Headline inflation, or the year-on-year change in the consumer price index (CPI), picked up slightly from 3.4 percent in February 2004 to 3.8 percent in March, based on the 1994-based CPI series released by the National Statistics Office (NSO). The new 2000-based CPI series showed an inflation rate of 4.2 percent for the month, an increase from 4.0 percent in February. Meanwhile, core inflation, which excludes prices of volatile food and energy items such as rice, corn, fruits and vegetables, LPG, kerosene and gasoline, was recorded at 4.0 percent based on the 1994 series and 4.6 percent based on the 2000 series.
The uptick in headline inflation was traced to increases in food and fuel prices, while that for core inflation was associated with higher prices for selected construction materials, items for household operations, and personal effects. The increases may also be partly a result of a base effect, as the NSO has also revised 2003 inflation downward to 3.0 percent from 3.1 percent previously.
The BSP believes that cost-side factors continue to represent the principal source of risk to the inflation outlook, given that demand-based pressures continue to be muted by excess capacity. Such cost-side factors include increases in transport fares and planned adjustments in utility charges. The potential price pressures resulting from such factors are likely to be short-lived and should not have a significant impact on the long-run path of inflation. The balance of demand- and supply-side risks to future inflation continues to suggest a manageable setting for prices over the policy horizon. The BSP believes that headline CPI inflation remains on track with the Government target of 4-5 percent (based on the 1994-base year CPI) for 2004 and 2005. Average headline inflation in the first quarter was 3.5 percent and 4.0 percent based on the 1994- and 2000-based series, respectively, of the CPI published by the NSO.
Nevertheless, monetary authorities also believe that recent price developments require close monitoring and will pay particular attention to the evolving long-run path for inflation. Monetary policy will continue to emphasize prudence in preserving price stability while ensuring a supportive macroeconomic environment for credit demand and investment activity.