Elevated oil prices may keep core inflation sticky — Nomura

ELEVATED OIL PRICES could keep core inflation sticky through second-round effects even as headline inflation is expected to ease in June, Nomura Global Markets Research said.

In a July 3 report, Nomura Research Analyst Harrington Zhang said the country’s core inflation may have quickened to 4.5% last month from 4.1% in May and 2.2% a year ago.

“We also expect core inflation to continue to rise further to 4.5% from (4.1%), reflecting pass-through effects from still-elevated energy prices,” Mr. Zhang said.

If realized, this would be the fastest core print in two-and-a-half years or since 4.4% in December 2023.

It would likewise mark the second straight month that core inflation breached the central bank’s 2%-4% target.

Core inflation strips out volatile oil and food prices, allowing policymakers like the Bangko Sentral ng Pilipinas (BSP) to determine whether prevailing consumer price movements reflect short-lived disruptions or a long-term trend. 

Oil prices have eased further in June, with the global oil benchmark price falling by 21%, the largest decline recorded since the onset of the COVID-19 pandemic in March 2020, to below $100 per barrel. This was also faster than the 19% drop seen in May.

Fuel retailers implemented price rollbacks, with gasoline down by as much as P7.50 per liter and diesel cut by as much as P21.19 per liter.

However, the price of kerosene climbed slightly last month, posting a net increase of P1.98 per liter.

As of the last week of June, a liter of gasoline was sold for P68 to P96.60, while diesel cost P62.60 to P79.99 per liter, and kerosene at P94.60 to P125.50 per liter.

While pump prices have recovered from the over P100-a-liter peak during the war, it still remained above the prewar range of P50 to P60 per liter. 

In terms of headline inflation, Mr. Zhang projects it to ease for a second straight month at 6.4% in June from 6.8% in May.

“We expect CPI (consumer price index) inflation to ease further to 6.4% y-o-y (year-on-year) in June from (6.8%) in May, helped by a further drop in crude oil prices as well as stable rice prices, although upward adjustments to electricity generation charges provided some offset,” he said.

This was slower than the median estimate of 6.6% in a BusinessWorld poll of 18 analysts conducted last week. 

Meanwhile, Deutsche Bank Research sees inflation at 6.8% as high electricity rates offset the expected relief from softer transport prices during the month.

“Philippines’ headline inflation is forecast to remain unchanged at 6.8% year on year in June,” Deutsche Bank analysts said in a separate report on Monday. “While private transport inflation likely eased further alongside the fall in oil prices, this is likely to be offset by higher electricity rates — 19% year on year higher in June 2026 vs 17% in May.”

In June, Manila Electric Co. hiked electricity rates by 14.88 centavos per kilowatt-hour (kWh) to P14.4833 per kWh from P14.3345 per kWh. This translated to a P30 increase in the overall monthly electricity bill of households consuming 200 kWh.

MUFG Global Markets Research also projects inflation to stay above 6% in June, which would give the BSP reason to remain hawkish.

“Meanwhile, we think inflation in the Philippines will likely remain elevated at more than 6% year on year, and with risks of El Niño and food price pressures moving forward, we see the BSP remaining hawkish for now,” MUFG Senior Currency Analyst Michael Wan said in a report on Monday.

For Mr. Wan, the BSP may raise the benchmark rate further by a total of 50 basis points (bps). 

“We are forecasting BSP to hike rates two times more, bringing the policy rate to 5.25% by the end of 2026, which should over time provide some support for the currency,” he said. 

The central bank has tightened by a total of 50 bps as it increased the key interest rate by 25 bps for a second straight meeting in June, bringing benchmark borrowing costs to 4.75%. 

BSP Governor Eli M. Remolona, Jr. told reporters on Monday that the economy can still handle another 25-bp hike as it expects domestic growth to recover by the second half of the year following three consecutive quarters of slowdown.

He also earlier said that they still have a lot of room to tighten, especially as they want to contain price risks and bring inflation back to their 3% target using monetary policy.

The Philippine Statistics Authority will release the June inflation report on Tuesday (July 7).

Meanwhile, the Monetary Board will have three more rate-setting meetings this year on Aug. 27, Oct. 22, and Dec. 17. — Katherine K. Chan