Commodity prices breach five-year high in June

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Metro Manila (CNN Philippines, July 5) — Prices of goods and services reached a fresh five-year high in June, triggered by higher cost of food and non-alcoholic beverages, according to data from the Philippine Statistics Authority (PSA).

In a report released Thursday, the PSA said inflation  last month was at 5.2 percent, more than double the 2.5 percent posted in June last year.

This is the fastest rate of increase in the prices of basic goods since the base to determine inflation was adjusted to 2012 from 2006.

In a statement, Socioeconomic Planning Secretary Ernesto Pernia attributed the spike "to faster price increases in major commodities like food, fuel and transport, as well as host of factors, such as world oil prices, peso depreciation, and price of rice."

Prices of food and non-alcoholic beverages in June rose by 6.1 percent year-on-year.

Alcoholic beverages and tobacco still posted the highest price increase at 20.8 percent, followed by transportation which went up by 7.1 percent. Utility prices like water and gas climbed by 4.6 percent, education by 4 percent, and cost of furnishings and household equipment by 3 percent.

Clothing and footwear prices were stable at 2.2 percent, while communication barely moved at 0.4 percent.

Inflation in Metro Manila was at 5.8 percent, while those in other regions were at an average 5.1 percent. Inflation was lowest in Central Luzon at 3 percent and highest in the Autonomous Region in Muslim Mindanao, for a hefty 7.7 percent.

The June inflation breached the forecast of the Bangko Sentral ng Pilipinas (BSP) at 4.3 to 5.1 percent, as well as the Cabinet-level Development Budget Coordinating Committee's (DBCC) multi-year target of 2 to 4 percent.

The DBCC, which groups the BSP, Office of the President, National Economic and Development Authority, Department of Finance, and Department of Budget and Management, pegged 2018 inflation at an average of 4.3 percent.

Presidential Spokesperson Harry Roque downplayed the impact of rising prices.

"There's money going around that's why you're bound to have inflation," Roque said during a press briefing Thursday.

He attributed this to free tuition, lower withholding tax because of the tax reform law, and the administration's aggressive infrastructure spending program.

"But it's not something to worry about. It's within historical amounts," Roque added.

On the other hand, BSP Governor Nestor Espenilla called the higher-than-expected inflation a "setback."

"This will shape the strength and timing of our next monetary policy response to firmly anchor inflation expectations," Espenilla said in a statement.

The BSP again raised policy rates in June by 25-basis points to 3.5 percent to temper rising prices.

Espenilla said the BSP will make sure inflation returns to within the 2 to 4 percent target.

In an additional statement released later that day, the BSP said it expects inflation to peak in the third quarter of 2018.

"For 2019, inflation is assessed to go back to target," the statement read.

Pernia reiterated a statement of economic managers that inflation will stabilize by the end of the year, even as people should brace for more price hikes in the short term.

"We expect inflation to peak in the third quarter and taper off by October, government needs to implement necessary measures, both short-term and long-term, to address the impact of inflation," Pernia said.

He added the administration has already planned mitigating measures to cushion the impact of rising prices. These include unconditional cash transfers until September, the upcoming fuel subsidy for public transport, and current free tuition fees in state universities and colleges.

Pernia said the price spikes will not dampen growth prospects for the whole year.

"We remain optimistic that we can meet our medium-term economic growth target of 7 to 8 percent, even while taking note of growth risks that we need to manage," Pernia said.

Nomura Global Markets Research pointed to two factors that influenced price movements, including the tax reform law.

"The pick-up came across the board, notably in food, transport, housing, water, electricity, gas and other fuels. Importantly, core inflation rose significantly to 4.3% from 3.6%, consistent with our long-held view that, given the strength of the economy, the pass-through from supply-side effects such as the impact of TRAIN tax reforms and oil prices is likely elevated," Nomura said in a statement.

The financial services group said the central banks's policy-making Monetary Board may again raise key rates by 25-basis points to 3.75 percent during its meeting in August to temper inflation.

READ: BSP raises interest rates anew to tame inflation

It also said inflation would likely peak in the coming months before prices begin to decline.

"We expect headline inflation to peak only around August or September, before gradually easing from there," Nomura said.

The expected rise in prices next month would be driven by increase in power rates, higher coal taxes, and the demand for higher wages.

"That said, we believe the risks around our CPI (consumer price index) forecast may now be tilted more to the upside because of upcoming supply-side factors, such as impending increases in power rates and the impact of a higher coal tax," the market research group said. " We believe inflation expectations are also likely to rise further, as evident in rising demand for wage increases."

READ: Trade chief warns against regional wage hikes