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June Inflation Picks Up at 5.1 Percent Above Expectations


We take note of the National Statistics Office report that the headline inflation increased by higher-than-expected 5.1 percent in June 2004 (1994=100) compared to 4.7 percent in May. In terms of the 2000 base year, inflation was also higher at 5.4 percent, higher than the May inflation of 4.7 percent.

The June 2004 inflation represents the highest inflation rate in the last 32 months since November 2001 when inflation reached 4.5 percent (1994=100) .Through all these price increases, we should realize that the average inflation for the first half of the year at 4.1 percent (1994=100) or 4.3 percent (2000=100) remains well within the 4-5 percent government target for 2004.

We do not expect this sharp spike in consumer prices to endure for a long period. Such acceleration in the headline inflation in June was driven mainly by the increase in food items, particularly, fish and meat, as well as in fuel, rentals as well as services, including educational services. Together, they contributed 3.15 percentage points or about three fifths of the 5.1 percent year-on-year inflation in June. On a monthly basis, these commodity groups likewise contributed significantly to the 1.5 percent month-on-month inflation during the month.

The upswing in food prices was due to adverse weather conditions which are non-permanent. Once importation of feedgrains and selected meat products is given due course in the second half of 2004, the supply will ease and food prices are expected to stabilize at lower prices. Rental increases were driven by the unregulated sector which took advantage of the increases in oil prices, transport fare and other related basic commodities. The increase in tuition fees is at most seasonal, coinciding as it did with the school opening during the month of June.

While it is true that core inflation also registered a sharp increase during the month, the factors that brought this about were also mostly supply-related. Core inflation (headline inflation less prices of volatile food and energy items such as rice, corn, fruits and vegetables, liquefied petroleum gas (LPG), kerosene and gasoline) was reported to have risen to 5.4 percent (1994=100) or 5.5 percent (2000=100). The other components of food items and services that are not excluded in the computation of core inflation pushed the underlying inflation to higher trajectory.

The Monetary Board recognizes the nature of the latest inflation process. In its policy meeting held on 1 July 2004, the Monetary Board noted that the observed uptrend in inflation in recent months was driven mainly by supply-side factors such as the rise in the prices of food products, increase in the domestic pump prices of gasoline and other oil products and the adjustments in transport fares. The impact of these supply-side factors is expected to be transitory. By nature, the direct impact on inflation of these supply-side is outside the sphere of influence of monetary policy.

Moreover, the potential supply-oriented price pressures are likely to be tempered by the persistence of resource slack given the relatively high unemployment rate as well as the lack of strong pick up in bank lending. However, the recent increase in the cost of living allowance in Metro Manila and pending petitions for wage adjustments in other regions could at most fuel inflationary expectations.

Given these developments, the BSP will continue to monitor closely the evolving economic and financial developments as well as assess their impact on the long-run price path, with particular focus on possible second-round effects of supply-side or cost-push factors on inflation which may require action on the part of monetary policies so as to contain further a build-up in price pressures. Going forward, the stance of monetary policy will continue to emphasize caution to ensure price stability yet with the flexibility of helping sustain economic activity.

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