The country’s inflation for the month of December 2022 was 8.1% year-on-year — a new 14-year high since November 2008 when inflation reached 9.1%. <\/p>\n\n\n\n
This was slightly higher than 8% logged in the previous month (November 2022) and 3.1% a year ago (December 2021) largely due to:<\/p>\n\n\n\n
i. higher food prices amid the seasonal increase in demand due to increased holiday spending with no more COVID restrictions;<\/p>\n\n\n\n
ii. some storm\/flood damage on agriculture in the latter part of the month (the effects of which on inflation could spill over in January 2023) on top of the spillover effects from the previous storm damage (especially Paeng in November 2022, Karding in the latter part of September 2022, etc.);<\/p>\n\n\n\n
iii. higher electricity prices;<\/p>\n\n\n\n
iv. some pick up in global crude oil and other commodity prices as China eased some of its COVID restrictions (economic reopening narrative).<\/p>\n\n\n\n
Possible peak in year-on-year inflation data<\/strong><\/p>\n\n\n\n In the coming months of 2023, expect lower inflation figures due to higher inflation base or denominator effects that could mathematically lead to slower year-on-year inflation.<\/p>\n\n\n\n Inflation could ease to 4.5%-5.5% in 2023 as year-on-year inflation would ease largely due to global crude oil prices already eased to among 1-year lows recently, alongside the easing of other global commodity prices in recent months amid aggressive Fed rate hikes that increase the odds of U.S. recession in the quest to bring down elevated U.S. CPI\/inflation largely triggered by the Russia-Ukraine war since February 24, 2022.<\/p>\n\n\n\n Inflation could fall below 4% in latter part of 2023<\/strong><\/p>\n\n\n\n Inflation could also go back to below 4% upper end of the target as early as the latter part of 2023 but the average for 2023 could still be above the said inflation target; largely due to higher base\/denominator effects especially in the second half of 2023 in view of the anniversary of the wage hikes and transport fare hikes (that started in June-July 2022) and the resulting second-round inflation effects of higher prices of other affected goods and service after the wage hikes passed on by some businesses; thereby mathematically resulting in lower year-on-year inflation especially in 3Q 2023 and 4Q 2023.<\/p>\n\n\n\n Elevated inflation could still lead to policy rate hikes<\/strong><\/p>\n\n\n\n Still the relatively high inflation at new 14-year highs would support and justify further local policy rate hikes that could possibly match future Fed rate hikes to help stabilize the peso exchange rate and, in turn, overall inflation.<\/p>\n\n\n\n For the meantime, the Fed rate is still expected to hike on the next rate-setting meeting on February 1, 2022 and for early 2023 towards 5% levels in its quest to sustain the easing in the U.S. inflation to the target of 2%.<\/p>\n\n\n\n Thus, the BSP would likely match any future Fed rate hikes that have been smaller recently, towards 6% levels by early 2023, as part of the measures to stabilize the peso and overall inflation, especially to fulfill the mandate of stable prices\/inflation; since the peso determines import prices and, in turn, overall inflation, since the Philippines is a net importing country.<\/p>\n\n\n\n But rate hikes could slow down the economy<\/strong><\/p>\n\n\n\n However, further hikes in local policy rates, at some point, could become a drag on loan growth and overall economic growth amid much higher borrowing costs\/financing costs.\u00a0<\/p>\n\n\n\n Higher local policy rates would lead to some increase in borrowing\/financing costs that could lead to lower earnings and valuations, as well as slow down the economy as an unintended consequence in the quest to fight off inflationary pressures.<\/p>\n\n\n\n