INFLATION could take longer than expected to return to target as domestic and external pressures reinforce each other, a former Bangko Sentral ng Pilipinas (BSP) official said, complicating central bank efforts to keep a lid on prices.
“The Philippines is facing two simultaneous inflation shocks: a larger-than-expected wage increase and renewed external pressures from volatile oil markets and a weaker peso,” GlobalSource Partners economist and former BSP deputy governor Diwa Guinigundo said in a commentary.
“Together, these could delay the return of inflation to target.”
While each of these developments would already require close monitoring on its own, Guinigundo said their simultaneous occurrence had made the policy environment more difficult.
"The policy challenge confronting the BSP is therefore no longer confined to a single inflation source," he said.
"It must now manage the interaction between stronger domestic cost pressures arising from wage adjustments and imported inflation transmitted through exchange rate depreciation and higher global oil prices.”
Guinigundo told The Manila Times that while he agreed with the central bank’s projection of inflation returning within target next year, “those double shocks could delay it.”
“I have no specific numbers, but I believe based on the forecasts and the dominant upside risks, 2026 and 2027 average headline inflation are likely to be above 6 and 4 percent, respectively,” he said.
“By 2028, given a more positive outcome for both domestic and global developments, inflation could be a little higher than the midpoint of the target, which is 3 percent.”
The BSP’s policymaking Monetary Board last month raised its 2026 and 2027 inflation projections to 6.4 percent and 4.5 percent, respectively, from 6.3 percent and 4.3 percent.
Guinigundo said the inflation outlook became more complicated after the Metro Manila regional wage board last month approved an P85 increase in the daily minimum wage, substantially higher than the roughly 6 percent adjustment assumed in the central bank's baseline forecasts.
The wage increase, equivalent to about 12 percent, will be implemented in two tranches — P60 beginning July 25 and another P25 in January next year. Given Metro Manila’s large contribution to the country's economy and formal employment, developments in its labor market are expected to have nationwide implications.
Based on the BSP's preliminary estimates, every peso increase in the minimum wage would raise inflation by around 0.0047 percentage point. Based on this, the full P85 wage adjustment could directly add roughly 0.4 percentage points to inflation.
A larger concern lies in possible second-round effects, Guinigundo said, including wage hikes in other regions, rising production and transport costs and higher food and service prices.
“If households and firms begin to expect permanently higher inflation, then wage and price adjustments may become mutually reinforcing, creating the very wage-price spiral that central banks seek to avoid,” he said.
Guinigundo also said that external developments were adding fresh uncertainty to the inflation outlook.
While the exchange rate pass-through to inflation has declined significantly since the Philippines adopted inflation targeting in 2002, he said a sustained depreciation would still increase the peso cost of imported goods, particularly fuel and food.
He also pointed to renewed hostilities between the United States and Iran, saying that concerns over possible disruptions in the Strait of Hormuz have heightened risks of higher crude oil prices and financial market volatility.
“For the Philippines, such developments have direct macroeconomic consequences,” Guinigundo said.
“The country remains heavily dependent on imported energy, with more than 95 percent of its oil requirements sourced from abroad,” he noted.
Given these developments, Guinigundo said monetary authorities were likely to remain cautious, continuing to prioritize price stability while keeping inflation expectations well anchored.
“While the BSP will continue to weigh the risks to economic activity, preserving price stability remains its primary mandate,” he said.
“In the current environment, maintaining the credibility of monetary policy and keeping inflation expectations well anchored may prove just as important as responding to the inflation shocks themselves.”
Monetary policy alone, Guinigundo said, will not be sufficient to bring inflation back to target.
“In the face of multiple inflationary pressures, policy coherence, not monetary policy alone, will determine how quickly the Philippines returns to low and stable inflation.”
