Though retail rice prices have started to fall in several regions of the Philippines, increased inflation pervasiveness and high inflation expectations suggest that inflation may not return to the policy target quickly, said Citi analyst Nalin Chutchotitham in a Philippines Economics Flash release on Oct 31. Despite noting dovish remarks from policymakers recently, Citi expects another 50bp rate hike for the fourth quarter of 2018, with possibly another 50bp hike in the first quarter of 2019.
Rice prices easing
Retail rice prices -- which have a 9.6 per cent weight in the consumer price index -- have fallen in several regions, though they remain significantly above early-2018 levels. This could be due to new harvests, orders to release government stocks in September, and a possible reduction in hoarding after official signals on import liberalisation, said Citi, noting prices might have fallen faster if not for delayed imports.
"Planned rice imports could bring down inflation by 1 percentage point over time by reducing supply constraints, but there could still be bureaucratic delays, as well as uncertainty on local production (6.8% import dependency in 2013-17) due to natural disasters," said Citi.
The central bank has forecast October inflation to come in between 6.2 and 7 per cent year-on-year, citing lower food and electricity costs despite higher petroleum prices and water rates. The Department of Finance expects the CPI to rise 0.5 per cent month-on-month, due to higher crude oil prices and a weaker peso. Citi's estimate is for inflation to ease to 6.6 per cent in October, compared to 6.7 per cent in September, partly due to energy price base effects.
However, upside inflation risks remain, including pressures from wage and transport fare hikes. Recently approved were a 4.9 per cent minimum wage hike in Manila and a one-peso increase in the minimum fare for jeepneys in Manila, central Luzon, and Calabarzon, as well as in the minimum bus fare in metro Manila. Effective in November, road transport could contribute 0.2 percentage points to inflation, said Citi.
Inflation pervasiveness is growing, with more items in the CPI basket recording inflation of over 4 per cent. Inflation expectations also remain high -- "likely still too high for (the central bank's) comfort", said Citi -- with the Bloomberg consensus in October standing at 5 per cent for 2018, significantly above the 3 per cent mid-point of the central bank's target.