Inflation fell to 3.7% in June, the lowest in four months

The Philippine Statistics Authority (PSA) said on Friday that headline inflation rose at the slowest pace in four months in June as price increases for housing, water, electricity, gas and other fuels, as well as transportation items slowed.

The agency’s preliminary data showed that the consumer price index rose 3.7% in June from a year earlier, down from 3.9% in May and 5.4% in the same period last year.

read: Inflation slows to 3.7% in June – PSA

That’s well below the Bangko Sentral ng Pilipinas’ (BSP) inflation forecast for this month of 3.4% to 4.2%, and slightly below the 3.9% average inflation forecast in an Inquirer survey of 10 economists conducted last week.

June’s inflation rate was the smallest since February’s 3.4%, marking the seventh straight month that inflation has remained within the Bangko Sentral ng Pilipinas’ target range of 2% to 4% this year.

Inflation averaged 3.5% in the first six months, well below the 7.2% in June 2023.

ONS director Claire Denise Mapa said inflation in June was mainly driven by lower electricity and petrol prices.

“The overall national electricity inflation rate is -13.6%, compared to -8.5% in May last year. The second factor that contributed to the lower overall inflation rate is of course transport, as gasoline prices are particularly low,” Mapa told a news conference.

‘A delicate economic landscape’

Inflation for housing, water, electricity, gas and other fuels fell to 0.1% in June from 0.9% in the previous month. Similarly, the decline in overall inflation was driven by the transportation sector, which fell to 3.1% in June from 3.5% in the previous month.

For Robert Dan Ross, chief economist at Security Bank, June’s inflation “revealed a delicate economic situation” in the country, despite an improvement in overall price stability.

“The divergence highlights the complex challenges facing policymakers. Lower housing, utility and transportation costs have contributed to lower overall inflation, which could support the economic recovery,” Roses said.

read: Inflation rose to 3.9% in May, the highest in five months

But food inflation alone rose to 6.5% from 6.1% in May.

The increase in food inflation accounted for 2.2 percentage points of overall inflation, as the index for vegetables, tubers, plantains, cooking bananas and pulses rose faster, to 7.2% in June, up from 2.7% in May.

“Inflation for meat and other parts of slaughtered land animals also contributed to the increase in inflation, rising from 1.6% in May to 3.1% in June,” the PSA added.

Roses also stressed the need for the government and central bank to balance overall economic stability by addressing inflationary pressures, as these trends could “disproportionately” affect low-income households.

Rice inflation

Mapa said the decline in rice inflation remained modest despite slower economic growth in June. However, he expects rice prices to fall in the coming months with the implementation of Executive Order No. 62, which revises tariff rates on agricultural products, including rice.

In June, rice inflation fell to 22.5% from 23% in May. This means that rice contributed 45.2%, or 1.7 percentage points, to the overall inflation rate. Rice has the largest weight in the overall inflation basket at 8.9%.

In fact, Bangko Sentral ng Pilipinas Governor Eli Remolona said in a statement that the decision to further cut import tariffs on staples helped tilt inflation risks this year and next to the “downside,” meaning the central bank now sees less upward price pressure that could fuel inflation.

Still, Remolona noted that rising food prices other than rice and higher transportation and electricity costs present “upside risks.” Overall, the central bank governor said the latest inflation data supports the central bank’s forecast for average price growth to be within its 2% to 4% target range this year and in 2025.

Robert Carnell, head of Asia-Pacific research at ING Bank, said lower inflation in June against the backdrop of a weak peso would make it easier for doves at the Philippine central bank to argue for a rate cut in the third quarter.

Last week, Remolona struck a more dovish tone, saying the central bank was likely to cut its policy rate by a total of 50 basis points this year, with the first 25 basis point cut likely in August, ahead of the Fed.

“The Philippine peso opened stronger this morning, driven by inflation data, which will be a key factor in gauging the ability of the Philippine peso to cut interest rates before the Fed does and without triggering an unnecessary depreciation of the Philippine peso,” Carnell said.

“This goal is certainly easier to achieve against a backdrop of solid economic growth but muted inflation. For now, we assume this goal is achieved and expect a 25 basis point rate cut in the third quarter of 2024,” he added.