Philippine headline inflation accelerates slightly in January, BSP likely to hike rate in Q3

Philippine headline inflation accelerated in January, coming in a tad below market expectations. Consumer price inflation accelerated to 2.7 percent year-on-year in the month from December’s 2.6 percent year-on-year. Annual gains in the National Capital Region surpassed those in the other regions, particularly with higher mark ups in food sub-index, noted ANZ in a research report.

Transport and utilities continued to add positively to headline annual gains in spite of the monthly contraction in transport prices. Core inflation, which excludes the volatile items of food and fuel, remained stable at 2.5 percent year-on-year in January. Market projections were for the figure to rise to 2.8 percent.

Demand-pull pressures are expected to contribute to cost-push forces. Looking at the present path of commodity prices, the impact of low base comparisons are likely to peak in the first half of 2017. However, solid domestic demand is expected to persist. Increasing incomes have been maintaining the growth in household consumption much above its long-term average of 4.8 percent. Private consumption in the Philippines rose 7 percent in 2016, surpassing the average growth in national elections.

Government spending is expected to further stimulate domestic demand. With public spending likely to concentrate on infrastructure development away from its traditional concentration on the NCR, the marginal impact on growth would possibly be considerable. Along with solid household spending, this might push core inflation higher, stated ANZ.

The Philippine central bank is likely to be one of the first Asian central banks to tighten monetary policy this year.

“Assuming headline inflation will peak in H1, we still expect average inflation this year to fall in the upper half of the 2-4 percent target range of the BSP. With strong domestic demand, we expect an interest rate hike in Q3”, added ANZ.