March 7th, 2023
Even though February inflation remains on the higher end, my prediction some weeks ago that inflation will be lower on February than on January remains true. Recall that on February 7, 2023, I told media that “You can be sure 8.7% will go down, but there’s a floor. All in all, it looks like 8% is a cyclical level, but 5% is structural.” I continue to believe that will be the case for the rest of the year.
The inflation level is also at the lower end of the BSP’s projections, and thus beats expectations, for the following reasons:
One, the peso did not depreciate and even slightly improved in strength, which, given our import dependency on certain consumer products, mitigates inflationary pressures. On a monthly average basis, the peso was stronger against the dollar by 0.38%;
Two, the decline in inflated prices of some commodities, most notably onion, materialized, although there’s room to keep going down. The declining onion prices is reflected in the vegetables category, which declined by a massive 11.9% month-on-month. Corn prices have also slightly declined month-on-month, although this remains a major threat.
Three, transport prices declined month-on-month, although expect this to shoot up in March due to the transport strike.
There remain key upward risks, as follows:
One, corn price inflation, which remains at 12.6 percent year-on-year remains a major risk, especially for pork, beef, poultry, milk, and oils and fats categories in the food basket. Eggs, which cannot be imported easily, will also continue to have high prices or lower supply – with concerning implications on nutrition, since eggs are the cheapest protein source for Filipino families. Cooking oil, in particular, remains expensive at 17.3 percent.
Two, sugar, whose year-on-year inflation rate remains a whopping 37 percent, is the most obvious bubble of them all. Our suicidal policy of refusing imports on sugar will continue to cost our food manufacturing sector. We already import major Filipino sugary brands such as C2 or San Mig Coffee because it is cheaper to make them in Vietnam or Thailand. Soon, our softdrinks might be imported, too, at the cost of our sweetened beverage excise taxes.
Three, electricity prices and water prices have gone up, partly due to regulatory price adjustments this year. Expect these adjustments to be reflected in the year-on-year inflation rates for the whole year.
I remain convinced that the 2-4% full year target inflation rate is slipping through our fingers. Expect something closer to 5 to 5.5% for the full year rate in 2023. Inflation remains the major challenge to growth – both in the aggregate and as felt by the ordinary Filipino. Most of it is structural – so fighting inflation will require not just BSP efforts to hike rates (for they have exhausted the extent of their impact), but sheer upward adjustments in food, feed, and power supply.