Philippine’s headline inflation accelerates to a 12-month high in May

The headline and core inflation of the Philippines for May came in higher than expected, reaching a 12-month high. According to the Philippine Statistics Authority, the annual headline inflation stood at 1.6% in May, as compared with April’s 1.1%. However, the moving 12-month average of 1% is much lower than the central bank’s inflation target range of 2%-4%.

On a sequential basis, inflation accelerated 0.3%. This was mainly due to month-on-month gains in prices of non-alcoholic beverages, food, transport and tobacco. But the gains were countered by a drop in electricity prices. Philippine core price inflation continued to be weak at 1.6% y/y.

In the first half of 2016, the agricultural produce was badly hit, resulting in reduced volumes of vegetables and fruit deliveries. Moreover, fresh produce were spoiled due to hot weather conditions in May. Food contributes 39% to the CPI basket. Therefore, it is better to be wary of its impacts on the pace of inflation amidst gradual rise in oil prices, noted ANZ in a research report. However, there remains slight risk of inflation breaching the central bank’s target range this year.

Nonetheless, the pace of price of food items produced locally is a sign of agricultural production. Attention will be paid as to how the agricultural sector will contribute to the economic growth overall. Contraction of 4.4% y/y in agricultural production had weighed on GDP growth in the first quarter.

Even if the Philippine central bank has transitioned officially to the interest rate corridor framework in June, it kept the Special Deposit Account (SDA) rate at 2.5%, as expected. This is the lower bound of the corridor. The central bank, on 8 June, will carry out its first weekly auction for 28-day and 7-day term deposit facility. As the nation’s inflation continues to be lower than the target range and an expected postponement of Fed’s rate normalization, the BSP is expected to tighten its policy in H1 2017, added ANZ.