Philippine Inflation Faces Prolonged Pressure Amid Wage Hike, Weaker Peso

MANILA, Philippines — A sharper-than-expected minimum wage increase and renewed pressure from a weaker peso and volatile oil prices could keep Philippine inflation elevated for longer, complicating the Bangko Sentral ng Pilipinas (BSP)’s efforts to bring price growth back within target. In a report, GlobalSource Partners country analyst Diwa Guinigundo said the simultaneous domestic and external inflation shocks could reinforce each other, creating a “more complicated policy environment” for the central bank. “These could delay the return of inflation to target, underscoring the importance of maintaining credible monetary policy and keeping inflation expectations well anchored,” Guinigundo said. The National Capital Region’s approved minimum wage adjustment reached about 12 percent, twice the six-percent increase assumed in the BSP’s baseline projections. The P85 daily increase will be implemented in two stages, with P60 taking effect on July 25 and the remaining P25 in January 2027. The adjustment carries broader economic implications as Metro Manila accounts for the largest share of the country’s output and formal employment, according to Guinigundo. Based on the BSP’s preliminary estimates, every additional peso in the minimum wage raises inflation by about 0.0047 percentage point. This means the full P85 increase “could add roughly 0.4 percentage points to inflation” through direct or first-round effects alone. Guinigundo said the bigger risk would come from possible second-round effects, including wage adjustments in other regions, higher production and transport expenses and increases in food and service prices. Price pressures could become more persistent should households and businesses begin expecting inflation to remain high, prompting workers to demand higher wages and companies to pass additional labor costs on to consumers. Meanwhile, external developments could add another layer of inflationary pressure. BMI, a unit of Fitch Solutions, has projected that the peso could weaken to between P61 and P63 against the dollar. Although the effect of currency depreciation on inflation has declined, a sustained peso decline would still increase the local cost of imported fuel and food. The country is particularly vulnerable to oil price shocks as more than 95 percent of its petroleum requirements are imported. Any prolonged disruption to oil supply could quickly translate into higher fuel, transportation and production costs, eventually feeding into consumer prices. “Should these shocks intensify or prove more prolonged than currently anticipated, the return of inflation to the BSP’s target range could be pushed even further into the future,” Guinigundo said. The former BSP deputy governor said monetary policy would likely remain cautious as the BSP balances the need to support economic activity with its primary mandate of maintaining price stability. However, he said monetary policy alone would not be enough to address the country’s inflation problem. “Policy coherence, not monetary policy alone,” he said, would determine how quickly inflation returns to low and stable levels, with the government also needing to strengthen energy security, improve food supply and raise productivity.