Headline inflation at 6.7 percent year-on-year in January fell near the midpoint of the BSP’s inflation forecast for the month of 6.4-7.1 percent. The latest data indicate that ongoing pressures on inflation continue to be linked largely to movements in prices of food and energy-related items, with food accounting for 2.8 percentage points of the 6.7 percent headline inflation rate; transportation and communication services, 1.2 percentage points; and fuel, light and water, 0.9 percentage point (Table 1). Meanwhile, year-on-year core inflation continued to decelerate to 5.5 percent in January.
Recent developments in prices have been favorable to the inflation outlook. The continued downtrend in core inflation, for example, indicates that demand-side pressures are likely to remain limited in the near term. Such an expectation is further supported by the deceleration in liquidity growth and the slowdown in aggregate demand, particularly consumer spending. In addition, the continued strength of the peso, stability of prices for major food crops due to better weather conditions, and mitigating Government measures relating to the RVAT should have a positive influence on consumer prices in the near term.
However, the BSP continues to expect cost-side pressures on consumer prices coming from movements in imported oil prices, the outlook for which remains surrounded with much uncertainty. The recent increase in the VAT rate is expected to cause one-off increases in consumer prices for a brief period but is not likely to create a sustained rise in inflation. Thus, inflation is seen to rise slightly in early 2006 and subsequently decelerate in the second half of the year as cost-push pressures subside. Nevertheless, average inflation rate in 2006 may still exceed the Government target of 4‑5 percent.
The BSP’s assessment of the monetary policy stance remains focused on the risks to inflation. Policy actions in the near future will remain oriented towards achieving the Government’s 4-5 percent inflation target for 2007. As a complement to monetary action, the BSP also continues to support the Government's use of non-monetary measures to address supply-side risks that are likely to affect basic commodity prices.