Angelo Taningco
Economist, Treasury Group

Inflationary pressures soared above market expectations in January as headline CPI inflation jumped to 4.0% yoy for the month from 3.3% in December. The January print was more than the 3.5% market median forecast, which also included our own projection, and the highest monthly tally since October 2014. Moreover, core CPI inflation skyrocketed to 3.9% yoy in January from 3.0% in December, fueling concerns that inflation expectations have risen; that the domestic economy is on the verge of overheating; and that the BSP will start tightening monetary policy earlier than expected.

The inflation acceleration, we argue, manifests from a confluence of factors—namely the excise taxes from TRAIN, rising global oil prices, rapid peso depreciation, and a low base effect. Most of these factors tend to fuel cost-push inflation, and therefore, are less likely to lead the economy to overheat. Though inflation has touched the upper end of the government’s target range, we think the BSP still has enough room to leave its key interest rates and reserve requirement ratios unchanged in its first monetary policy meeting on 8 February. This is because the relatively high January figure is within the inflation target range and, we posit, was more of cost-push inflation and partly due to a low base. Moreover, we have observed that global oil prices appear to have stabilized and peso depreciation has become more modest at the start of this month. Likewise, we also see high base effects to potentially temper this month’s rate of increase in consumer prices. Thus, it’s possible that inflation for this month could stay within the target range, and may even be less than last month’s figure. Against this backdrop, it might be worthwhile for the central bank to monitor further inflation trends before making a move to tighten monetary policy.

The increase in the yoy headline CPI inflation rate between December and January reflected the sharper price increases in seven out of eleven commodity groups in the CPI, led by the heavily-weighted food and non-alcoholic beverages in which its price inflation quickened to 4.5% yoy in January from 3.8% in December. Aside from food and non-alcoholic beverages, other product items that posted relatively high price inflation include alcoholic beverages and tobacco, housing and utilities, transport, and restaurant and miscellaneous goods and services. On a mom basis, CPI inflation accelerated to 1.0% in January from 0.3% in December.

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