Inflation is a problem

PHILIPPINES - In Brief 07 Feb 2023 by Romeo Bernardo

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A particularly strong 1.7%[1] month-on-month (mom) jump in consumer prices sent the headline inflation rate to 8.7% in January, the highest since late 2008. The surprise inflation outturn is above analysts’ forecasts (median 7.6%) as well as the BSP’s (7.5-8.3%). About 60% of the increase in mom inflation could be traced to food prices, most prominently vegetables and fish as well as meat, fruits/nuts, and milk/dairy/eggs. While part of the food price increase reflected seasonal factors, continuing shortages of farm produce (e.g., sugar, onions, eggs) were also to blame. Likewise, non-food items contributed markedly to the mom inflation, particularly housing rentals, which make up close to 13% of the CPI basket, as well as increases in water and electricity rates. Perhaps most concerning for monetary authorities is the relatively sharp 7.4% yoy rise in core inflation, revealing rising demand side price pressures. Despite the extension of reduced tariff rates for key commodities (swine meat, corn, rice and coal) under Executive Order 10, the latest inflation print points to the need for other urgent measures to address supply shortfalls and bring down prices of food items. As it is, the current momentum will likely see the headline inflation rate continue to trek up and bring the average inflation rate for the year to around 7%, much higher than our previous 4.8% forecast. Earlier, BSP Governor Felipe Medalla said that for its policy meeting next week, monetary authorities will focus on inflation rather than the recent 25bp US Fed rate hike. With January inflation surprising on the upside and expected to raise inflation expectations, a minimum 25bp increase in domestic ...