Manila Times

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