Inflation Preview: Not cooling just yet

Both global and domestic headwinds likely kept inflation above target in September, with crude prices triggering massive oil price hikes in recent weeks, and stormy weather, intensified by the anticipated Super El Niño, pushing food prices higher. 

Metrobank forecasts headline inflation at 6.5% in September, higher than the previous month’s 6.1%. 

The weather shock

Food prices likely continued their uptrend in September, as stormy weather disrupted food production throughout the month.  

Specifically, prices for rice, vegetables, and fruits were the most affected, as the Department of Agriculture reported billions of pesos in damage to agricultural crops due to flooding and intense rainfall.  

Seafood prices also likely rose, though to a lesser extent. Meanwhile, relative improvements in livestock production compared with last year show that meat products likely remained in deflation in September, though at a lower rate. Moving forward, the government is considering implementing a pork import cap to protect local farmers from further price declines.

Back above USD 100

Global crude prices remained volatile throughout September, as threats to oil supply persisted amid worsening geopolitical developments in the Middle East. Brent crude averaged above USD 100 per barrel (bbl) in September, after peaking at USD 108/bbl mid-month, the highest since May.  

In the domestic space, this translated into a cumulative increase in fuel pump prices, with marginal price rollbacks at the start and end of September unable to offset consecutive mid-month price increases. With domestic pump prices rising sharply over the month, year-on-year oil inflation likely accelerated in September.

Still a source of pressure

Meanwhile, electricity prices moved in mixed directions in September. Customers of Manila Electric Company and Visayan Electric Co. saw a slight reprieve in rates for the month, while customers of Davao Light saw higher rates due to higher Wholesale Electricity Spot Market prices.  

Despite mixed movement, electricity rates remain elevated year-on-year and likely remained among the top sources of inflationary pressure in September.

Metrobank’s take

Metrobank expects inflation to remain above the Bangko Sentral ng Pilipinas (BSP)'s target of 3.0% ± 1.0% for the rest of the year. Global oil prices have soared again due to renewed geopolitical tensions in the Middle East, prompting transport fare hikes across the country.  

Meanwhile, the anticipated Super El Niño, expected to be the strongest in decades, will further strain agricultural supply and push up food inflation.

Above-target inflation will likely lead to further monetary policy tightening, with additional interest rate hikes still on the table in the fourth quarter.

As a result, domestic bond yields are expected to remain elevated across the curve. The USD/PHP exchange rate is also forecast to remain above 60, pressured by a strong US dollar and weak economic fundamentals.  

However, higher remittance inflows and outsourcing bonuses in the fourth quarter may bring it down from its all-time highs earlier in the month.