Cumulative Inflation Pressures Mount as Electricity Costs and Peso Weakness Converge in Philippines

The Bangko Sentral ng Pilipinas (BSP) is signaling that multiple inflationary headwinds could push the country’s cumulative inflation trajectory back into focus this year. While the Philippines enjoyed an exceptionally benign inflation environment in 2025—averaging just 1.7%, the slowest pace in nine years—the central bank’s latest monetary policy assessment suggests this respite may not persist.

What’s Driving Inflation Higher

The confluence of rising electricity tariffs, favorable base effects from last year’s food price declines, and a depreciating peso create a complex inflationary backdrop. The BSP specifically highlighted that elevated power rates, combined with base effects stemming from 2025’s rice price drops, could reignite price pressures. The consumer price index (CPI) is now expected to average 3.2% this year, marking a meaningful shift from the subdued 1.7% seen last year.

Beyond immediate supply shocks, the lagged impact of the central bank’s own policy easing—200 basis points in cuts since August 2024—poses demand-side risks. The policy rate now sits at 4.50%, and Governor Eli M. Remolona, Jr. has signaled openness to one final reduction if economic conditions warrant it. However, this accommodative stance could inadvertently feed price pressures through increased spending.

The Peso Factor and Cumulative Effects

The weakening peso deserves particular attention in the cumulative inflation calculation. As the local currency depreciates, import costs rise, creating an additional transmission mechanism for global commodity price volatility to reach domestic prices. This dynamic, combined with wage pressures and possible tariff impacts from external developments, forms a complex nexus that could push cumulative inflation toward the upper end of the BSP’s 2%-4% target range.

The central bank’s baseline scenario envisions inflation approaching 4% by mid-2026 before moderating toward 3% in the second quarter of 2027, contingent on global commodity price stabilization and the lagged effects of rate cuts taking full effect.

Growth Concerns Complicate the Picture

The economic backdrop remains fragile, which paradoxically may help contain some inflationary pressures. The Philippines’ GDP growth fell to 4% in the third quarter of 2025, dragged down by a corruption scandal that dampened both public investment and business sentiment. Full-year 2025 growth likely averaged around 4.6%, well below the government’s 5.5%-6.5% target.

For 2026, the BSP has lowered its growth projection, expecting investment activity to remain subdued during the first half amid weakened economic sentiment. The output gap has turned more negative, signaling underutilized economic capacity. Growth is projected at 5.4%, creeping into the revised 5%-6% government target range, before accelerating to 6.3% in 2027.

Market Expectations and Rate Outlook

External forecasters surveyed by the BSP in November expect cumulative inflation to average 2.9% in 2026, down slightly from their prior 3% forecast, and hold at 3% for 2027. The probability that inflation remains within the central bank’s target band has risen substantially—88.6% for 2026 (up from 75.4% in October) and 89.6% for 2027 (up from 71.2%).

Most analysts anticipate further policy rate reductions of 25–75 basis points in 2026, with rates likely held steady in 2027. This reflects growing confidence that the cumulative effects of previous cuts, combined with persistent growth headwinds, will prevent an overheating scenario.

Risks and Uncertainties

The BSP identified several upside risks: adverse weather worsening food supply constraints, tariff escalations, wage adjustments, and external economic shifts. Downside risks center on governance issues affecting infrastructure spending, particularly the proposed removal of flood control projects from the 2026 budget, which could weigh on both growth and inflation expectations.

Despite these crosscurrents, consumption may provide a stabilizing anchor. Rising real wages and household incomes could sustain spending, while a projected recovery in investment and infrastructure activity beginning in 2027 could support demand. The cumulative monetary stimulus already deployed, combined with potential fiscal adjustments, will shape whether the Philippines achieves the soft landing scenario the BSP envisions.