Year-on-year inflation slowed down to 3.1 percent in December 2003 from 3.3 percent in the previous month due mainly to lower inflation for all commodity items except for housing and repairs. Month-on-month inflation, however, rose by 0.3 percent in December from 0.2 percent in November due to the increase in food prices associated with the seasonal rise in demand during the holidays. Similarly, the increase in the prices of liquefied petroleum gas (LPG) contributed to higher fuel prices during the month.
The December inflation brings the full year average inflation rate to 3.1 percent, equal to the average inflation rate recorded in 2002. This was also within the BSP’s inflation forecast of 3.0-3.5 percent for the month. The 2003 average annual inflation also reaffirms the general expectations of a lower-than-target inflation of 4.5-5.5 percent for the year.
While the near-term outlook on consumer prices points to a modestly rising trend, the average inflation for 2004 is expected to tract broadly the 4.0-5.0 percent target for the whole year. This is consistent with the projected rise in output growth and improvements in aggregate demand conditions as well as the cost-push influence of planned adjustments in tariff rates and power rates. At the same time, the inflation outlook also considers the risks stemming from financial market concerns over domestic political conditions in the run-up to the May 2004 elections, which may influence the direction and movement of the nominal exchange rate and other financial variables with potential inflationary effects.
Given these considerations, the BSP will continue to monitor closely the evolving developments overseas and in the domestic front as they bear on the country’s inflation outlook. Over the policy horizon, monetary policy will continue to focus on ensuring price stability in order to sustain the impetus for economic growth.