MANILA - Prices of goods and services in the Philippines continued to spike in December 2020 as inflation hit a 22-month high of 3.5 percent, above analysts’ expectations of 3.2 percent but still within the Bangko Sentral ng Pilipinas’ forecast range of 2.9 to 3.7 percent.

Philippine inflation has now quickened for three straight months since October 2020, settling at its highest level since February 2019’s 3.8 percent rate.

But the upward trend during the final months of last year was not enough to disrupt the inflation target for the whole year as annual inflation averaged at 2.6 percent which is within Bangko Sentral ng Pilipinas’ 2 to 4 percent target range.

This means the monetary authorities still have room to keep rates at record lows, helping the local economy weather the negative economic impact of the COVID-19 pandemic.

In fact, BSP Governor Benjamin Diokno isn’t concerned about the accelerating inflation, saying the uptick in December is transitory, only brought about by the impact of typhoons on food supply and prices.

He doesn’t also expect inflation to be a concern until at least 2024.

“This pandemic is a marathon, not a sprint," Diokno said, adding that inflation is the least of the BSP's worries.

"Average inflation for 2020 is 2.6 percent is within our target, in fact we are keeping that target for the next 5 years, through 2024. We are confident,” Diokno emphasized.

As shown in the chart above, inflation was actually stable or saw some relative easing in December with food and beverage (4.8 percent), health (2.6 percent), transport (8.3 percent), as well as the restaurant and miscellaneous (2.5 percent) indexes the only ones that saw a spike.

In the previous month, inflation was actually above the central bank’s forecast range of 2.4 - 3.2 percent. Then, Diokno also said, the upward pressure in the prices of food products, particularly vegetables, fruits, and meat were largely transitory and were only brought about by the typhoons during the month.

National Statistician Undersecretary Dennis Mapa backed Diokno’s view.

“‘Yung meat, alam naman natin, this is partly because of demand and ‘yung ASF (African Swine Fever) na may problem tayo sa supply,” Mapa explained.

“I also noted in the report, ‘yung mais for example sa National Capital Region tumaas din siya partly because of the holidays. Hopefully, that would start to go down sa January.”

For a clearer picture of the biggest inflationary drivers last year, the chart above shows prices of transportation services (orange line) went negative during the start of the Enhanced Community Quarantine (ECQ) in mid-March, which paralyzed local mobility.

But after bottoming in April, it steadily increased before seeing drastic spikes starting June, when the economy was starting to reopen.

Food, on the other hand, has been seeing positive inflation all throughout the year, but only started to spike in October, when the country saw a string of strong typhoons until November, inundating crucial agricultural areas.

Based on the Agriculture Department’s estimates, typhoons Quinta, Ulysses, and Super Typhoon Rolly caused major losses in the local farm sector that reached around P12 billion.

It’s no wonder vegetable inflation (green line) went from negative in September to positive 19.7 percent in December 2020. Mapa said the vegetables that saw the biggest increases were tomatoes and onions.

Meat inflation (orange line) has also been on an upward trend since October, peaking at 10 percent in December, coinciding with the seasonal demand for meat during the holiday season, as well as supply constraints brought about by ASF.

As for rice inflation, it turned positive for the first time since March 2019 (or since the Rice Tariffication law took effect), largely driven by an uptick in prices in the National Capital Region (NCR).

Mapa explained, “Ito (rice inflation) ay negative pa sa areas outside the National Capital Region at sa NCR lang positive, pero you will notice sa NCR bumaba siya compared to November so this is slightly above zero, positive 0.1 percent. I cannot tell right now, if this is the start of an upward trend, we will see in the next month or two kung talagang mag-popositive na siya.”

(“Rice inflation is still negative in areas outside the National Capital Region and it’s only positive in NCR. But you will notice in NCR, it eased compared to November so this is slightly above zero, positive 0.1 percent. I cannot tell right now, if this is the start of an upward trend, we will see in the next month or two if it will really be positive.”)

Amid all these factors, inflation in the Philippines was actually the fastest among major Southeast Asian economies, bucking the trend of a low inflationary environment in the region brought about by the health crisis.

But Mapa said it’s still too early to say, if inflation in the Philippines will continue to accelerate in the coming months.

“Nakita natin na meron tayong upward trend nitong nakaraan na three or four months. So we will continue with our monitoring. Itong araw na ito (January 5) ay ang aming first visit sa mga outlets natin para i-measure naman ang ating January 2021 inflation. So we will analyze the data as they come in,” he explained.

(“We saw that we have an upward trend in the past three or four months. So we will continue with our monitoring. This day, January 5, is our first visit in our outlets to measure January 2021 inflation. So we will analyze the data as they come in.”)

RCBC Chief Economist Mike Ricafort said, while the uptick in December inflation is expected, a further acceleration should be seen starting March through the rest of 2021, citing a low-base effect.

“We have leeway for higher rates until February because of high base effect. But starting March to the end of the year, we will see a much lower base so expect some uptick, to 3 percent levels,” he explained.

Ricafort added, the record low policy rate of 2 percent is now unusually below inflation rate, which results in net negative interest rates, “making any further cut in policy rates more challenging at the moment.”

But he said, the soft economic outlook due to the pandemic may keep inflation relatively benign in the coming months, which could help justify more monetary easing measures, especially reducing banks’ reserve requirement ratio (RRR) from 12 percent.

Ricafort explained, “that would infuse more liquidity into the financial system and, in turn, help further reduce borrowing costs/financing costs, as the economy still needs all the support measures that it could get in order to help sustain the economic recovery”.