August inflation back above 5%

PHILIPPINES - In Brief 05 Sep 2023 by Christine Tang

---

Analysts had expected a higher inflation rate for August but the actual number, 5.3%, exceeded the median 4.9% forecast. The relatively sharp 1.1% month-on-month increase in prices can be traced largely to the 2.4% rise in food prices, reflecting notably a 4.9% increase in rice prices, the first increase of such magnitude since the 2019 Rice Tariffication Law (RTL). Rice is Filipinos’ basic food staple making up close to 9% of the CPI basket. In addition to rice, vegetable prices also rose markedly (11.2%) whilst non-food items rose marginally (0.4%) despite the weekly increases in pump prices during the month. The sharp reversal in the steady downtrend since February of the headline inflation rate puts monetary policy moves back on analysts’ radar screen. BSP Governor Eli Remolona had said that the BSP is prepared to resume hiking rates if needed and today’s inflation print raises the odds of a rate hike. The case for raising policy rates may be made on the following grounds: The inflation path has moved up, with the headline rate now expected to average 5.8% this year (vs. 5.5% forecast in August Forecast report). Following current price trends, including for oil, the average next year is also expected to settle above the midpoint of the BSP’s 2-4% inflation target. Given narrower policy interest rate differentials with the U.S. (<100bp), a rate hike is possible to preempt more peso volatility if markets expect another bout with inflation. The Monetary Board next meets on September 21 to decide policy rates and will do so again only in mid-November, a rather lengthy gap in case of market turbulence. The peso weakened slightly today, reaching P56.9/$, before closing a...