Core inflation keeps climbing, suggesting price increases are becoming entrenched.
The Philippines finds itself caught between the rhythms of nature and the tremors of geopolitics, as El Niño's approach and Middle East conflict conspire to keep prices painfully elevated for ordinary Filipinos. The Bangko Sentral ng Pilipinas, tasked with holding inflation within a two-to-four percent band, now watches headline inflation run at 4.8 percent while core inflation climbs to a near-three-year high — a sign that price pressures are no longer confined to food and fuel but are seeping into the broader fabric of economic life. In raising interest rates to cool demand, the central bank risks slowing the very growth it seeks to protect, confronting the timeless tension between the discipline required to preserve trust in money and the human cost of making credit dear.
- Headline inflation at 4.8 percent and core inflation at a near-three-year high of 4.4 percent signal that price pressures in the Philippines are no longer a temporary disruption but a deepening structural threat.
- Fresh U.S. strikes on Iran have darkened hopes for the Strait of Hormuz reopening, threatening to push oil prices higher in a country that imports nearly all of its crude — a shock that ripples from fuel pumps into food, transport, and utilities.
- A potential 'super El Niño' looms over harvests while a weakening peso makes imports costlier, and imminent minimum wage increases in Metro Manila risk triggering a second wave of price increases as businesses pass labor costs to consumers.
- Analysts now forecast inflation remaining above the central bank's three percent target for three consecutive years, with the mean projection for this year holding firm at six percent despite two months of modest headline easing.
- The Monetary Board has already raised its benchmark rate by 50 basis points since April, and Governor Remolona has signaled the economy can absorb another quarter-point increase — but economists warn the door to further tightening remains open as long as core inflation keeps climbing.
- The central bank faces its defining dilemma: tighten too aggressively and risk recession, move too cautiously and allow inflation expectations to become permanently unmoored from reality.
The Philippines is grappling with an inflation problem that refuses to yield. As of June, prices were rising at 4.8 percent annually — well above the Bangko Sentral ng Pilipinas' two-to-four percent comfort zone — and three converging forces threaten to keep them there: an approaching El Niño season, ongoing Middle East conflict disrupting global oil supplies, and the risk that Filipinos simply stop believing inflation will ever return to normal.
The central bank's own "high-inflation scenario" envisions headline inflation drifting further above the three percent target over the medium term, driven by potential oil shortages, escalating military action against Iran, drought-driven rice costs, and unmoored inflation expectations. Under that scenario, the bank would need to tighten monetary policy even more aggressively — a path that risks slowing economic growth. A more benign outcome exists if oil prices moderate and the Strait of Hormuz reopens, but that path depends on geopolitical developments beyond Manila's control.
The more troubling signal is core inflation, which strips out volatile food and fuel to reveal whether price increases are becoming embedded in the broader economy. At 4.4 percent in June — a near-three-year high and the sixth consecutive month of acceleration — it suggests the answer is yes. Economist Emilio Neri of Bank of the Philippine Islands pointed to a potential "super El Niño," a peso averaging over 61 to the dollar, and upcoming minimum wage hikes in Metro Manila as forces that could entrench price pressures further, as businesses pass higher labor costs on to consumers.
Analysts surveyed by the central bank expect inflation to remain above target for the next three years, with a mean forecast of six percent for this year. The Monetary Board has already raised its benchmark rate by 50 basis points since April, bringing it to 4.75 percent, and Governor Eli Remolona has suggested the economy can absorb another quarter-point increase. Yet Neri argued that the door to further tightening stays open as long as core inflation keeps climbing — because the long-term damage of entrenched high inflation may ultimately prove more harmful than the short-term pain of higher borrowing costs.
The months ahead will be decisive. If El Niño arrives as forecast, if Middle East tensions deepen, and if Filipinos begin to expect permanently higher prices, the central bank may find itself with no choice but to keep tightening — whatever the cost to growth.
The Philippines faces a stubborn inflation problem that shows no sign of easing anytime soon. As of June, prices across the economy were climbing at 4.8 percent annually—well above the central bank's comfort zone of two to four percent. The Bangko Sentral ng Pilipinas, the country's monetary authority, has spent months raising interest rates to cool demand and bring inflation back down. But three converging pressures threaten to keep prices elevated for years: an approaching El Niño season that could devastate crops, ongoing conflict in the Middle East that has disrupted global oil supplies, and the risk that Filipinos will simply stop believing inflation will ever return to normal.
The central bank laid out its fears in a report released after its June policy meeting. In what it calls a "high-inflation scenario," headline inflation drifts further above the three percent target over the medium term, pushed higher by potential oil shortages, escalating U.S. and Israeli military action against Iran, costlier rice from drought, and the possibility that inflation expectations become unmoored from reality. If that scenario unfolds, the bank said, it will need to tighten monetary policy even more aggressively—raising interest rates further—even though doing so risks slowing economic growth and widening the gap between what the economy could produce and what it actually does.
Oil prices are the immediate culprit. In June, Dubai crude averaged $79.45 per barrel. But this week, fresh American attacks on Iran have threatened a fragile peace agreement and dimmed hopes that the Strait of Hormuz—one of the world's most critical oil chokepoints—will fully reopen. The Philippines, which imports most of its oil, felt the shock acutely. When crude prices spike, the cost of fuel rises, which ripples through transportation, food production, and utilities. The central bank expects headline inflation to accelerate sharply to 6.4 percent this year, up from 1.7 percent last year, before gradually easing to 4.5 percent in 2027 and 3.1 percent in 2028.
But there is a less dire path. If global oil prices fall to an average of $80 per barrel this year and drop further to $70 in 2028—a scenario that requires Middle East de-escalation and the reopening of the Strait of Hormuz—then inflation could stay elevated only in the near term before fading by next year. Weaker consumer spending and business investment could also help ease price pressures. Under this "low-inflation scenario," headline inflation would remain above target in 2026 but gradually decline to within the central bank's tolerance band by 2027, requiring less aggressive rate increases than the high-inflation case.
The real worry, though, is core inflation—the measure that strips out volatile food and fuel prices to reveal whether price increases are becoming embedded in the broader economy. In June, core inflation hit 4.4 percent, a near-three-year high and the sixth consecutive month of acceleration. This signals that price pressures are spreading beyond energy and agriculture into other goods and services. Emilio Neri, lead economist at Bank of the Philippine Islands, warned that a potential "super El Niño" could push food and electricity prices sharply higher, while the peso's weakness against the dollar—it has averaged over 61 pesos per dollar in recent months—makes imports costlier. He also flagged upcoming wage increases: the minimum wage in Metro Manila is set to rise by 60 pesos this month and another 25 pesos in January, which could trigger second-round price pressures as businesses pass higher labor costs to consumers.
Analysts surveyed by the central bank expect inflation to remain above the three percent target for the next three years. Their mean forecast for this year stands at six percent, unchanged from May. For the following two years, they have trimmed their estimates slightly to 4.1 percent and 3.4 percent respectively, but these figures still sit well above the central bank's goal. They expect the bank to raise its benchmark rate by 25 basis points to as much as 175 basis points this year before reversing course and cutting next year.
The Monetary Board has already delivered 50 basis points in rate increases since April, bringing the key policy rate to 4.75 percent. Governor Eli Remolona said the economy can absorb another 25-basis-point increase, anticipating that growth will rebound in the second half of the year as government spending accelerates. Yet Neri argued the door for further tightening remains open. While headline inflation has eased for two straight months, core inflation continues climbing, suggesting that price increases are becoming more entrenched. Additional rate hikes could dampen economic activity, but he contended that the damage from sustained high inflation may ultimately prove more harmful to growth than the temporary slowdown from higher borrowing costs.
The central bank faces a classic dilemma: raise rates aggressively and risk recession, or move cautiously and risk letting inflation expectations spiral out of control. The next few months will be critical. If El Niño arrives as forecast, if Middle East tensions escalate further, and if Filipinos begin to expect permanently higher prices, the bank may have no choice but to keep tightening, regardless of the cost to growth.
Notable Quotes
The door for further tightening remains open amid hotter core inflation and persistent pressures on the peso.— Emilio Neri, Bank of the Philippine Islands Lead Economist
The economy can still take another 25-basis-point increase as growth is expected to rebound in the second half of the year.— BSP Governor Eli Remolona, Jr.
The Hearth Conversation Another angle on the story
Why does the central bank seem so worried about something that hasn't happened yet—the El Niño, the further Middle East escalation?
Because inflation expectations are self-fulfilling. If workers demand higher wages because they expect prices to keep rising, and businesses raise prices because they expect costs to keep rising, then inflation becomes a fact regardless of what actually happens to oil or crops. The bank is trying to prevent that psychology from taking hold.
But they've already raised rates five times. Why hasn't that worked?
It takes time. Rate increases work by making borrowing more expensive, which discourages spending and investment. But the shock that started this—the Middle East war in March—is still pushing oil prices up. You can't rate-hike your way out of a supply shock. You can only contain the damage while you wait for the shock to fade.
So what's the worst case?
Oil stays elevated, El Niño hits and destroys the rice harvest, the peso keeps weakening, wages go up, and suddenly everyone believes inflation is permanent. Then you get a wage-price spiral where workers demand raises, businesses raise prices to cover those raises, workers demand more raises, and so on. That's when inflation becomes truly entrenched.
And the best case?
Oil prices fall back to $70 a barrel, the Middle East stabilizes, El Niño is mild, and people stop expecting inflation to stay high. Then the rate increases the bank has already made start to bite, demand cools, and inflation comes back down naturally.
Which one do you think is more likely?
The bank is hedging. It's preparing for the worst while hoping for the best. But the fact that core inflation—the stuff that excludes food and energy—is accelerating suggests the worst case is already starting to happen. That's why even though headline inflation has eased the last two months, the bank isn't relaxing. They see the warning signs.