Dissecting Data: Inflation eases in August, but was this caused by weaker demand?

Warren de Guzman and Edson Guido, ABS-CBN News

Posted at Sep 04 2020 03:56 PM

Inflation eased for the first time in 3 months. Data: Philippine Statistics Authority

MANILA - Philippine inflation eased for the first time in 3 months in August.

The inflation rate hit 2.4 percent last month, which was lower than the Bloomberg consensus forecast of 2.7 percent, and the Philippine Central Bank’s own forecast range of between 2.5 percent and 3.3 percent.

BPI lead economist Jun Neri said this could be an indicator of weak demand from consumers during the Modified Enhanced Community Quarantine, instituted in the National Capital Region and surrounding provinces for half of August. Neri however notes the drop in inflation is welcome as “a spike could complicate the Central Bank’s policy efforts to support the economy.” 

Philppine Central Bank Governor Benjamin Diokno says while the inflation rate was lower than expected, it was “consistent with the expectation that inflation will remain benign over the policy horizon. The balance of risks tilts toward the downside owing largely to potential disruptions to domestic and global economic activity of the ongoing pandemic.” 

As for monetary policy, which Neri noted has been used aggressively by the Central Bank to pump prime the economy, Diokno said “the prevailing interest rate environment and ample liquidity in the financial system, reflecting the significant monetary policy easing and liquidity enhancing measures undertaken thus far by the BSP, are seen to provide sufficient support to economic activity. 

Early signs of recovery in domestic activity are being noted, with further improvements expected as containment measures are relaxed further, and firms and households adjust better to the post pandemic operating environment.”

Neri also noted the data gathering for the inflation report may not have captured the complete picture of conditions on the ground, saying “there may be some ‘distortions’ given that consumer demand transferred rapidly during the pandemic, and the fixed basket of goods used to measure inflation may not be accurate to their current lifestyle.” 

A large number of businesses have gone online this year, with products ranging from food to personal protection equipment, as consumers shift to e-commerce to get around various quarantine conditions and the COVID-19 outbreak.

National Statistician Dennis Mapa earlier said their data gathering methods for the inflation report did not allow them to measure factors affecting consumer demand, such as household spending. 

Mapa said “it seems there is enough supply. As for expenditure patterns, sa households, makikita natin, next year pa nga lang.” 

(It seems there is enough supply, but as for household expenditure patterns, we will see that in a separate survey, but that comes out next year.) 

Mapa also clarified that the information they obtained could not determine any impact on inflation from the lockdown in August, saying “wala naman kaming nakitang particular na direction, walang shock or spike sa food items.” (We did not see any particular direction, shock or spike in food items.)

Regina Capital Managing Director Luis Limingan said “Inflation surprisingly weakened in August after an uptrend the last few months, and despite a very low base from last year (Aug19 1.7%).” The low base effect principle assumes a low base from the previous year, would generally result in a larger percentage change in the next.

Limlingan adds “perhaps the strengthening of the peso’s effect on input costs from imported materials also helped with this.” The Philippine peso is among most appreciated currencies against the US dollar in Asia this year. 

The Philippine Finance Department actually mentioned the mild inflation environment, alongside record levels of reserve buffers, as reasons for the Philippine Peso’s strength against the US dollar.

ABS-CBN Data Analytics Team

Lower inflation for food and non-alcoholic beverages was a big contributor to the slowdown in prices in August. Lower Inflation for cigarettes, captured by the alcohol and tobacco column, and restaurant meals, captured in the restaurant and miscellaneous column, also helped slow inflation. Negative inflation was seen in recreation and culture, as these sectors continue to suffer from the ban on large public gatherings due to COVID-19.

ABS-CBN Data Analytics Team

Transport inflation, which has been elevated in previous months due to the banning of public transport under certain quarantine conditions, remained at 6.3 percent in August, the same as July. 

High transport prices do not stem from changes in fares as these are regulated. The high costs actually come from social distancing measures which require groups that would normally save by paying a single fare for one trip, to pay separate fares on separate trips for each group member. Food inflation meanwhile, is on a clear downtrend.

ABS-CBN Data Analytics Team

This chart takes a closer look at food inflation, broken down into rice (blue), meat (orange), fish (gray), fruits (yellow), and vegetables (green). Inflation for vegetables turned negative in August, while inflation for fruits, meat and fish all trended lower. Rice inflation meanwhile stayed negative for a 16th straight month. This again is attributed to a more stable supply of imported rice, facilitated by the rice tariffication law. 

Data: Philippine Statistics Authority

The story for rice in the National Capital region however was different. Inflation for the staple turned positive in NCR in August, hitting 0.6 percent from -0.1 percent. Mapa however said this is nothing to be concerned about, since the inflation rate is still negligible at below 1 percent.

Data: Philippine Statistics Authority

Looking at inflation in the NCR, it was still below the national average inflation rate.

Data: Philippine Statistics Authority

This infographic breaks down inflation across regions outside NCR. 12 regions saw inflation ease in August, while only 4 regions saw an increase. 

Data: Philippine Statistics Authority

The Bicol Region had the highest inflation rate in the Philippines at 4 percent in August. But this is an improvement compared to the previous month.

Data: Philippine Statistics Authority

The Davao region meanwhile had the lowest inflation rate in the Philippines in August, at 0.2 percent. This is a one percentage point deceleration compared to July. Negative inflation or deflation however would not be a desirable situation. 

Any decrease in inflation would bring out concerns of falling demand, as noted by BPI Economist Neri. A negative inflation rate would magnify such concerns, as weak demand coupled with falling prices would make it difficult for businesses to survive.

ABS-CBN Data Analytics Team

This chart looks at Philippine inflation compared to the major ASEAN economies. The Philippines (red), still has one of the highest inflation rates in the region, second only to Vietnam (green). Indonesia (gray), Singapore (yellow), Thailand (blue), and Malaysia (orange) all have lower inflation. Singapore, Thailand and Malaysia even have negative inflation using latest data.

Overall the August inflation rate of 2.4 percent was a surprise, as it came in lower than government and market expectations. Whether or not this is an indicator of weak demand, which could lead to a weaker economic performance, remains to be seen. 

However, it is important to note that the inflation rates in April and May, during the worst quarter of economic contraction in Philippine history, were lower compared to August. This means if demand is getting worse, it still isn’t as bad as what was seen in that quarter.