THE recent slowdown in inflation may not indicate that the season of low commodity prices is here to stay, as certain factors would justify a hawkish stance to be adopted by central banks worldwide, according to Oxford Economics.
In its latest economic brief, Oxford Economics said the mix of supply shocks in the next few years will be even “more damaging than the prepandemic years.”
The impact on shipping by the recent Red Sea attacks is telling; they have already caused global shipping rates to surge by 200 percent and shipping costs between China and Europe to increase by 300 percent.
“It may be more realistic to view that prepandemic period as exceptional, and to regard the recent run of adverse supply shocks—and resultant sharp swings in inflation—as a return to more ‘normal’ conditions of higher inflation volatility,” Oxford Economics.
The UK-based think tank said this is another argument to support the caution exercised by central banks when it comes to cutting rates too soon.
Oxford Economics said it expects central banks to be more wary of supply shocks moving forward. It said that the theory suggested that increases in inflation would be short-lived, with a horizon of two to three years.
However, the think tank said based on recent developments, supply shocks have been able to not only increase inflation but also trigger second-round effects that tight monetary policy intends to prevent.
This, Oxford Economics said, means inflation could be higher and more volatile moving forward. It will also be less anchored on inflation targets.
While the think tank does not expect this to be a sufficient reason to prevent central banks from cutting rates this year, it will convince monetary authorities to take it slow when it comes to easing policy rates.
“If inflation is more volatile, and expectations react more to actual price swings, it will become more likely that central banks will have to tighten monetary policy in response to episodes of higher inflation—even if caused by a shock that may be temporary—to re-anchor expectations and hence prevent persistent second-round effects,” Oxford Economics said.
“The experience of recent years suggests that this may require relatively large interest rate cycles compared to a scenario in which inflation expectations are well-anchored,” it added.
Earlier, the Philippine Statistics Authority (PSA) said commodity prices slowed to 2.8 percent in January. Inflation was the slowest since October 2020 when inflation averaged at 2.3 percent.
However, the price of rice, the country’s staple, stood out as the commodity that posted the highest increase in January. (See: https://businessmirror.com.ph/2024/02/06/rice-inflation-highest-since-2009-psa-data/).
PSA data also showed rice price inflation experienced by All Income Households averaged 22.6 percent, the highest since the 22.9 percent posted in March 2009.
Rice inflation rose to 24.8 percent for the poorest Filipinos or the Bottom 30 percent of households. This is the highest in the series, which began in 2013.
This remains a concern since poor regions, including the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) and even the so-called rice granary of the Philippines, saw high retail prices for rice in January 2024.
Based on the latest data released by the PSA, retail prices for regular milled rice averaged P48.71 per kilo in the first two weeks of January and P49.9 per kilo in the last two weeks of January. (See: https://businessmirror.com.ph/2024/02/09/poor-regions-bear-brunt-of-higher-rice-prices-in-january-psa-data).