Philippine inflation rate averages 3.8% for Q1 2018

MANILA, Philippines (3rd UPDATE) – Inflation, or the movement of prices of basic goods and services, hit its highest quarterly average since 2014 as the tax reform law, higher oil prices, a weaker peso, and the tightening of United States monetary policy took their toll.

In a briefing on Friday, April 20, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo announced an average inflation rate of 3.8% for the 1st quarter of 2018.

Inflation for the January-March period this year was faster than the 3% average inflation in the 4th quarter of 2017, and the 3.2% average inflation in the 1st quarter of 2017.

It also neared the upper end of the BSP's initial target of between 2% and 4% for this year. (READ: January | February | March inflation rate announcements)

PH tax reform, global factors

The higher results came as the economy felt the impact of the Tax Reform for Acceleration and Inclusion (TRAIN) law, which was implemented last January 1.

It lowered personal income taxes, but raised excise taxes on fuel, motor vehicles, and sugar-sweetened beverages.

"We welcome TRAIN as it left the halls of Congress to deliver most of the resources for building and enhancing the state of infrastructure in the Philippines, to ensure the sustained expansion of the country's productive capacity," Guinigundo said.

"Short-term inflation pressure is one of the costs of this long-term goal of higher and more inclusive growth," he added.

The BSP also noted that the economy felt the effects of higher global oil prices, a weaker peso, and tighter US monetary policy throughout the 1st quarter of 2018.

"The ongoing tightening of US monetary policy, trade tensions between the US and China, as well as geopolitical tensions also dampened the view on peso-denominated assets," Guinigundo said.

Only 'transitory'

According to the BSP, "inflation is expected to settle close to the high end of the target range in 2018, before settling around the midpoint of the target range in 2019."

The central bank's forecast is 3.8% for 2018 and 3% for 2019.

Inflation would still settle close to the high end of the target range this year, given the following "upside factors" cited by the BSP: additional wage adjustments, potential increases in transport fares and electricity rates, as well as faster than expected monetary policy normalization in the US. (READ: Inflation seen to continue hitting poor Filipinos hard)

The BSP emphasized, however, that the rise in inflation "derives largely from supply-side factors which are expected to be transitory and therefore non-persistent."

"Indeed, in the 3rd and 4th quarters of 2018, inflation is projected to stabilize, [and also] through 2019," Guinigundo said.

"The major reason here is of course base effects and the relative importance of the petroleum prices. In the last quarter of last year, we saw an upsurge in oil prices that we do not expect to happen for Q3 and Q4 of 2018," he added.

Guinigundo also said "present monetary policy settings remain appropriate, given the prevailing outlook for inflation and economic activity." Despite the faster inflation, the BSP has so far kept its key interest rate at 3%.

But Guinigundo said they would "have no second thoughts in reconsidering the current stance of monetary policy should second-round effects become more apparent or should inflation expectations pace the likelihood of being disanchored, if only to send [a] strong signal that the BSP fully recognizes the configuration of risks and the likelihood of those risks happening."

Switching base year

The latest inflation rate is based on the Philippine Statistics Authority (PSA) rebasing the inflation index to 2012 prices, from the previous series using 2006 prices.

If the 2006 base year would be used, average inflation for the 1st quarter of 2018 would be 4.4%, well above the BSP target.

The PSA's move was part of the protocol of statistical rebasing, which is done every 6 years.

It had announced last January that it would update the consumer price index (CPI) and other national accounts using 2012 as the base year, partly because prices of oil and other commodities have dramatically changed in the past decade.

In particular, the weighting of some key goods in the CPI or basket of goods was changed from base year 2006 to base year 2012. These include food from 36.1% to 35.46%, alcoholic beverages and tobacco from 2% to 1.58%, and electricity from 7.07% to 7.44%.

University of Asia and the Pacific (UA&P) economist Victor Abola previously told Rappler that the rebasing of the CPI and other national accounts is important because they "tend to be overstated" if prices are not updated. – Rappler.com