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Inflation further eases to 3.9% in December

Inflation slowed to 3.9% in December, settling within the central bank’s 2-4% target range for the first time in nearly two years, amid easing prices of food and utilities.


Preliminary data from the Philippine Statistics Authority (PSA) showed the overall year on year increase in prices of widely used goods and services eased to 3.9% in December, from 4.1% in November and 8.1% a year ago.


December’s inflation print was the slowest reading in 22 months or since the 3% reading in February 2022.


The latest consumer price index (CPI) is a tad lower than the 4% median estimate in a BusinessWorld poll last week. It also settled within the 3.6% to 4.4% forecast for the month given by the Bangko Sentral ng Pilipinas (BSP).


However, inflation averaged 6% for 2023, slightly higher than the 5.8% in 2022. This marked the second straight year that inflation breached the BSP’s 2-4% target band.

The 6% print was the highest in 14 years or since the 8.2% full-year average in 2008, at the height of the global financial crisis.


“The latest inflation outturn is consistent with the BSP’s projections that inflation will likely moderate in the near term due to easing supply-side price pressures and negative base effects,” the BSP said in a statement.


Core inflation, which discounted volatile prices of food and fuel, stood at 4.4% percent in December — slower than the previous month’s 4.7% and the 6.9% a year earlier.

For the entire year, core inflation averaged 6.6%, much faster than the 3.9% print in 2022.


At a press briefing, National Statistician Claire Dennis S. Mapa said December inflation print was due mainly the 1.5% growth in prices of housing, water, electricity, gas and other fuels, which was slower than the 2.5% in November.


This was followed by the 5.4% rise in the food and non-alcoholic beverages index, easing from 5.7% in November.


Food inflation alone went down to 5.5% in December, from 5.8% in November and 10.6% a year ago.


However, rice inflation quickened to 19.6% in December from 15.8% in November. It was also the most significant contributor to December inflation, adding 1.7 percentage points (ppt) to the headline print.


At 19.6%, rice inflation was the highest since the 22.9% recorded in March 2009.

Mr. Mapa said the average price of regular milled rice last month went up to P48.50 per kilo from P46.73 per kilo in November. The average price of well-milled rice also rose to P53.82 per kilo in December from an average of P51.99 per kilo a month earlier.


Year on year, prices of regular milled rice and well-milled rice grew by 22.3% and 22.4%, respectively.


In a statement, the National Economic and Development Authority (NEDA) said the extension of the Executive Order (EO) No. 50, which extended the Most Favored Nation (MFN) reduced tariff rates for key agricultural commodities like pork, corn, and rice, is crucial to ensure a stable food supply in the Philippines.


“Amid an uptrend in international rice prices and the expected negative impact of the El Niño phenomenon, the Interagency Committee on Inflation and Market Outlook will closely monitor the situation and propose further temporary tariff adjustments, if necessary,” NEDA Secretary Arsenio M. Balisacan said.


“We will also push for trade facilitation measures to reduce other non-tariff barriers. While our medium-term objective to boost agricultural productivity remains, it is important to augment domestic supply to ease inflationary pressures on consumers, particularly those in low-income households,” he added.


Meanwhile, transport inflation inched up 0.4% in December, reversal from the 0.8% contraction in November.


PSA’s Mr. Mapa said passenger transport by road such as jeepney and tricycle fares increased 2.9% in December from 2.4% a month prior.


Prices of diesel decreased by 13% year on year, but lower than the 18.4% decline in November. Gasoline also recorded a -3.9% inflation rate from the -4.8% seen in the previous month.


In December alone, pump price adjustments stood at a net increase of P0.3 per liter for gasoline. Diesel and kerosene prices had a net decrease of P0.35 and P0.51 respectively.

Meanwhile, inflation for the bottom 30% income households edged higher to 5% in December from 4.9% in a month prior. Year to date, the inflation rate for this income group stood at 6.7%.


Inflation in the National Capital Region (NCR) decelerated to 3.5% in December from the 4.2% print in November and 7.6% a year ago.


Outside of NCR, consumer prices slowed to 4% from 4.1% in November and 8.2% in December 2022.


STILL HAWKISH OUTLOOK


The BSP said risks to the inflation outlook remains significantly on the upside, citing possible inflationary pressures from higher transport charges, increased electricity rates, rising oil prices, and elevated food prices due to strong El Niño conditions.


“Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident,” the BSP said.


“The BSP will continue to monitor inflation expectations and second-round effects and take appropriate action as needed to bring inflation back to the target, in keeping with the BSP’s price stability mandate,” it added.


HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris Dacanay in a note said export prices of rice increased to $659 per metric ton amid lingering El Niño risks to supply.


“Not only is this the highest since 2008, but we have yet to see global rice prices peak. And with rice being a heavy component of the Philippines’ CPI basket, elevated export prices will likely put a floor under how much inflation can moderate,” he said.


Inflation may also quicken to above the 2-4% target in the second quarter due to unfavorable base effects.


“But once these base effects wear off, we expect headline CPI to immediately ease on a year-on-year basis and average within 3-3.5% in the second half,” he said.


“Keeping inflation more manageable is the extension of EO 50, which rolls over the low tariff rates for key food items such as rice and pork. The BSP’s tight monetary stance will also continue to stem any price pressures coming from core items such as rent and housing,” he said.


HSBC lowered its full-year headline inflation forecast to 3.5% in 2024 from 4.1% previously.


“The BSP now has more leg room to adjust monetary policy with the inflation outlook more benign. The larger concern now is the differential between BSP and Fed rates,” Mr. Dacanay said.


Mr. Dacanay said he expects the BSP to cut policy rates alongside the US Fed starting second quarter this year.


“We then expect the BSP to clock a similar pace as the Fed by cutting its policy rate by 25bp in each quarter until the benchmark rate reaches 5% in the third quarter of 2025,” he added.


The BSP has kept its benchmark interest rate unchanged at a 16-year high of 6.5% during its December policy meeting. This was after it hiked 450 basis points (bps) from May 2022 to October 2023 to tame inflation.


On the other hand, the US Federal Reserve kept borrowing costs unchanged at 5.25-5.5% in December, following the 525-bp rate hikes it did from March 2022 to July 2023.

Citi Economist for the Philippines Nalin Chutchotitham said even though upside risks remain, inflation expectations are now better anchored.


“We expect the BSP to maintain its policy rate through the first half of 2024, to help anchor inflation at around the mid-point of the policy target. We expect gradual rate cuts from third quarter onwards as inflation shows a steady declining trend,” she said.

Ms. Chutchotitham also noted that the BSP will likely maintain at least a 50-bp interest rate gap with the Fed to help ensure the peso’s stability against the dollar.


“We forecast the key rate at 5.5% at end-2024, and at 4.5% at end-2025,” she said.


The Monetary Board is scheduled to have its first policy review this year on Feb. 15.


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