Multinational bank HSBC expects Filipino consumption of non-essential goods and services to continue growing despite a sticky inflation, reflecting the country’s upgrade to a predominantly upper-middle income status.

“Despite household budgets getting tighter, consumers are, interestingly, reallocating their spending from essentials, such as food and clothing, to restaurants and other miscellaneous goods services, even as prices have climbed,” HSBC economist Aris Dacanay said.

He said the “paradox” is evidenced by strong demand in products and services like skincare, sports and take-out food.

“This suggests that, when inflation does decline, overall household consumption will likely pick up, but, perhaps, more on goods and services that are beyond just subsistence. The nicer things, so to speak,” Dacanay said.

Household consumption further declined to 4.6 percent in the first quarter from 6.3 percent and 5.3 percent  in the first and fourth quarters of last year, respectively, according to the Philippine Statistics Authority.

The latest consumption data followed higher inflation of 3.7 percent in March from 2.8 percent in January and 3.4 percent in February, PSA’s data showed.

Dacanay said such change in consumer preferences supports the government’s goal to help more Filipinos become wealthier.

“This is a testament that tastes and preferences change, more so with the Philippines being inches away from becoming an upper-middle income economy,” he said.

Dacanay said earning opportunities await more Filipinos as businesses continue to tap the country’s young workers.

“Given the country’s demographic tailwinds, many look forward to setting up shop in a country with an expanding domestic market,” he said.

However, Dacanay cautioned consumers that prices of goods and services will keep up with their income and likely spending behavior, and will encourage the Bangko Sentral ng Pilipinas to maintain high interest rates to manage inflation.

“We can expect inflation to be stickier as consumers become wealthier and allocate more of their budgets to services and less to staples like rice, which tend to be more sensitive to supply-side shocks,” he said.

“Policymakers would then need to tighten the monetary reins even further if inflation were to surge in the future, supporting our view that, when the dust settles, monetary policy in the Philippines will likely be higher for longer,” Dacanay continued.