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September Inflation Rises to 6.9 Percent

10.04.2004

Data released by the National Statistics Office (NSO) today showed that headline inflation or the year-on-year change in the consumer price index (CPI) accelerated to 6.9 percent (1994=100) in September from 6.3 percent in August. The year-to-date average inflation now stands at 4.8 percent. It should be noted that the Government has earlier set the average annual inflation target for 2004 at 4.0-5.0 percent. Meanwhile, the 2000-based headline inflation rose to 7.2 percent in September from 6.8 percent in the previous month for a year-to-date average inflation of 5.2 percent.

Similarly, both the 1994- and 2000-based core inflation were also higher in September compared to the previous month. The 1994-based core inflation went up to 6.6 percent (1994=100) in September from 6.2 percent in August while the 2000-based core inflation inched higher to 6.6 percent from 6.4 percent. Core inflation is defined as headline inflation less the volatile items consisting of food and energy products.

The higher inflation for September resulted from an increase in the inflation of all major commodity groups, except for clothing. As in the previous months, the increase in the prices of food and energy-related components of the CPI registered the largest contribution to the observed uptrend in inflation. Food alone accounted for 3.7 percentage points of the 6.9 percent rise in inflation, with meat, fish, and fruits and vegetables contributing a combined share of 2.3 percentage points.  The global rise in prices of oil products also exerted upward pressure on domestic inflation as indicated in the rise in the inflation for fuel, light and water (FLW) items as well as services, particularly those allied to transport and communication. FLW represented 0.5 percentage points of the total increase in inflation while services contributed 1.4 percentage points with transport and communication accounting for 1.0 percentage point.

Monetary authorities believe that ongoing pressures on inflation remain largely rooted in the impact of supply shocks on prices. They also continue to expect that supply-side factors will remain the primary source of risk to the inflation outlook. Of particular importance is the expected rise in international oil prices, which will feed into the cost of producing other goods and services. Latest BSP forecasts show that in the absence of appropriate supply-side measures, average headline inflation will continue to rise over the next year or so, and will likely exceed the 4-5 percent target for 2004 and 2005 as the full impact of the supply factors is felt. However, average inflation is expected to revert to the 4-5 percent target by 2006. This stems from the fact that the cost-push forces behind the uptrend in inflation are temporary in nature and have no lasting impact on the inflation path.

Given the lack of preponderant evidence of demand-driven inflationary pressures or second-order inflationary effects from ongoing supply shocks, the BSP finds no compelling reason at this time to modify present monetary policy settings.  However, the BSP continues to stand ready to respond to the inertialization of price pressures via second-order effects of supply shocks and to the inflationary consequences of disorderly conditions in the foreign exchange market arising from narrowing interest rate differentials.  Monetary authorities will therefore continue to assess economic and financial developments and undertake the necessary adjustment in monetary policy settings to arrest the buildup in inflation expectations and prevent inflation persistence.       

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