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Economics – Markets – Strategy
Economics: Philippines
Inflation to hit consumer spending
A key negative factor weighing
on the consumption outlook
in the coming quarters is inflation,
and this year we expect real
private consumption expenditure
(PCE) growth to slip to 5.4%,
before returning to 5.8% in
2009, the same pace as 2007.
As prices rise, the amount of
goods consumers can purchase
for the same amount of money
shrinks. This erosion of purchasing
power was already evident in
1Q08. Although we found the
slowdown in first quarter
consumption growth to be too
sharp and not quite
commensurate with the rise
Chart 2: Growth to slow this year
%-pt contrib to YoY GDP growth
20
15
10
5
0
-5
-10
DBSf 08: 5.4%,
09: 6.0%
Dec-06 Dec-07 Dec-08 Dec-09
PCE GCE Investment
Stat disc Net exports GDP YoY
in inflation, the negative correlation between prices and spending over time is
clear (Chart 3).
Chart 3: Inflation vs real spending
% YoY
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
CPI
inflation,
RHS (inv)
PCE growth
Latest: 1Q08
% YoY, inv
Mar-02 Mar-04 Mar-06 Mar-08
0
1
2
3
4
5
6
7
8
9
Chart 4: Headline inflation busts BSP's target
% YoY
12
10
8
6
4
2
0
BSP inflation
target
DBSf 08: 9%
Headline CPI
Latest: May08
Jan-03 Jul-04 Jan-06 Jul-07 Jan-09
We expect inflation to rise further in coming quarters on the back of food and
fuel prices. For the second quarter we only have April and May data in hand,
but headline inflation has already averaged a whopping 9% YoY. This compares
to an average of 5.5% YoY in 1Q08. Based on current trends, and on the observation
that prices generally face much greater resistance adjusting downwards than
upwards, our estimates suggest that headline inflation will surpass 10% YoY in
the remaining months of the year, peaking at above 11% YoY in Sept/Oct. Such
will take inflation for the year to 9%. More specifically, food inflation could rise
to above 16% YoY later this year. Given that food accounts for over 53% of
total consumer spending, this surge in prices must have an adverse impact on
PCE growth. Next year, as base-year effects wear off and assuming some stability
in energy prices, inflation should print 4.8% (Chart 4).
Prices have more
room to rise;
inflation this year
will average 9%,
and 4.8% in 2009
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