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Inflation Decelerates to 6.4 Percent in July

08.04.2006

The National Statistics Office (NSO) announced today that headline inflation slowed down to its lowest level in two years at 6.4 percent in July 2006.  This can be traced primarily to slower price increases for food, beverage and tobacco (FBT), housing and repairs (H&R), and services. The year-to-date headline inflation rate is now 7.0 percent. The July inflation outturn was also within the BSP’s forecast range for the month of 6.3-7.0 percent. On a month-on-month basis, headline inflation likewise slowed to 0.5 percent from 0.7 percent in June.

The latest CPI data continue to support the BSP’s assessment that the ongoing pressures on inflation remain linked largely to supply-side factors such as movements in prices of food and energy-related items. Of the 6.4 percent year-on-year headline inflation rate, 2.4 percentage points were attributed to food, 1.0 percentage point to transportation and communication, and 1.0 percentage point to fuel, light and water (Table 1).

Meanwhile, the sustained slowdown in core inflation (from 5.8 percent year-on-year in June to 5.4 percent in July) suggests a relative absence of broad-based demand pressures on consumer prices.   

Given these developments, the BSP continues to expect a general deceleration in inflation for the remainder of 2006. Average inflation for 2006, however, is still projected to exceed the inflation target of 4.0-5.0 percent as a result of high oil prices. Latest BSP forecasts also point to the possibility of within-target inflation for 2007, barring further adverse shocks from the supply side.

The continued easing of inflation gives the BSP additional flexibility to encourage economic growth which would ultimately reinforce price stability.

Nevertheless, the BSP remains of the view that there are upside risks to future inflation. World oil prices are expected to remain above-trend in the near term, given geopolitical tensions in key oil-producing countries and the onset of the hurricane season in the Gulf of Mexico. This and other cost-push developments could increase the risk of second-round effects and adverse shifts in inflation expectations. Thus, the BSP is prepared to undertake appropriate monetary action as and when necessary. The strong growth in domestic liquidity and rising foreign interest rates will also be closely monitored in view of their impact on inflation.

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