2 reasons behind Philippines' rising inflation

Analyst postpones timing of first rate cut this year.

According to Deutsche Bank's Markets Research, Philippines' inflation has been rising this year for two reasons.

First, it thought that after falling to its lowest level in 13 years (second lowest in 24 years) food price inflation would begin to normalize this year. Food inflation has averaged 6% over the past ten years but was only 2.3% last year. At 39% of the CPI index, if even half of this ‘gap’ is closed this year, headline inflation would be pushed up 1.4ppts.

Secondly, expecting Brent crude to average about USD112/bbl in the first half of the year, it expected oil prices to push inflation higher.

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On both fronts, we have been (pleasantly) surprised. Food price inflation is rising more slowly than we’d expected (2.7% in Q1 from 2.3% in Q4, but 2.2% in April) and fuel prices are still falling.

The recent drop in global crude oil prices reduces significantly the increase in fuel-related inflation that we had been expecting in Q3. Oil price inflation is likely to be about 10ppts below what we had been expecting.

Therefore, even anticipating a rise in food-related inflation and some upward pressure on core prices in an economy growing faster than its potential growth rate, the lower oil price inflation outlook means that headline inflation will rise more slowly than we had previously forecast.

We now see inflation rising into the upper half of the BSP’s target band only in Q4 this year. Consequently, we expect the timing of the first rate hike to be no earlier than December this year.