Inflation rises to 7.6% in Feb

Inflation rises to 7.6% in Feb
By Des Ferriols
The Philippine Star 03/08/2006

The average inflation rate rose to 7.6 percent year-on-year in February, higher than the 6.7-percent level last January but still within the projected range for the period.

The National Statistics Office (NSO) pointed out that the increase in the value-added tax (VAT) had a relatively small impact on domestic prices as the surge was caused mainly by the rising prices of VAT-exempt goods such as food.

The Bangko Sentral ng Pilipinas (BSP) had originally projected the February inflation rate to be within the 7.6- to 7.9-percent range, factoring in what monetary officials called the "one-time" adjustment in prices due to the VAT.

The VAT adjustment became effective on Feb. 1, raising the tax on value added to all goods and services from 10 percent to 12 percent.

The BSP said that, as in previous months, pressures on inflation in February were linked mainly to movements in the prices of food and energy-related items.

"The inflation rate is well within our projected range, in fact it’s the low end," said BSP Governor Amando M. Tetangco Jr. "We don’t expect inflation rate to start decelerating until the second half of the year anyway."

According to the BSP, the rise in food prices accounted for 3.2 percentage points of the 7.6-percent inflation rate while transportation and communication services accounted for 1.4 percentage points. Fuel, light and water added another 1.2 percentage points.

Meanwhile, BSP officer-in-charge Diwa Guinigundo said year-on-year core inflation rose to 6.3 percent in February after continued deceleration over the past eleven months.

Core inflation reflects the movement of the prices in basic commodities excluding those with volatile prices such as food and energy-related items. The BSP uses this indicator to determine if second-round effects are beginning to be detectable enough to necessitate monetary action.

"But at this point, the BSP remains of the view that the two-percentage point increase in the VAT rate is not likely to lead to a sustained rise in inflation," Guinigundo said. "The impact consists mainly of a one-time increase in prices, rather than a long series of price increases."

Guinigundo said mitigating measures are in place against the impact of the VAT increase and this should prevent spiraling prices. These measures include the duty-free importation of basic commodities such as sugar and rice to regulate supply.

Other factors also point to an easing of price conditions in the near term, Guinigundo said, particularly the recent easing in international and local oil prices.

"Demand and credit indicators also continue to suggest limited demand-side pressures on prices, while domestic liquidity growth has been steadily slowing down," he added. The peso has also continued to strengthen against the US dollar, thus providing stability to import prices.

Guinigundo said the BSP still expects inflation to decelerate in the second half of the year as the impact of cost-side pressures tapers off. "Nevertheless, average inflation rate in 2006 may still exceed the government target of 4-5 percent," he said.

The BSP said it would watch out for potential risks to the inflation outlook, particularly the risk associated with imported oil prices given limited global surplus capacity.

Potential second-round effects and adverse shifts in inflation expectations continue to be key policy concerns, particularly adverse changes in wage- and price-setting behavior, the BSP said.

 

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