The National Statistics Office (NSO) reported today that headline inflation in March was unchanged from the previous month at 8.5 percent, based on the 2000-based CPI series. This was in line with market expectations and the BSP’s inflation forecast for the month. Higher annual inflation rates were reported for tobacco, clothing, housing and repairs (H&R), and services.
Meanwhile, month-on-month headline inflation rose to 0.3 percent in March from 0.2 percent in February. The uptick was due to higher inflation for rice, corn, meat, and transportation and communication. Continuing supply restrictions due to an El Niño-induced lower harvest pushed up prices of rice and corn by 0.7 percent and 1.1 percent, respectively. Meat prices were 0.6 percent higher in March compared to February, as hog and poultry raisers held off from unloading their products in anticipation of lower meat demand during the Lenten season. Meanwhile, inflation for transportation and communication accelerated to 1.3 percent in March, reflecting higher domestic prices for petroleum products such as gasoline and diesel.
At the same time, core inflation—defined as headline inflation after excluding volatile food and energy items such as rice, corn, fruits and vegetables, liquefied petroleum gas (LPG), kerosene and gasoline—fell slightly to 8.0 percent in March from 8.1 percent a month earlier.
The March inflation outturn is in accordance with the BSP’s assessment that the ongoing pressures on inflation continue to be linked largely to supply-side particularly movements in prices of food and energy-related items. Of the 8.5 percent inflation rate for March, 3.6 percentage points were attributed to food, beverage and tobacco (FBT), 1.7 percentage points to transportation and communication services, and 1.3 percent to fuel, light and water (Table 1).
Looking ahead, inflation is expected to slow to around 5.0 percent by yearend and to decline further towards the 4.0-5.0 percent target by 2006. There is still no strong evidence of demand-driven pressures given fairly high unemployment, modest credit growth, and spare capacity in manufacturing. However, there are continuing risks to inflation from the supply side, particularly price fluctuations in the world oil market and weather-induced pressures on agricultural food prices.
The impact of supply shocks could eventually feed into inflation expectations, and thereby push expected inflation away from the inflation target. The BSP, therefore, continues to stand ready to undertake monetary action to guard against second-round effects of supply shocks and to help steer inflation expectations toward the target. Authorities are also alert to any increased risk of exchange market pressures arising from narrowing interest rate differentials, which could likewise feed into inflation and inflation expectations. To guide its decisionmaking, the BSP will continue to assess the emergent risks to the inflation outlook, paying particular attention to adjustments in nominal wages and transport fares. Likewise, it will continue to closely monitor recent increases in liquidity growth due to external inflows. The overall stance of monetary policy remains geared toward responding to inflationary risks and delivering price stability in the medium term.