July inflation at 6.4%

PHILIPPINES - In Brief 05 Aug 2022 by Romeo Bernardo

Despite softening oil prices, the headline inflation climbed to 6.4% in July from 6.1% in June. The persistence of price pressures may be seen in the still high 0.8% month-on-month inflation, which can be traced largely to continuing increases in prices of all food groups (except vegetables) as well as transport fare hikes approved last month. Upticks in the prices of an assortment of goods and services (e.g., house rentals, food services, personal care, clothing) reflect continuing adjustments to factor in higher input costs, including earlier wage hikes.

Although the headline inflation is expected to stay above 6% in the coming months, supporting our 5.5% inflation forecast for the year, the gloomier global economic outlook and improving crude oil price outlooks, with futures prices declining markedly recently, will likely see a flattening of the inflation path, increasing the odds that inflation will fall within the BSP’s 2-4% target next year.

With its 75bp surprise interest rate increase last month, monetary authorities have definitively moved towards anchoring inflation expectations and taming excessive peso depreciation, rather than supporting economic growth. While ruling out another 75bp rate hike, Governor Felipe Medalla has said that the Monetary Board will continue to tighten policy settings this month and raise policy rates by either 25bp or 50bp. The latest inflation print as well as the still aggressive tone of US Fed officials put the odds in favor of a 50bp hike. 2Q economic performance, to be released on Tuesday, is also expected to support this move.