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October Inflation Rises to 7.1 Percent

11.05.2004

The National Statistics Office (NSO) reported today that headline inflation in October rose to 7.1 percent (1994=100) from 6.9 percent in the previous month. This is well within the BSP’s inflation forecast of 6.9-7.4 percent for October.  It also brings the year-to-date average inflation rate to 5.1 percent,  which is close to the upper bound of the 2004 average annual inflation target of 4.0-5.0 percent set by the Government.  On a monthly basis, October inflation decelerated further to 0.3 percent from 0.6 percent in the previous month.  Meanwhile, the 2000-based headline inflation rate was 7.7 percent for the month and the year-to-date average is 5.4 percent.

Similarly, both the 1994- and 2000-based core inflation rates were also higher in October compared to the previous month. The 1994-based core inflation went up to 6.9 percent (1994=100) in October from 6.6 percent in the preceding month while the 2000-based core inflation inched up to 6.7 percent from 6.6 percent.  Core inflation is defined by the NSO as headline inflation after excluding selected food and energy products.

The October CPI data are in accordance with the BSP’s assessment that the ongoing pressures on the inflation continue to be largely rooted in the impact of supply-side shocks on prices.  As in the previous months, the increase in the prices of food and energy-related CPI components accounted for the largest contribution to the observed increase in inflation.  Food alone contributed 4 percentage points to the 7.1 October inflation rate, while Fuel, Light & Water and Transport & Communication Services accounted for a combined 1.66 percentage points. 

Going forward, supply-side factors are expected to continue to be the principal source of risks to the inflation outlook.  Such risk factors include, among other things, the possibility of a prolonged period of rising global oil prices, which will affect the cost of producing domestic goods and services.  The expected path of headline inflation over the near term, however, is likely to be hump-shaped, with average inflation expected to exceed the government inflation target of 4-5 percent in 2004 and 2005 before easing back to 4‑5 percent by 2006.  This is entirely in accordance with past experience concerning episodes of food- or oil-driven supply-side inflation in the Philippines, during which headline inflation has tended to promptly revert to manageable levels after a brief upsurge.  The dominant role of supply-side developments in the inflation outlook also implies that inflation may be best mitigated by appropriate non-monetary policy measures that would facilitate, among other things, the timely importation, distribution and delivery of certain commodities. The BSP has therefore continued to express its support for the use of such measures and has made representations with relevant government agencies on the matter.

In its recent assessment of the monetary policy stance, the Monetary Board noted that in the absence of clear evidence of demand-side effects of supply shocks or mounting demand-side inflationary pressures, monetary authorities have for the time being opted to maintain current monetary policy settings.    

In the near term,  the need for monetary action will be reassessed when the available economic evidence begins to point more strongly to the following conditions: (1) emerging demand-side pressures on prices; (2) inflation pressures that are over and above those generated by ongoing supply shocks; and (3) increased risk of prolonged exchange market pressure caused by narrowing nominal interest differentials, ample liquidity among banks, and negative market sentiment that could feed into inflation and inflation expectations.  The BSP thus continues to place a high priority on assessing the emergence of economic conditions that necessitate a monetary response and stands ready to undertake the appropriate policy adjustment to safeguard the inflation target over the policy horizon.

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