Year-on-year inflation in May 2002 held steady at 3.6 percent, the same as in the previous two months, and fell in line with overall expectations. Lower food inflation in May helped offset a pickup in non-food inflation, which was attributed to adjustments in electricity rates and domestic oil prices. Average inflation for the first five months of 2002 now stands at 3.6 percent, lower than the government’s target of 5-6 percent for the year.
The BSP continues to expect a quiescent inflation environment for 2002, with average inflation likely to fall below the government’s current target of 5-6 percent for the year. This outlook is based on expectations of favorable agricultural output performance, continued broad exchange rate stability combined with relatively soft—although improving—domestic demand conditions and the continued presence of spare capacity. In addition, the BSP believes that the current low-interest rate environment will exert a favorable cost-side impact on overall prices by helping reduce the cost of capital for firms.
However, these expectations are also tempered by potential inflationary risks associated with the negative impact of a predicted dry spell on crop production in 2003, the uncertainty in the direction of world oil prices, and the possible adjustment in utility and transport fares.
In the months ahead, monetary authorities will continue to keep a close watch on the potential pressures on inflation over the policy horizon as well as on developments in the real sector.