Year-on-year inflation rose to 3.1 percent in October 2003 from 2.9 percent in the previous month. The increase was traced mainly to higher year-on-year inflation rates for food items such as corn, fruits and vegetables, meat and dairy products as well as increases in housing and repairs and miscellaneous items. However, the October inflation rate was still within the BSP’s inflation forecast of 2.9-3.2 percent for the month. The year-to-date average inflation rate as well as the month-on-month inflation in October remained unchanged at 3.0 percent and 0.1 percent, respectively.
The near-term outlook for inflation remains essentially unchanged. Barring any adverse shocks, the current benign inflation environment is expected to continue. Expectations of benign inflation are based on prevailing subdued improvements in aggregate demand, soft labor market conditions, the diminished influence of cost-push factors such as energy prices, and broadly stable conditions in the foreign exchange market. Average annual inflation in 2003 is therefore expected to fall below the Government’s target of 4.5-5.5 percent. For 2004, it is expected to track broadly the 4-5 percent target.
The benign outlook notwithstanding, monetary authorities continue to be mindful of possible adverse cost-side developments. For example, sharp movements in the foreign exchange market arising from negative sentiment could impact negatively on public expectations about future prices. Such factors underscore the need for the BSP to assess continuously the evolving macroeconomic environment to be able to respond well ahead of time to any potential risk to the inflation outlook. This shall ensure the maintenance of price stability conducive to a balanced and sustainable economic growth.