Government sees inflation's peak as it misses target for second straight year

Ramon Royandoyan - Philstar.com

MANILA, Philippines (Update 1, 11:04 a.m.) — Inflation accelerated to its fastest pace in 14 years in December, with the national government missing its annual target for the second straight year amid a supply-demand imbalance that has stoked painfully high price growth.

Inflation, as measured by the consumer price index, quickened to 8.1% year-on-year in December, the Philippine Statistics Authority reported Thursday. Data showed this was the fastest reading since November 2008.

For the entire 2022, inflation averaged 5.8%, way above the Bangko Sentral ng Pilipinas’ 2-4% target for this year. This means BSP Governor Felipe Medalla would have to explain to President Ferdinand Marcos Jr., who took office in June last year, why the inflation target was not met.

At the start of its term, the Marcos Jr. administration projected inflation would settle between 4.5-5.5% this year. But supply chain issues, expensive fuel prices, and a weak peso caused more problems than the government had thought they would. Economic managers later revised their annual inflation forecast to 5.8% in their year-end briefing. 

Core inflation, computed without volatile items such as fuel and food, rose to 6.9% year-on-year in December. 

Food prices were largely responsible for the uptick in December, peak spending season as Filipinos welcomed the holidays. National statisticians saw increases in the prices of vegetables (32.4%), rice (3.4%), and fruits and nuts (7.6%). 

The BSP, which aggressively hiked interest rates this year to temper resurgent demand and bring it in line with limited supply, projected inflation would peak in December. Likewise, the BSP expects inflation to slow down beginning in 2023.

Domini Velasquez, chief economist at China Banking Corp., said that while inflation likely peaked in December, "we are not out of the woods yet".

"In 2023, we expect inflation to breach the BSP’s target yet again, possibly higher than 5.0%. Key domestic risks are higher electricity and water tariffs, continued higher prices for food, and calls for wage and transport fare increases," Velasquez said.

"On the international front, oil prices will likely not fall as initially expected as China’s reopening will drive up demand for the commodity," she added.

BSP to stay hawkish?

National statistician Claire Dennis Mapa told journalists that the uptrend in food prices, especially vegetables, was due to typhoons that battered various parts of the country amid the monsoon season.

The inflation of vegetable prices averaged 7.8% in 2022. In December alone, vegetable inflation jumped 32.4% year-on-year, the highest since February 1999 when it hit 44%. The price of red onion, a staple vegetable that has proven to be more expensive by the day, increased in the weeks leading to December, according to the PSA’s monitoring.

Rice prices could see increases in the coming months as well. Regular rice, which cost P38 in 2021, rose to an average of P40 in 2022.

Even Noche Buena fixtures, such as ham (14.4%) and fruit cocktail (9.4%), saw prices shoot up in December.

The Marcos Jr. administration would need to mount a heftier policy response to inflation. Citing market force as largely responsible for the uptrend for most of the year, core inflation averaged 3.9% in 2022, an increase from the 3% average recorded in the preceding year. In 2019, this stood at 3.4%.

But analysts like Nicholas Antonio Mapa, senior economist at ING Bank in Manila, expect inflation to slow down this year.

“Storm damage to crops may have helped fan price pressures for basic food items but elevated transport and utility costs for nearly a year may have also contributed to price pressures spreading across the CPI basket.  Meanwhile, resurgent demand reflected in the stronger-than-expected GDP growth, fanned inflation even further with notable increases in inflation for the services sector,” he said in an emailed commentary.

The ING economist expects the BSP to keep a hawkish stance in the coming months.

Mapa also expects the BSP to match the US Federal Reserve’s moves to tame inflation. Experts everywhere expect the global economy to land face first into a recession in 2023, due in part to interest rate hikes by central banks.

“However, once the Fed carries out its much-anticipated ‘pivot’ we believe Governor Medalla could consider a pause of his own as policy rates are currently already in restrictive territory,” he added.