PHL may face heavier inflation risks in 2nd half

THE ASIA-PACIFIC REGION must brace for tougher economic conditions in the second half of the year, with the Philippines facing even heavier inflation risks amid the looming El Niño season, Moody’s Analytics said.

In a commentary dated June 18, Moody’s Analytics Assistant Director and Economist Sarah Tan noted that the Philippines was one of the hardest-hit by inflation pressures from the war-driven energy shocks.

“The Philippines has experienced some of the strongest pass-through, with transport and utility costs pushing inflation well above the central bank’s target range,” she said.

Headline inflation came in at 6.8% in May, marking the third month in a row that inflation breached the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% target and bringing the five-month average to 4.5%. 

Pump price rollbacks during the month helped lower transport costs, which allowed the headline clip to recover from the over three-year high of 7.2% in April.

Several analysts have noted that the latest reading signals that the worst may be over for the Philippines’ inflation environment.

However, Moody’s Analytics said the Philippines is highly exposed to food-related risks once the upcoming El Niño season takes shape.

“Another risk to watch is the developing El Niño weather pattern, which looks set to bring hotter and drier conditions to much of Asia in the second half of the year,” Ms. Tan said. “Lower rainfall could reduce crop yields and tighten food supplies, pushing food prices higher.”

She noted that the last El Niño phenomenon in late 2023 to early 2024 drove food inflation higher in the Philippines, India and Indonesia.

The country is expected to encounter a “strong” El Niño season from September to November, and potentially a “very strong” one between October and January next year, according to the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA).

PAGASA also reported earlier this month that El Niño conditions are now present in the tropical Pacific, saying there is an 80% chance that it will become a full-blown El Niño.

This means the Philippines could suffer back-to-back shocks as high food prices from weather disturbances will compound the impact of the recent energy shock from the Middle East war on commodity prices.

“Coming on top of the recent energy shock, a bout of food price inflation would complicate the outlook for growth and monetary policy,” Ms. Tan said.

Moody’s Analytics sees Asia-Pacific’s gross domestic product growth weakening to 4.1% this year, slower than the 4.3% expansion last year but slightly faster than its previous 4% forecast for the year.

For 2027, it expects the region’s growth to slow further to 3.6%.

Ms. Tan also noted that the region may encounter higher-for-longer inflation rates as the impact of the energy crisis will likely linger in affected economies.

“The challenge is that inflation often proves stickier on the way down than on the way up,” she said. “Businesses are quicker to pass on cost increases than to pass on cost savings.”

“Even if commodity prices stabilize, the recent energy shock could keep inflation elevated for longer than policymakers expect,” she added.

According to the BSP, Philippine inflation may average 6.4% this year, before easing to 4.5% next year and back to its target range in 2028 at 3.1%.

“Rising inflation is making it harder for policymakers to support growth,” Ms. Tan said. “With geopolitical tensions still elevated and El Niño threatening another inflation shock, the balance of risks remains tilted to the downside.” — Katherine K. Chan