Private sector economists expect faster inflation rate this year until 2020 on the back of higher oil prices, the impact of the Tax Reform for Acceleration and Inclusion law on domestic goods and peso depreciation.
Results of the latest survey conducted by the Bangko Sentral ng Pilipinas for September 2018 showed that the mean inflation forecast by private sector economists in 2018 rose to 5.3 percent from 4.5 percent in the June 2018 survey.
Mean inflation forecasts for 2019 and 2020 also increased to 4.3 percent and 3.9 percent, both from 3.8 percent in the previous survey, respectively.
“Analysts noted that risks to inflation in 2018 remain tilted to the upside. Possible upside risks to inflation are the higher and volatile global oil prices, impact of the implementation of the Train law on the prices of domestic goods, weakening peso and the rise in the prices of food and other commodities due to adverse weather conditions and supply shortage,” the Bangko Sentral said.
Other reasons cited that will trigger faster inflation rate are higher utility rates, rise in wages and transport fares, strong domestic demand during the holiday season and due to the upcoming election, delay in the implementation of the government’s mitigating measures against rising inflation, higher government spending on infrastructure, global trade war and higher inflation expectations.
The key downside risks to inflation were seen to emanate from fiscal policy actions or mitigating measures such as the Rice Tariffication bill, Pantawid Pasada program and unconditional cash
transfers, the recent and expectations of further policy rate hikes by the BSP and slower global growth.
“Meanwhile, inflation is anticipated to moderate in 2019 and 2020 as the impact of Train tapers off, global oil prices stabilize and the government implements mitigating measures to temper inflation,” the Bangko Sentral said.
The peso averaged 53.54 against the US dollar in the third quarter 2018, depreciating by 2.07 percent from the previous quarter’s average of 52.43 per greenback. The local currency’s depreciation during the quarter was due mainly to concerns over the lingering trade war between US and China.
The peso also depreciated 5.05 percent relative to the 50.84 per dollar average in the third quarter of 2017.
Analysts said they remained watchful of potential inflationary pressures from a possible reduction in reserve requirements of banks and the implementation of the second package of the Train law.
Package one of the Train law took effect in January 2018. This reduced the personal income taxes but raised the excise taxes on fuel, alcohol, tobacco, sugary drinks and automobile. Package two aims to reduce corporate income taxes and rationalize fiscal incentives.
The Bangko Sentral said that based on the probability distribution of the forecasts provided by 24 out of 28 respondents, there was a 0.5-percent probability that average inflation for 2018 would settle between the 2 percent and 4 percent target range, while there was a 99.5-percent chance that inflation would rise beyond 4 percent.
For 2019, the respondents assigned a 30.2-percent probability that inflation would fall within the 2 percent to 4 percent target range and 69.5-percent chance that inflation would breach the upper end of the target.
The BSP reported that inflation in the third quarter rose faster to 6.2 percent from 4.8 percent in the second quarter, driven by rising food and energy prices.
This brought the average inflation in the first three quarters of the year to 5 percent, above the upper end of the government’s target range of 2 percent to 4 percent for 2018.
“Inflation pressures during the review quarter were attributed mainly to rising food and energy prices. Similarly, core inflation increased to 4.7 percent, higher than the rates posted in the previous quarter
and a year ago,” the BSP said during the inflation report for the third quarter.
Inflation in September accelerated to a nine-year high of 6.7 percent from 6.4 percent in August.
Inflation expectations also remained elevated amid indications of second-round effects.