Oil Prices at $90 to $100 Could Push Philippines Inflation Beyond Target

The Bangko Sentral ng Pilipinas (BSP) has warned that if global oil prices rise to $90 to $100 per barrel, the country's inflation rate may surpass the government's goal range of 2-4 percent this year and 2026. The BSP's Monetary Policy Report (MPR) predicts inflation of 4.1 percent in 2024 and 4.4 percent in 2025 due to average oil prices of $90 per barrel. In a more severe scenario in which oil prices reach $100 per barrel, inflation may average 4.5 percent this year and 4.7 percent in 2026.

“Inflation could breach the 2-4 percent target range if Dubai crude oil prices average above $90 per barrel in 2025 and 2026,” the BSP said in its Monthly Policy Report (MPR). The central bank cautioned that these predictions only take into account the direct consequences of increasing oil prices and do not account for anticipated second-round effects on transportation fares, food costs, or wage hikes.

Dubai crude oil prices are anticipated to decrease in 2025 and 2026, with the BSP estimating an average of 70.05 per barrel this year and 68.15 per barrel in 2026. However, poor global demand and probable excess have delayed oil output increases by the Organization of Petroleum Exporting Countries and its allies (OPEC+), potentially pushing prices higher in the short term.

Supply-Side Challenges and Food Inflation

The BSP also stated that supply-side concerns continue to pose major threats to domestic commodities prices. Using a 90-percent confidence range, the central bank forecast that inflation will exceed the government's objective in 2025 and 2026 by 50 percent. Food, which makes up 34.78 percent of the Consumer Price Index (CPI), remains an important contributor.

Local pig, poultry, and fish production is at risk due to supply restrictions caused by El Niño, African Swine Fever (ASF), and Avian Flu. ASF and avian flu have already had an impact on meat supply, which accounts for 6.43 percent of the CPI. Meanwhile, fish supply is predicted to become “insufficient” due to decreasing local productivity, decreased imports, high input prices, and bad weather conditions. Fish and seafood account for 5.66 percent of the CPI total.

The BSP cautioned that La Niña and Mt. Kanlaon's latest eruption might significantly limit domestic sugar production. Sugar, confectionery, and sweets make up 1.05 percent of the CPI. “Under this risk scenario, elevated commodity prices are assumed to persist until the first quarter of 2025,” the Philippine Bureau of Statistics stated.

Rice Tariffs and Transport Fare Hikes

On the bright side, recent reductions in rice import taxes may bring some assistance to consumers. Rice prices, which account for 8.87 percent of the CPI, are projected to fall after the execution of Executive Order No. 62, which formalized the tariff decrease on June 20, 2024. However, the BSP noted that the tariff cut would have a smaller impact than prior rounds because local rice prices had already been progressively decreasing.

Transportation expenses are also expected to grow, increasing inflationary pressures. The BSP anticipates that fee rises for jeepneys, trains, and taxis will take effect in the first quarter of 2025. Petitions to raise minimum jeepney rates submitted last year are expected to be accepted, while the Manila Metro Rail Transit (MRT)-3 has suggested raising the minimum fee by P3 to P16. Taxi operators have also sought fare modifications, which are now being reviewed by the Land Transportation Franchising and Regulatory Board.

Electricity Rates and Economic Development

Another point of worry is electricity pricing since greater generation costs are often passed on to customers. The Supreme Court overturned the prior restriction on Wholesale Electricity Spot Market (WESM) pricing for November and December 2013, effective July 2023. The BSP anticipates that this adjustment will be dispersed equally over the next three years, with a strong likelihood of subsequent rises in power rates.

The combination of high commodity prices and rising transport and power costs is projected to keep demand muted, resulting in “below potential” economic growth in the short term. According to the BSP, slower-than-expected GDP growth in 2024 would be led by contractions in agriculture and moderate growth in industry and services. Weather disruptions also had an impact on tourist and leisure expenditure, slowing economic activity even more.

Conclusion

The BSP's predictions highlight the delicate balance the Philippines must strike while managing inflation in the face of global and local problems. While the drop in rice tariffs provides some respite, increased oil prices, supply-side limitations, and rising transportation and energy costs all represent substantial threats to the inflation forecast. As the central bank analyzes these changes, policymakers will need to manage the complexity in order to maintain economic stability and protect consumers from the negative impacts of inflation.