Inflation rises; more policy tightening expected

PHILIPPINES - In Brief 05 Oct 2018 by Romeo Bernardo

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The headline inflation rate continued to rise, reaching 6.7% in September from 6.4% in August. The uptrend reflects a high 0.9% month-on-month inflation rate, which may be traced to higher prices of food, particularly rice, meat, fish and vegetables, and fuel-related costs, including transportation. Core inflation meanwhile, which excludes the more volatile food and fuel items, dipped slightly to 4.7% in September from 4.8% previously. Although the headline rate fell below the median analyst forecast of 6.8%, inflation expectations have shifted up, as seen in analysts’ forecasts of above 7% inflation for the October to December period, driven by typhoon-induced food supply disruptions.Our revised inflation forecast also shows the headline rate touching the 7% level next month and staying elevated through early next year, falling back to within the BSP’s 2-4% target only in 3Q19. We expect inflation to average above the target in both years, 5.5% in 2018 and 4.6% in 2019.Inflation ForecastSource: Philippine Statistics Authority (PSA), authors' computationsThe challenge of anchoring inflation expectations will keep the BSP in defensive mode, in our view, especially given additional pressures from the external environment, including expectations of continuing US monetary tightening, runups in crude oil prices and escalating trade tensions. By January 2019 too, additional increases in oil excise taxes will be imposed. Thus at a minimum, the BSP is likely to keep step with US Fed actions which means that for this year, we are anticipating another 25bp policy rate increase in line with financial market expectations of what the US central bank will do. But we also think that ...