Inflation to hover above 5% until Q3

MANILA, Philippines — Headline inflation is seen breaching five percent until the third quarter of the year, as commodity prices remain elevated amid the unpredictability of the ongoing Russia-Ukraine war.

In its latest Market Call report, First Metro Investment Corp. (FMIC) and University of Asia and the Pacific (UA&P) Capital Markets Research said inflation – the rate of increase in the consumer price index – would remain at five percent in the months ahead.

“Given the uncertainty on how long the Russia-Ukraine war will last and its impact on crude oil and commodity prices, it now looks like average inflation for the second and third quarter will exceed five percent,” FMIC said.

Inflation soared to 4.9 percent in April, hitting its highest rate in over three years, amid continued price pressures due to global tensions.

For the month of May, the central bank said it expects inflation to settle within the five to 5.8 percent range.

FMIC said rising inflation is already putting an early dampener on growing business optimism after the economy grew at a stronger-than-expected pace of 8.3 percent in the first quarter.

“The main headwind for the economy emerges from rising inflation that should average above five percent for the remaining months of 2022, unless we see a sudden end in the Russia-Ukraine war and sharply lower crude oil prices,” FMIC said.

“The war remains unpredictable, but the second-round effects of unusually elevated crude oil prices have affected other commodities. With higher inflation comes higher interest rates, which impinges on spending by consumers and borrowing by firms,” it said.

Other than inflation concerns, FMIC remains upbeat on the Philippine economy, prompting greater optimism among businesses.

FMIC said the pre-election spending gains would likely spill over into the second quarter, since the current administration still has much cash to spare.

However, it warned that such growth pace may dwindle in the second half, based on historical precedents and the tighter fiscal space that the Marcos government will face.

But FMIC noted that the appointment of technocrats in the economic team should ease concerns.

President-elect Ferdinand Marcos Jr. has tapped Bangko Sentral ng Pilipinas Governor Benjamin Diokno as the new finance chief, while Philippine Competition Commission chair Arsenio Balisacan is returning as the socioeconomic planning head.

BSP Assistant Governor Amenah Pangandaman, on the other hand, will lead the Department of Budget and Management.

“While a tighter fiscal space and inflation pose serious headwinds in the second half, an economic team of high-quality technocrats in the new president’s Cabinet can handle the emerging scenario,” FMIC said.