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Inflation Continues to Slow Down in June


The National Statistics Office (NSO) reported today that headline inflation decelerated further to 6.7 percent year-on-year in June from 6.9 percent in May, with inflation for all major commodity groups except housing and repairs (H&R) registering a slowdown. June inflation outturn was closer to the lower end of the BSP’s forecast range of 6.5-7.2 percent for the month.  On a month-on-month basis, headline inflation rose to 0.7 percent from 0.2 percent in the previous month, as a result of higher prices of oil products, education- and health-related goods and services.

As in the previous months, the inflation outturn in June is consistent with the BSP’s assessment that current price pressures are coming mainly from the supply side. Of the 6.7 percent headline inflation rate for June, 2.6 percentage points were attributed to food, 1.2 percentage points were accounted for by transportation and communication (which include gas prices), and 0.9 percentage point to fuel, light and water (Table 1).      

Similarly, year-on-year core inflation decelerated further to 5.8 percent in June from 6.1 percent in May, supporting the BSP’s assessment of limited demand-side pressures on prices.  

Looking ahead, headline inflation is expected to continue to decelerate towards the end of 2006.  Average inflation in 2006 is still projected to exceed the Government-announced target of 4.0-5.0 percent due largely to above-trend oil price levels.  However, latest BSP forecasts also indicate that inflation could settle within the 4.0-5.0 percent target range in 2007 in the absence of renewed domestic or external shocks.

Nevertheless, the BSP remains of the view that the balance of risks to the inflation outlook continues to be tilted toward the upside, linked mainly to movements in oil prices.  The current regime of high oil prices is still expected to persist in the near term, given a tight demand-supply balance in the international oil market.  Such a prospect increases the risk of adverse shifts in inflation expectations, as well as the likelihood of second-round effects on prices and wages.  Rising global interest rates will also be closely monitored by the BSP, in view of their impact on inflation. 

The BSP remains strongly committed to achieving the inflation target for 2007 and stands ready to act upon evidence of escalating risks to the outlook for inflation. Authorities will continue to monitor closely the developments in the economy, including supply-side developments, in view of their potential impact on inflation expectations and wage- and price-setting, as well as domestic liquidity. The BSP will likewise continue to support the use of non-monetary measures to mitigate the impact of increased consumer prices by concerned government agencies.

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