The Bangko Sentral ng Pilipinas (BSP) said Tuesday that price pressures will continue to be tempered in the second half of the year after noting that inflation rate for the month of June of 4.1 percent is lower than consensus forecast but within its own 3.9 percent-4.7 percent estimate.

The June inflation of 4.1 percent broke the 4.5 percent inflation rate registered for the months of March, April and May. The BSP and economists point to easing transport inflation as a main factor for the decline.

The BSP said the 9.6 percent annual increase in the transport index in June, which was lower than May’s 16.5 percent, was a “major contributor to the slower pace in the inflation.”

“The latest inflation number is consistent with expectations that inflation could remain above target in the near term as meat and oil prices remain elevated,” said the BSP.

It said that while average inflation is projected to settle at the high-end of the two-four percent target for 2021 at a flat four percent, its expected gradual slowing of price pressures have already started.

“Price pressures are seen to abate leading to the reversion of average inflation near the midpoint of the target in 2022 to 2023. The effective implementation of direct non-monetary measures will be crucial in mitigating further supply-side pressures,” the BSP reiterated.

The risks to inflation outlook are still the same and broadly balanced as far as the BSP is concerned. It said the upward movement in the prices of international commodity due to supply chain bottlenecks and global demand recovery continue to put pressures on inflation. “However, downside risks to the inflation outlook continue to emanate from the emergence of new coronavirus variants which could delay the easing of lockdown measures and temper prospects for domestic growth,” noted the BSP.

ING Bank economist Nicholas Mapa and Security Bank Corp. economist Robert Dan Roces said transport costs tempered the inflation rate in June. They both projected a higher inflation than 4.1 percent for June.

“The big surprise for the month was the stark deceleration in transport inflation which slowed considerably to 9.6 percent from 16.5 percent in May as base effects from pandemic-related rules for public transportation faded. Year-to-date inflation remains at 4.4 percent and we expect inflation to slide back within target by July should both food and transport cost behave,” said Mapa.

Roces had commented before government’s inflation announcement that transport inflation was expected to have slowed on base effects but that oil price movements is still a “primary upside risk in the months ahead.”

“Oil prices remain the primary upside risk; fuel and utilities inflation track changes in oil prices very closely albeit with a three to four-month lag, based on our estimates. Thus, the recent gains in oil prices point to a probable upside contribution to inflation by the fourth quarter 2021,” said Roces.

Mapa said the potential upside pressure is largely on any increase in the global energy prices and any fallout from OPEC leaders “squabble on production hikes.”

“Meanwhile, downside pressure remains present as the economy struggles to dig itself out from the recession with overall economic activity still sluggish,” said Mapa. “In the near term, we could see higher global energy prices exerting upward pressure on utilities and fuel costs but we also expect base effects from tricycle fares and other services to offset this increase,” he said. As such, the “probability of inflation hitting five percent has diminished considerably,” he added.

The ING economist also expect inflation to “glide back within target” of two-four percent as BSP will stick to an accommodative stance. “We expect BSP to retain policy rates at two percent for the balance of 2021 and only consider adjusting policy by mid-2022,” said Mapa.

Mapa noted that the BSP will continue to not be bothered by an above target inflation number as it is focused on delivering stimulus “at a time of economic struggle and stalling inflation will relieve some pressure on the central bank to hike policy rates to combat inflation.”

“With price pressures fading, we expect inflation to decelerate in the second half of the year as meat prices normalize with authorities allowing higher import volume for the commodity,” he said, adding that base effects “tied to social distancing guidelines for transport and other services are also likely to fade in the coming months, offsetting a projected acceleration in utility and fuel costs given the surge in global oil prices.”

Source: Manila Bulletin (