Angelo Taningco
Economist, Treasury Group

Philippine headline inflation levelled off at 4.6% year-on-year (yoy) in May, slightly higher than April’s 4.5% but much lower than market expectations of near 5% (market’s median forecast: 4.9%, our forecast: 5.1%). More surprisingly, the month-on-month (mom) inflation rate dropped substantially to 0.0% in May from 0.5% in April and likewise way below its January-April average of 0.7%; this was the first time during the year (and since July last year) that overall consumer prices didn’t increase on a monthly basis despite an upswing in global oil prices and further depreciation in the peso.

May’s headline yoy inflation rate is a new record-high using the 2012-based Consumer Price Index (CPI). Similarly, core CPI inflation edged up to its highest level of 3.6% yoy in May from 3.5% in April. Meanwhile, using the old base year (2006), headline CPI inflation nudged higher to 5.2% in May from 5.1% in April. The 0.1 percentage point uptick in the 2012-based yoy inflation between April and May stems from higher price increases in four out of eleven commodity groups in the CPI (alcoholic beverages and tobacco; housing, water, electricity, gas, and other fuels; transport; restaurant and miscellaneous goods and services) that were partially offset by lower inflation in food and non-alcoholic beverages and steady price increases in the remaining six product items.

The yoy inflation rate has averaged 4.1% in January-May, breaching the government’s inflation target range of 2%-4% for the year. We think the weaker-than-expected increase in inflation supports our view that the BSP’s Monetary Board would probably maintain the policy rate in its next monetary policy meeting scheduled on 21 June. But we believe that the mom change in the CPI will turn positive in subsequent months, and therefore will yield higher yoy inflation until the third quarter (Q3). There still exists upside risks to our inflation outlook, specifically given likely approvals of pending petitions for hikes in electricity rates, minimum wages and transport fares. Furthermore, it appears that government’s proposal for a shift in its rice importation policy to tariffication from quantitative restrictions that is expected to slash inflation by half a percentage point (more or less) will still be discussed in Congress possibly until the end of the year, and thus, wouldn’t probably have a bearing on inflation this year.

Against this backdrop, we still maintain our inflation forecasts of 4.7% for 2018 and 3.3% for 2019. Moreover, we also hold on to our view of another 25 basis point (bps) policy rate hike this year, expecting it to take place in the third quarter (Q3).

Figure: Consumer Price Inflation & Inflation Target

(year-on-year %)

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