Rising prices

Don’t look now, but inflation—a measure of the rate of increase in the prices of basic goods and services—was already at a 28-month high last month. In short, the prices of consumer items have been steadily rising. Simulations done by the Bangko Sentral ng Pilipinas also showed that inflation will continue to rise until the third quarter of 2017 before slowly decelerating to average within the BSP’s target range of 2-4 percent for the year.

The Philippine Statistics Authority (PSA) reported last week that inflation rose 3.4 percent year-on-year in March, the fastest rate of increase in the costs of basic goods in more than two years, with both food and nonfood items posting price rises. It was the highest since November 2014’s 3.7 percent. The March result also brought the year-to-date inflation to 3.2 percent, nearing the high end of the BSP’s target range.

Socioeconomic Planning Secretary Ernesto Pernia explained that the first three months of 2017 saw inflation trending higher partly due to recent increases in food and oil prices and a generally low base in 2016. According to the PSA, prices of alcoholic beverages and tobacco rose 6.4 percent year-on-year last March; clothing and footwear were up 2.9 percent; housing, water, electricity, gas and other fuels also jumped 4 percent; furnishing, household equipment and routine house maintenance rose 2.5 percent; and health products were higher by 2.8 percent.

Private economists noted that inflation picked up last month primarily because of the peso’s depreciation to the P50-to-$1 level and higher electricity rates as a result of the 20-day Malampaya maintenance shutdown. Manila Electric Co., the country’s biggest power distributor, announced that its base rate rose by P0.67 per kilowatt-hour (kWh) in March because of a higher generation charge due to Malampaya’s shutdown. The natural gas facility’s shutdown from Jan. 28 to Feb. 16 prompted power plants that run on natural gas to shift to more expensive fuel.

The imposition of higher “sin” taxes on cigarettes starting January also pushed inflation higher.

Looking forward, Pernia warned that potential upward adjustments in transport fares and electricity rates and the continued depreciation of the peso against the greenback could exert upward inflationary pressures in the coming months. Higher electricity rates are expected to persist in the next two months as an offshoot of the Malampaya shutdown. The Meralco base rate hike in March included only the first of three equal monthly installments of P0.2211/kWh approved by the Energy Regulatory Commission (ERC). Meralco customers can expect subsequent increases in their April and May electricity bills.

Economists from the private sector shared such an outlook. They noted that higher excise taxes on alcoholic beverages and cigarettes as well as increasing prices of gasoline and fuel would contribute to rising basic prices. The other factors they cited that could affect inflation in the short and long run are movements in world oil production, prices of coal that fuels many of our power plants, the peso-dollar exchange rate, and the shift in US trade policy to more protectionism.

The recovery of the American economy might likewise influence inflation indirectly by weakening the peso against the dollar as investors bring funds back to the United States.

To date, the central bank sees no immediate need to raise policy rate settings, but said it would be watching the international oil supply picture, developments in the comprehensive tax reform program, and geopolitical developments, among others. Bangko Sentral Governor Amando Tetangco Jr. said it would make adjustments “if and when needed.” While consumers can expect prices to continue increasing only at moderate rates of 2-4 percent a month from their previous year’s levels, such increases are still worth taking into account when ordinary families balance their incomes and expenses for essential goods and services.