Headline inflation slowed down to 7.6 percent year-on-year in June after holding steady at 8.5 percent in the past three months. The favorable movement in the overall consumer prices in June was traced mainly to a deceleration in inflation for all commodity groups (except for clothing) relative to year-ago levels. This brought average inflation for the first semester to 8.3 percent. On a month-on-month basis, however, headline inflation rose by 0.9 percent in June from 0.5 percent in the previous month owing mainly to the seasonal rise in tuition fees and related expenses coinciding with the start of classes during the month. Food continued to account for the largest portion of the headline inflation rate for June (3.23 percentage), followed by transport and communication (1.33 percentage points) and FLW (1.32 percentage points) [Table 1]. These figures suggest that the ongoing pressures on inflation remain largely tied to the impact of rising fuel prices and the El Niño-pressures on food prices in recent months.
Similarly, core inflation—defined as headline inflation after excluding volatile food and energy items—slowed down further to 7.1 percent in June from 7.6 percent in May. The year-to-date average core inflation rate is 7.7 percent.
The BSP believes that the slowdown in both headline and core inflation is consistent with monetary authorities’ expectations of a mild deceleration in inflation in the second half of 2005. Nevertheless, the BSP’s latest forecasts indicate that the average CPI inflation will still exceed the Government targets of 5.0-6.0 percent for 2005 and 4.0-5.0 percent for 2006. This will be due mainly to two things: (1) the impact of higher oil prices on other key goods and services, particularly transport prices; and (2) the impact on food prices of the recent El Niño dry spell. It is easy to see, however, that most of the foreseeable pressures on consumer prices are temporary episodes (e.g., the El Niño dry spell), and inflation is therefore likely to slow down further towards the second half of 2006 as the impact of current supply-side influences taper off.
In terms of the monetary policy stance, the favorable turnout in both the headline and core inflation provides monetary authorities with some flexibility to manage inflation expectations while ensuring that the economy’s liquidity requirements are met in accordance with the desired pace of output growth. The BSP will continue to pay close attention to price pressures coming from high oil prices and other sources. While the recent suspension of the VAT reform law could defer its impact on prices, the BSP will continue to monitor closely the repercussions of these developments and their implications on future inflation.
On the whole, the BSP continues to emphasize continuity and consistency in its policymaking and remains committed to fighting inflation and undertaking all necessary action to respond to the risks to future inflation and inflation expectations.