Rising rice and energy prices in the Philippines raise inflation concerns
Inflation in the Philippines has now dropped.
Inflation in the Philippines hit a one-year high of 8. 7% in January 2023, driven by rebounding domestic demand and high global commodity prices.
Inflation has since fallen to 4.7% year-on-year in July.
A series of aggressive monetary tightening measures (increasing interest rates to a total of 425 basis points) combined with moderate global energy prices have helped push inflation back to the 2-4% inflation target as Bankko Sentral ng Pilipinas (BSP) pose. BSP expects inflation to return to target in Q4.
However, recent developments could deflect the current downturn, especially with renewed pressures on prices of key commodities.
Rice, transportation and electricity = three important things
Previous episodes of high inflation in the Philippines were mainly due to supply-side problems.
Domestic production of rice is not enough to meet domestic demand and thus the country depends on grain imports from neighboring economies.
The Philippines also depends on imported energy for electricity generation and transportation, which shows how vulnerable the economy is to sharp fluctuations in global energy prices.
We have identified 3 key commodities in the CPI basket as rice, electricity and transportation, which together account for 23.41%.
In the most recent inflation run, these three key factors accounted for 41% of inflation in 2022, underscoring the importance of stabilizing the price movements of these key commodities.
Given their share in the CPI basket and the country’s reliance on rice and energy imports, any sharp increase in the so-called “Important 3” could lead to further inflation in the Philippines.
Not a meal without rice
Rice is the staple food in the Philippines and meals without rice are not considered “full meals”.
This fact is reflected in the proportion of rice 9.
6% in the CPI basket.
In the past, crop damage due to storms or bad weather has forced the Philippines to import more goods to boost supply.
The developments in 2023 clouded the outlook for domestic production with the arrival of El Niño weather phenomena, in addition to the recent export ban from India.
The Act passed in 2019 (RA 11203) removed the rice import quota, which could theoretically help increase domestic supply.
However, the Philippines may face high import costs due to El Niño’s impact on rice exporters and India’s rice export ban. Rice inflation recently exceeded target (4.2% y/y) and could become increasingly worrisome if supply conditions tighten further in the coming months. The Philippines depends on rice imports
The Philippines depends on rice imports
Energy dependence
In addition to being dependent on rice imports, the Philippines is also dependent on energy imports for electricity generation and transportation.
Transport and electricity have a significant proportion in the CPI basket, at 9.02 points and 4.8 points, respectively.
The spike in global energy prices in 2022 is the main cause of inflation, with the transportation and electricity sectors recording inflation of 12.9% yoy and 18.5% yoy respectively
The recent recovery in global energy prices, due to developments in Ukraine and production cuts, has driven pump prices in the Philippines higher.This development will eventually lead to higher electricity costs, with 13.5% of electricity generation provided by diesel power plants.
In addition, high inflation in transport and electricity often leads to a second round effect.
High transportation and electricity costs can increase the price of items that need transportation and electricity to produce, which will lead to even greater price pressures.
Will soaring inflation “Crucial 3” complicate BSP’s easing plan?
The BSP recently hinted at the possibility of a policy reversal in the first quarter of 2024, pointing to forecasts that inflation will hit its target by then.
The BSP is an inflation-targeted central bank whose goal is to keep inflation in the 24%range.
Recent tightenings occurred in 2014, 2018 and 2022, when the BSP raised interest rates in response to a spike in rice prices caused by rising rice and energy costs.
The recent rise in rice prices, coupled with a rebound in global energy costs, could cause further price pressures and prevent overall inflation from stabilizing within the BSP inflation target range.
We initially expected a BSP rate cut in the first quarter of next year, based on the disappointing second quarter GDP report.
However, if we continue to see rice and energy prices rise in the coming months, we could see the BSP delay the easing plan to mid-2024.
Look at the birds of the air, that they do not sow, nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not worth much more than they?
