Jan. Inflation Sizzled To 14-Year High

Headline inflation accelerated to a 14-year high in January as food prices continued to surge, fueling bets of further interest rate hikes to anchor expectations.

Photo Insert: Food inflation quickened from 10.6% a month ago and 1.6% in January 2022, mainly due to the 37.8% increase in vegetable prices from 32.4% in December.

The consumer price index jumped 8.7% in January, the Philippine Statistics Authority (PSA) said on Jan 7, Tuesday, well above the 7.6% median estimate in a poll conducted of economists last week and the 7.5% to 8.3% forecast range given by the Bangko Sentral ng Pilipinas (BSP).

This was also higher than the 8.1% in December, which the BSP had earlier said would be the peak, and 3.0% a year ago. January’s headline inflation was the fastest in over 14 years or since the 9.1% uptick recorded in November 2008. It also marked the 10th consecutive month inflation was above the BSP’s 2-4% target range.

Month-on-month, inflation climbed to 1.7% from 0.3% in December. Stripping out seasonality factors, month-on-month inflation rose by 1.0% in January. Core inflation, which excludes volatile prices of food and fuel, jumped to 7.4% in January from 6.9% in December and 1.8% in the same month in 2022. This was the fastest core inflation print in more than two decades or since 8.2% in December 2000.

National Statistician Claire Dennis S. Mapa traced the sizzling January inflation to the 11.2% annual increase in food inflation, which was the fastest since the 11.3% in March 2009. Food inflation quickened from 10.6% a month ago and 1.6% in January 2022, mainly due to the 37.8% increase in vegetable prices from 32.4% in December.

Supply issues drove up prices of key agricultural products such as onions. Mapa noted onions accounted for only 0.34% of the food basket, but its inflation hit 132% in January. This pushed onions’ contribution to food inflation to 12.7% during the month.

He added inflation was also driven by faster increases in housing, water, electricity, gas, and other fuels (8.5% from 7% in December) and restaurants and accommodation services (7.6% from 7.0%).

Housing rentals rose in January after being relatively stable during the pandemic, as landlords adjusted rates to reflect the economy’s reopening, he noted. which brought the annual inflation of housing rental to 5%, along with electricity (22%) and water rates (6.6%). Higher rents would likely affect overall inflation for the whole year since landlords usually set rental rates for at least one year, he concluded.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa commented headline inflation blew past expectations as price pressures were “clearly broad-based and not limited to select commodities.”

He stressed: “Poor agriculture output and elevated energy prices drove much of the supply-side price pressure but inflation was also driven by surging domestic demand. Robust economic growth resulted in accelerating inflation for items related to recreation (4.2%), restaurants and accommodation (7.6%), and personal care (5.0%).”

Out of 13 commodity groups, nine reported faster inflation in January, including alcoholic beverages (10.9% from 10.7% in December), furnishings and household equipment (5.2% from 4.8%), clothing and footwear (4.4% from 3.9%), and health (3.3% from 3.1%).

Meanwhile, a slower rate of price increase was seen in transport (11.2% from 11.7% in December), while the annual inflation rate for education services (3.6%), information and communication (0.7%), and financial services (0%) were unchanged.

Inflation for the bottom 30% income households, which started using the 2018-based prices, quickened to 9.7% in January. This was faster than the 9.4% print in December and 4.0% last year. In the National Capital Region (NCR), inflation also climbed to 8.6% in January from 7.6% in December and 1.3% a year ago. Outside of NCR, consumer prices went up 8.7% from 8.2% in December and 3.5% a year before.

“The January 2023 inflation data points to the need for sustained efforts to combat price pressures, particularly non-monetary government measures to mitigate the impact of persistent supply-side constraints,” the BSP said in a statement.

In a statement on Tuesday, President Ferdinand R. Marcos, Jr. said it was unfortunate that inflation continued to rise, noting that the measures to address high inflation “have not yet gone through the system.”

Finance Secretary Benjamin E. Diokno said the government will intensify efforts to bring full-year inflation within the 2.5-4.5% forecast for 2023. “With the peso stabilizing, oil prices falling, and relatively mild La Niña (less unpredictable weather in first half of the year), I expect the deceleration of prices to start in the first quarter 2023,” Diokno said.

However, PSA’s Mapa said headline inflation may further accelerate in the coming months if food prices rise. “We saw it in the past that if inflation for food items goes up further, there is a higher probability headline inflation will increase. Especially for inflation of the bottom 30% because the weight of their food basket is larger,” Mapa said.

HSBC Economist for ASEAN Aris Dacanay said inflation in the Philippines has yet to reach its peak, as January marked the 11th straight month of higher inflation. “And momentum is still relentless, with month-on-month inflation at 1%… It seems second-round effects are still reverberating in the economy, supported by still-high demand,” Dacanay said.

Mapa said the confluence of supply and demand side pressures will likely keep inflation elevated in the next few months, “with inflation only grinding lower throughout 2023.”

“The BSP remains focused on restoring inflation to the government target and stands ready to adjust its monetary policy settings as necessary to anchor inflation expectations and safeguard the inflation target over the policy horizon,” the central bank said.

With the faster-than-expected inflation in January, economists said the BSP is now likely to raise interest rates by as much as 50 basis points (bps) at its Feb. 16 meeting. “We believe Governor Medalla will whip out a 50-bp rate increase in an attempt to get ahead of surging inflation,” Mapa said.

While Medalla had previously signaled the possibility of a pause in the first quarter, Mapa, however, said the latest inflation print “likely means BSP will need to stay hawkish in the near term.” “Our baseline forecast is a 25-bp hike next week. But the risk of a higher hike, such as a 50-bp hike, increases given the stronger-than-expected inflation reading,” Dacanay said.

The Monetary Board increased the benchmark key rate by 350 bps to a 14-year high of 5.5% in 2022. “Additional rate hikes will help in easing price pressures coming from revenge spending. The economy has enough strength to absorb the impact of higher interest rates,” Bank of the Philippine Islands (BPI) senior economist Emilio S. Neri, Jr. said.

Mapa of ING said the BSP will likely need to continue raising rates “until we see inflation head back towards the target in a convincing manner.” The BSP sees inflation averaging 4.5% this year before easing to 2.8% in 2024.

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