Angelo Taningco
Economist, Treasury Group

Philippine headline CPI inflation for December stood at 3.3% year-on-year (yoy), matching our projection and also the market’s median forecasts from Bloomberg and BusinessWorld. For 2017, it averaged 3.2%, likewise consistent with our expectation. We think inflationary pressures will intensify this year due to higher taxes imposed on coal, cigarettes, mineral products, petroleum, and sweetened beverages which in turn could exert second-round price upswings in the form of transport fare and wage hikes. Our full-year 2018 inflation forecast is 3.6%, and we see the risk to our inflation outlook being tilted to the upside.

Headline CPI inflation in December was unchanged from November as the sharper price increases incurred by four commodity groups in the CPI were offset by weaker price inflation in three product categories and by steady inflation in the remaining four commodity items. By area, the National Capital Region (NCR) experienced lower inflation at 4.6% yoy in December versus 4.9% in November whereas inflation in areas outside NCR edged up to 2.9% yoy from 2.8% in the same period.

Meanwhile, core CPI inflation—which excludes certain products such as corn, fresh fruits, gas oils, meat, natural gas, rice, and vegetables— decelerated to 3.0% yoy in December from 3.3% in November, and we attribute this largely to the relatively sharp drop in transport price inflation.

We calculated the average headline CPI inflation for the fourth quarter (Q4) 2017 to be at 3.4% yoy, which is 0.3 percentage point (pp) higher than the Q3 2017 average. Similarly, core CPI inflation climbed 0.2pp to 3.2% yoy in Q4 2017 from Q3 2017. The quarterly average inflation rates in 2017 were all within the central bank’s inflation target of 3 percent ± 1 percentage point.

On an annual basis, the average headline and core CPI inflation rates stood at 3.2% and 2.9% yoy, respectively, in 2017, higher than the former’s 1.8% and latter’s 1.9% recorded in 2016. Similar to our expectation, the inflation environment has stayed manageable since the inflation target has been achieved despite stronger inflationary pressures. However, we foresee increases in consumer prices to gain traction this year arising from the inflationary impact of the Tax Reform for Acceleration and Inclusion (TRAIN). The government expects TRAIN to increase consumer price inflation this year by less than 1pp, i.e., around 0.4-0.7pp. Our estimate is a 0.6pp uptick from our baseline, leading us to arrive at a 3.6% forecast for the year.

The government’s economic managers have been reassuring the public that inflation will remain stable or manageable on potential favorable supply conditions given plans to shift government’s rice importation policy from quantitative restrictions (QRs) to tariffication, which could slash the inflation rate by as much as 1pp.

The central bank has however signaled that it is ready to adjust its monetary policy settings in order to ensure that inflation meets the target. We maintain our view of a 25 basis point hike in key interest rates this year, which could transpire as early as the first quarter (Q1) especially if inflation would elevate more-than-expected at the start of the year. The modest rate hike, we believe, is consistent with the central bank’s thrust of accommodating economic growth and ensuring price stability. We believe the risk to our inflation and monetary policy outlooks is titled to the upside; potential events like a rapid depreciation in the Philippine peso and sharp upswings in global oil prices are among the sources of the upside risk.

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