Should we worry about inflation?

PHILIPPINES - In Brief 08 Jan 2021 by Romeo Bernardo

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For the last two months of 2020, inflation had surprised on the upside. Although the headline rate still looked rather benign at 3.5% in December, the overall price level in fact increased by 1.9% between October and December, reflecting month-on-month inflation rates of 1.1% in November and 0.9% in December. The price increases had been traced primarily to higher food prices, particularly meats,[1] fish and vegetables,[2] as well as higher local pump prices that also fed into food transport costs. Fortunately, the price of rice, the staple food and historically a strong driver of headline inflation, declined last year, helping to pull down the average.CHART 1.Philippine inflationSource of basic data: PSAAlthough we expect the recent price pressures to recede as typhoon effects dissipate and meat import bans are lifted, we anticipate lingering effects of the African Swine Fever on meat prices given reduced local hog population[3]. As well, the steady uptrend in world food prices, including for rice[4], bears close monitoring with the UN Food and Agriculture Organization estimating still ample but slightly lower world stock to use ratio for rice[5]. Despite higher expected domestic rice production this year, local prices can be expected to reflect changes in world prices. Likewise, depending on how fast global growth recovers, oil prices pose an upside risk as well.We are adjusting our inflation forecast for the year from 2.8% to 3.3%, which is within the BSP’s 2-4% inflation target. Given the economy’s modest growth prospects this year, we think monetary policy considerations will remain tilted towards supporting growth with more than even odds of more policy rate redu...