Department of Finace Expects Inflation to Remain Favorable this Year

The Department of Finance (DOF) expects the rate of increase in consumer prices to remain favorable this year after inflation dipped to its lowest level in almost three decades in 2016.

DOF undersecretary and its chief economist Gil Beltran said that ensuring sufficient food production through investments in infrastructure is crucial to keeping the country’s favorable inflation rate.

Beltran also said the government needs to ensure that credit and insurance coverage are available to agriculture stakeholders.

“The country’s inflation rate remains favorable; the average annual inflation rate of 1.8 percent for 2016 is the lowest in 29 years,” Beltran said in his report to Finance Secretary Carlos Dominguez III.

“Food production is crucial to maintaining this favorable macroeconomic scenario. Support to production through infrastructure development, credit availability and insurance coverage is necessary to sustain this,” he added.

The Philippine Statistics Authority (PSA) earlier reported that inflation in December grew at its fastest pace in two years owing to higher food and transportation costs.

Inflation was at 2.6 percent last December, up from 1.5 percent in the same month in 2015, and 2.5 percent in November, bringing the full-year 2016 rate to 1.8 percent.

But the full-year inflation was below the Bangko Sentral ng Pilipinas (BSP)’s target range of 2.0 percent to 4.0 percent.

“For two consecutive years, the average inflation rate has fallen below 2.0 percent, largely on the back of lower fuel and energy prices,” Beltran said. “Stable rice prices also muted inflationary pressures.”

In the past two years, food contributed 1.1 percentage point to the inflation rate, while the share of non-food items doubled from 0.2 to 0.5 percentage point.

Meanwhile, Beltran said inflation would continue to manageably pick up in the coming months because of the normalization of oil prices in the world market.

“In the foreseeable near-term, the general price increase may be above 2.0 percent as indicated by above 2.0 percent core inflation, [which is] an indicator of inflation outlook,” Beltran said.

Amid the expected higher inflation, Beltran said the BSP has “significant credibility” in managing price expectations, aided by the newly implemented interest rate corridor system that will make its operations more efficient.

“This and the government’s prudent fiscal management will continue to help maintain macro-economic stability in the country, which in turn fosters a conducive environment for generating investments,” Beltran said.

Last December, the general price increase for food and non-alcoholic drinks further rose to 3.6 percent from 3.3 percent, contributing 1.1 percentage point to inflation. Vegetable prices accelerated by 11.5, while the cost of rice increased 1.6 percent.

But year-on-year, rice inflation fell 0.3 percentage point.

“Rice inflation has dropped due to production recovery and timely importation,” Beltran said. “Programs to enhance vegetable farming are needed to temper the double-digit inflation in this sector which has continued for more than a year now.”

Meanwhile, prices of alcoholic drinks and tobacco declined to 6.3 percent from 6.5 percent in November; health decreased to 2.5 percent from 2.6 percent; while housing, utilities and fuels remained at 1.3 percent.

Likewise, furnishing, household and equipment remained at 2.4 percent; transport jumped 1.9 percent from November’s 0.5 percent; clothing and footwear down to 2.5 percent from 2.6 percent; restaurants & miscellaneous services maintained the 2.1 percent level.

On the other hand, communication (0.1 percent) and education (1.8 percent) were steady while recreation and culture were slightly up to 1.7 percent from 1.6 percent.

Last month, Manila Electric Co. (Meralco)’s rate per kilowatt hour (kWh) for an average of 300 kilowatts-per-month consumption slightly increased to P8.70 from P8.60 in November, but still lower than P8.90 a year ago.

Meralco’s generation rate per kWh also increased to P3.90 during the month from P3.80 in November, but still below P4.10 in the previous year.

Also, the average price of diesel in Metro Manila among the “big three” oil companies jumped to P29.10 per liter from P27.30 in the previous month, which is also higher than the P23.90 registered in the same month in 2015.

Average price of gasoline during the month also increased to P44.80 per liter from P42.70 in November and P41 a year before. (DOF)

DOF Economic Bulletin on Inflation

05 January 2017

· Inflation rate inched up to 2.6% in December as against DOF’s internal forecast of 2.5%. For the year, inflation rate averaged 1.8% which is below the BSP’s lower end of the target range.

· For two consecutive years, the average inflation rate has fallen below 2%, largely on the back of lower fuel and energy prices. Stable rice prices also muted inflationary pressures. In the past two years, food contributed 1.1 percentage point to inflation rate. The contribution of non-food doubled from 0.2 to 0.5 percentage point.

· Inflation is generally expected to pick up with the continued normalization of oil prices in the world market. In the foreseeable near-term, the general price increase may be above 2% as indicated by above-2% core inflation, an indicator of inflation outlook.

· The BSP has built significant credibility in managing price expectations, aided by the newly implemented interest rate corridor system that will make its operations more efficient. This and the government’s prudent fiscal management will continue to help maintain macro-economic stability in the country, which in turn fosters a conducive environment for generating investments.

Table 1: Inflation Rate (%) and Contribution to Inflation (percentage points) by Commodity Group

Inflation Rate (%)

Contribution

to Inflation

Commodity Group

Dec-15

Nov-16

Dec-16

2015

2016

2015

2016

All items

1.5

2.5

2.6

1.4

1.8

1.4

1.8

Food and non-alcoholic beverages

1.7

3.3

3.6

2.6

2.5

1.1

1.1

Rice

(2.6)

1.4

1.6

1.7

(0.3)

0.2

(0.0)

Vegetables

12.0

11.0

11.5

2.7

11.2

0.1

0.4

Alcoholic beverages and Tobacco

4.4

6.5

6.3

3.9

5.7

0.1

0.1

NON-FOOD

1.1

1.5

1.8

0.4

1.0

0.2

0.5

Clothing and footwear

2.3

2.6

2.5

2.6

2.4

0.1

0.1

Housing, Utilities & Fuels

(0.3)

1.3

1.3

(1.3)

(0.2)

(0.3)

(0.0)

Electricity, Gas & Other Fuels

(6.4)

–

0.4

(8.9)

(4.4)

(0.6)

(0.3)

Furnishings, household equipment

1.6

2.4

2.4

1.9

1.9

0.1

0.1

Health

1.9

2.6

2.5

2.1

2.4

0.1

0.1

Transport

2.2

0.5

1.9

(0.1)

0.3

(0.0)

0.0

Communication

–

0.1

0.1

(0.0)

0.1

(0.0)

0.0

Recreation and Culture

1.1

1.6

1.7

1.1

1.5

0.0

0.0

Education

3.6

1.8

1.8

4.2

2.5

0.2

0.1

Restaurants & Misc. Services

1.4

2.1

2.1

1.3

2.1

0.1

0.2

Core

2.1

2.4

2.5

2.0

1.9

Source of Basic Data: PSA

Table 2: Prices of Selected Commodities

Item

Dec-15

Nov-16

Dec-16
2015

2016

Meralco (rate per kWH for 300KW/mo consumption)

8.9

8.6

8.7
9.8

8.8

Meralco Generation Charge per kWH

4.1

3.8

3.9
4.6

3.9

Diesel (PHP/litre), NCR

23.9

27.3

29.1
27.8

25.4

Gasoline, RON 95 (PHP/litre), NCR

41.0

42.7

44.8
42.3

39.8

Sources of Basic Data: Meralco, DOE
DOF View

The country’s inflation rate remains favorable; the average annual inflation rate of 1.8% for 2016 is the lowest in 29 years. Food production is crucial to maintaining this favorable macroeconomic scenario. Support to production thru infrastructure development, credit availability and insurance coverage is necessary to sustain this.

RIce inflation has dropped due to production recovery and timely importation. Programs to enhance vegetable farming are needed to temper the double digit inflation in this sector which has continued for more than a year now.