The National Statistics Office (NSO) reported yesterday that the headline inflation, or the year-on-year change in the overall Consumer Price Index (CPI), rose to 7.9 percent in December 2004 from 7.6 percent in November, using the 1994-based CPI series. This is within the BSP’s forecast of 7.6-8.1 percent for December. In line with expectations, the average inflation rate for 2004 of 5.5 percent was higher than the upper end of the Government’s full-year target of 4.0-5.0 percent. Likewise, the 2000-based CPI inflation—which is based on an updated consumer basket of goods and services—increased to 8.6 percent in December from 8.2 percent in November, bringing the average inflation rate for 2004 to 6.0 percent. On a monthly basis, December inflation was steady at 0.6 percent using the 1994-based CPI series. Using the 2000-based CPI series, month-on-month headline inflation declined to 0.7 percent in December from 0.8 percent in November.
Higher inflation rates in all commodity groups except for housing and repairs (H&R) drove the December increase in headline inflation. The year-on-year inflation rate for food, beverages and tobacco (FBT) grew to 7.7 percent in December from 7.1 percent in November. For food alone, inflation rose to 8.0 percent from 7.2 percent, as prices of fish, eggs, meat, and fruits and vegetables, accelerated. This resulted from supply disruptions brought about by a series of typhoons between late November and early December, as well as seasonally-higher demand (particularly for fruits) during the Christmas holiday season. The year-on-year inflation rate for fuel, light and water (FLW) edged up to 18.0 percent in December from 17.3 percent in November, owing mainly to the recent power rate adjustments.
In terms of contribution to inflation, food, oil and energy-related products (food, fuel, light, as well as transport and communication) accounted for 4.0 percentage points of the 5.5 percent average inflation for 2004 (Table 1).
Meanwhile, core inflation—defined as headline inflation after excluding volatile food and energy items such as rice, corn, fruits and vegetables, liquefied petroleum gas (LPG), kerosene and gasoline—was also higher in December compared to November. The 1994-based core inflation went up to 7.6 percent in December from 7.3 percent in November while the 2000-based core inflation inched up to 7.8 percent from 7.6 percent.
Despite the recent higher outturns, the medium-term outlook for inflation remains essentially unchanged. The BSP believes that the likely path of future inflation will be hump-shaped, with average inflation in 2005 to continue exceeding the 4.0-5.0 percent inflation target but to ease back to the 4.0-5.0 percent range by 2006. The uptrend in inflation in recent months has essentially been generated by supply pressures, particularly increases in food and energy prices, which are expected to be temporary, and are outside the scope of monetary policy. At the same time, overall output conditions continue to indicate slack in the economy. Growth in domestic demand, as evidenced by strong consumption spending, rising energy sales and increased merchandise trade activity, continues to be accompanied by sizeable unemployment and moderate lending activity. The outlook for economic activity is also partly dampened by signs of reduced business optimism, as shown in the recent BSP Business Expectations Survey. Under such conditions, the impact of monetary action—through an increase in policy rates—in containing inflation pressures, would be limited. For these reasons, the Monetary Board has kept the BSP’s key policy interest rates unchanged until the present time.
Monetary authorities, however, are ready to undertake monetary action when the available evidence begins to point more strongly to the following conditions: (1) the emergence of demand-side pressures on consumer prices; (2) the emergence of inflationary pressures that are over and above those generated by ongoing supply shocks; and (3) an increased risk of possible exchange rate market pressures arising from narrowing interest rate differentials which could feed into inflation and inflation expectations. To guide its decisionmaking, the BSP will continue to monitor closely the evolving economic and financial developments as well as assess their impact on the long-run price path.
On an operational note, the BSP wishes to inform the public that it will shortly begin using the 2000-based CPI data published by the NSO in its monetary assessment and inflation forecasting. This is in line with the National Statistics Office’s (NSO) discontinuation of the publication of its 1994-base year CPI data. The inflation target of 4-5 percent for 2005 and 2006 will now apply to the 2000-based CPI.