Headline inflation—which refers to the year-on-year change in the overall consumer price index (CPI)—remained steady at 3.4 percent in February 2004 as in the previous month, using the 1994-based CPI series released by the National Statistics Office (NSO). The relative stability in the overall consumer prices during the month can be traced to steady prices of food products and clothing materials as well as lower inflation for some services, which helped mitigate the impact of the higher inflation for fuel products and construction materials. The headline inflation in February hit the low-end of the BSP’s internal forecast of 3.4-3.6 percent for the month.
We also welcome the fact that based on the new 2000-based CPI series, headline inflation eased slightly to 4.0 percent in February 2004 from 4.1 percent in the previous month. The new 2000-based CPI series—which the NSO started to release in January 2004—reflects an updated basket of goods and services that captures the current spending patterns and preferences of Filipino consumers.
Alongside the headline inflation rate, the NSO has also started to release the core inflation rate in January 2004. Core inflation refers to the rate of change in the headline CPI after excluding selected food and energy items. Based on this concept, February CPI data indicate that core inflation increased slightly to 3.7 percent from 3.6 percent in the previous month using the 1994-based CPI series. Similarly, 2000-based core inflation inched up to 4.1 percent from 4.0 percent during the same reference period. From a monetary policy perspective, this small increment indicates relative price stability in the first two months of 2004.
The concept of core or underlying inflation aims to filter out the effects of temporary disturbances or shocks on the CPI which, by convention, is typically associated with items related to food and energy. Information about the general or underlying trend in consumer prices is a valuable input to economic policy, particularly monetary policy, which seeks to respond only to long-term or permanent movements in prices and aggregate demand. In the context of inflation targeting, we hope to use eventually the core inflation series as the operational target for monetary policy once the concept becomes familiar to and is duly accepted by the public.
Moving forward, the BSP expects the overall or headline CPI inflation to be on track with the Government target of 4-5 percent for 2004 and 2005. The trend in the overall consumer prices is consistent with expectations of improving aggregate demand conditions as well as the impact of cost-side factors such as the volatility in oil prices and related pressures coming from petitions for fare rate hikes.
Accordingly, the BSP will continue to keep an eye on the evolving macroeconomic developments, particularly the latest volatility in the peso-dollar rate and continuing political noise which has potential inflationary impact. Monetary policy, therefore, will continue to exercise prudence to ensure a macroeconomic environment which is conducive to credit demand and investment activity while preserving the overall price stability.