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January Inflation Slows Down Further to 3.9 Percent


Inflation pressures continued to ease in January.  At 3.9 percent, this is the lowest level since October 2003. Inflation rates for all commodity groups, with the exception of clothing, decelerated. The January inflation was at the lower end of the BSP’s forecast range for the month of 3.9-4.6 percent. Subsiding base effects, the strengthening peso and generally lower retail prices of petroleum products helped keep inflation pressures at bay. On a month-on-month basis, headline inflation inched up to 0.3 percent in January from 0.1 percent in the previous month, due mainly to higher inflation for heavily-weighted food items. 

Core inflation registered a steep drop of 0.7 percentage point to 3.9 percent in January from 4.6 percent in the previous month, supporting the BSP’s assessment of reduced generalized pressures on consumer prices.   

Price data for January provide early indications of a generally benign inflation environment for 2007. Barring unforeseen external and domestic shocks, average inflation for the year is expected to settle within the Government’s target range of 4-5 percent. Minimal inflation pressures from the demand side, as indicated by the still moderate improvements in demand indicators, and well-contained inflation expectations support this outlook. The low-inflation environment is seen to continue well into 2008, when average inflation is forecast to fall within the Government’s target of 4.0 percent ± 1 percentage point. 

Nevertheless, there are foreseeable risks to inflation in the form of cost-push pressures from a prolonged El Niño dry spell, likely increases in wages and domestic power costs, and volatility in world oil prices. The strong growth in domestic liquidity, should it persist, could also exert a potential upside impact on inflation.  
While recent benign inflation readings add latitude to the conduct of monetary policy, the BSP continues to watch data closely and monitor risks to the inflation outlook with a view to charting a policy course that would ensure the promotion  of price stability conducive to sustainable economic growth.

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