August inflation at 6.4%

PHILIPPINES - In Brief 05 Sep 2018 by Romeo Bernardo

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Markets today were surprised anew by a higher than expected inflation rate – 6.4% for the month of August, rising from 5.7% in July. The headline figure exceeded even the BSP’s high-end forecast of 6.2%, as the month-on-month rate accelerated to 0.9% in August from 0.5% previously. Core inflation likewise climbed from 4.5% in July to 4.8% in August. In a statement, BSP Governor Nestor Espenilla called the higher than expected inflation rate “an unfortunate confluence of cost-push factors…” citing the following causes:Food supply shocks, particularly rice. Food items contributed over 3/5s to the jump in the month-on-month rate with rice prices accounting for more than a third of this;Elevated oil prices as they impact transport and power prices;Currency weakness due to emerging market uncertainties and a strong US dollar;Strong domestic demand that “is making it too convenient for producers and traders to pass on higher costs and possibly more to consumers.”Clearly, the Governor’s statement, essentially calling on government to do something about the supply-driven factors, reveals a worried central bank and puts the spotlight on the Monetary Board’s meeting on September 27. Our updated forecasts suggest an inflation path that will remain elevated through most of next year, with the average 2019 inflation at greater risk of exceeding 4%, the upper end of the BSP’s target. We are also raising our inflation forecast for this year to 5.2% from 4.9%. Hence, we think that should the US Fed raise interest rates this month as markets now expect, the BSP is likely to keep step.Philippine stocks fell 1.6% today to close at 7,752 while the peso moved sideway to close at Php53.53/US$.