Year-on-year inflation rose to 3.1 percent in February 2003 from 2.7 percent in the previous month. The increase was traced to higher year-on-year inflation rates for food items such as fish, fruits and vegetables, meat and dairy products as well as increases in petroleum prices, which fed into the fuel, light and water (FLW), and services components of the CPI basket. Meanwhile, lower inflation rates were observed for rice and corn, which together make up about 13 percent of the CPI basket. The comparable inflation rate for the same month in 2002 is 3.5 percent.
On a month-on-month basis, however, February CPI inflation was lower at 0.2 percent compared to 0.5 percent in the preceding month. This was due primarily to a decline from January levels in the prices of major food items such as rice, fish, fruits and vegetables, and chicken, which cushioned the impact on the CPI of the upward adjustments in electricity rates and prices for household cooking fuels such as liquefied petroleum gas (LPG) and kerosene.
On the whole, movements in overall inflation remain linked to specific components of the CPI basket, notably food and fuel, rather than to broad price changes across commodity groups. This implies that current pressures are driven mainly by supply-side factors which could be transitory, and that present aggregate demand conditions remain consistent with a benign inflation setting. Current price trends, therefore, continue to support the BSP’s expectations of a generally subdued inflation environment going forward. However, the BSP recognizes that there are potential risks to inflation in the months ahead in the form of cost-push pressures arising from higher farm prices associated with the El Niño weather phenomenon along with the expected further increases in oil prices due to escalating geopolitical tensions in the Middle East. Even with these risks, the BSP’s assessment of current economic conditions suggest that there is good reason to expect that average inflation in 2003 will settle within the government’s full-year target of 4.5–5.5 percent.
In the light of these considerations, and given the continued likelihood of a weaker-than-expected global economic recovery, monetary authorities continue to recognize the need for monetary policy to provide a supportive environment for aggregate demand by ensuring that sufficient liquidity is available for the economy’s growth requirements, while guarding firmly against any potential build-up in commodity price pressures.