Inflation jumps anew

PHILIPPINES - In Brief 05 Jul 2018 by Romeo Bernardo

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June inflation rate rose sharply to 5.2%, exceeding the high-end of the BSP’s forecast range (4.3% to 5.1%) for the month as well as the median analysts’ forecast (4.7%). Month-on-month inflation, which had showed signs of decelerating in April and May, jumped by 0.6% in June. Apart from seasonal factors (related to school opening), the increase in monthly inflation may be traced to higher food prices, in part reflecting the effects of typhoons during the month, as well as oil prices. Notably, rice prices, which we had thought would ease, remained on the uptrend as the expected distribution of imported rice was delayed due to logistical problems. We expect the headline rate to peak this quarter and average 4.7% for the whole year, falling back to the BSP’s 2-4% target range only in 2019. However, upside risks from second round effects, e.g., adjustments in transport fares that were just approved and petitions for wage increase still pending, continue to pose threats to the outlook. The higher than expected inflation outturn will keep markets fretting about lax monetary policy settings. Given information today, including sustained growth in money supply (14.3% in May) that exceeds nominal GDP growth, we think the probability of a third rate hike when the Monetary Board meets in August high.