Inflation Targeting

June 2019

THE BSP AND PRICE STABILITY

1. What is inflation?

Inflation refers to the rate of change in the average prices of goods and services
typically purchased by consumers. If inflation is low and stable, then we say that
there is price stability.
Inflation is typically defined as the annual percentage change in the Consumer
Price Index (CPI). The CPI represents the average price of a standard basket of
goods and services consumed by a typical Filipino family for a given period. This
standard basket contains hundreds of consumption items (such as food products,
clothing, water and electricity) whose price movements are monitored to determine
the change in the CPI, or the level of inflation.

The Philippine Statistics Authority1 (PSA) calculates and announces the monthly
CPI and the rate of inflation based on a nationwide monthly survey of prices for a
given basket of commodities. The PSA also determines the composition of the CPI
basket through surveys that are conducted periodically.

2. Why do we want price stability?

Studies based on the experience of many countries have shown that maintaining
price stability supports economic growth because it allows households and
businesses (including export enterprises) to plan ahead and arrive at better-
informed decisions about their consumption, investment, saving and production
needs. In the case of export firms, price stability allows them to price their products
competitively, reducing the risks related to the rising cost of raw materials.

Price stability also promotes income equality by protecting the purchasing power of
the poor who often do not have assets (real or financial) that allow them to hedge
against inflation.

The consensus among economists and policymakers is that the primary objective of
central banks should be to achieve price stability. Thus, since the 1990s, a growing
number of countries have granted institutional independence to their central banks
and enacted laws that committed the central banks’ monetary policy to achieving
price stability.

1
Under RA 10625, s. 2013 (otherwise known as the Philippine Statistical Act of 2013), the Philippine Statistics Authority (PSA) was
created to be primarily responsible for all national censuses and surveys, sectoral statistics, consolidation of selected administrative
recording systems and compilation of the national accounts. Effective 29 December 2013, the PSA shall constitute all the major
statistical agencies of the government such as the National Statistics Office (NSO); the National Statistical Coordination Board
(NSCB); the Bureau of Agricultural Statistics (BAS); and the Bureau of Labor and Employment Statistics, (BLES).

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3. Why is the BSP the main government agency responsible for promoting price
stability?

Among the various government bodies, the Bangko Sentral ng Pilipinas (BSP) is
uniquely qualified to promote price stability because it has the sole ability to
influence short-term market interest rates. By influencing short-term interest rates,
the BSP is able to affect the demand of households and firms for various goods and
services. Domestic demand and the aggregate supply of goods and services
determine the general price level.
In addition, as the Philippines’ central monetary authority, the BSP is tasked to
promote price stability conducive to balanced and sustainable economic growth.
This is mandated by law under the provisions of Republic Act No. 7653, also known
as the New Central Bank Act, which was passed into law on 10 June 1993.
Achieving price stability is a universal goal shared by central banks and monetary
authorities all over the world.

This does not mean, however, that the BSP pursues price stability to the exclusion
of other objectives. Although the price stability objective is the BSP’s main priority,
other economic goals—such as promoting financial stability and achieving
broad-based, sustainable economic growth—are given consideration in policy
decision-making. Thus, the BSP coordinates with other government agencies to
make sure that its policies are part of a consistent and coherent overall policy
framework.

4. What is the BSP’s role in relation to inflation?

The BSP controls inflation through its conduct of monetary policy which is done
primarily by moving its policy interest rate. Adjustments in the interest rate for the
BSP’s overnight reverse repurchase (RRP) facility, the primary monetary policy
instrument, typically leads to corresponding movements in market interest rates,
thus affecting the demand by households and firms for goods and services. This,
together with the aggregate supply of goods and services, determines the level of
prices.

Nevertheless, movements in inflation can be driven by factors beyond the influence

of the central bank, and this often poses challenges for the BSP’s conduct of
monetary policy. The inflation targeting framework of the BSP recognizes these
factors, which can include inflation pressures arising from (a) volatility in the prices
of agricultural products; (b) natural calamities or events that affect a major part of
the economy; (c) volatility in the prices of oil products; and (d) significant
government policy changes that directly affect prices such as changes in the tax
structure, incentives, and subsidies.

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MONETARY POLICY AND ITS CURRENT FRAMEWORK

5. What is monetary policy?

Monetary policy is a set of measures or actions implemented by the central bank to

affect the supply of money and credit in the economy. Monetary policy actions of
the BSP are aimed at influencing the timing, cost and availability of money and
credit, as well as other financial factors, in support of its key objective of keeping
inflation low and stable.

6. How does the BSP implement monetary policy?

The BSP implements monetary policy using various instruments to achieve the
inflation target set by the National Government.

The primary monetary policy instrument of the BSP is the overnight RRP rate. The
RRP rate is the rate at which the BSP borrows money from commercial banks
within the country. The BSP raises or reduces its overnight RRP rate depending on
the BSP’s assessment of the outlook for inflation and GDP growth, and in doing so,
implements its monetary policy stance. If the BSP perceives the inflation forecast to
exceed the target, then it can implement contractionary monetary policy by raising
its policy interest rate. On the other hand, if the BSP sees the inflation forecast to be
lower than the target or there is need to increase liquidity in the financial system,
then it can implement expansionary monetary policy by reducing its policy interest
rate.

To contract or expand liquidity in the financial system, the BSP can also do the
following actions:

• increasing/decreasing the reserve requirement;

• encouraging/discouraging deposits in the overnight deposit facility (ODF) and

term deposit facility (TDF) by banks;

• increasing/decreasing the rediscount rate on loans extended by the BSP to

banking institutions on a short-term basis against eligible collaterals of banks’
borrowers; and

• outright sales/purchases of the BSP’s holdings of government securities.

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7. What is the basic approach to monetary policy in the Philippines?

The BSP uses the inflation targeting framework as its basic approach to monetary
policy. Under this approach, the BSP announces an explicit inflation target and
strongly commits to achieving it over a policy horizon using various monetary policy
instruments. The inflation targeting approach that is currently adopted by the BSP
formally replaced the monetary aggregate targeting approach in January 2002.
The monetary aggregate targeting approach is based on the assumption of a stable
and predictable relationship between money, output, and inflation. On the
assumption that the money velocity2 remains stable over time, changes in money
supply are directly related to price changes or to inflation. Given the desired level of
inflation consistent with economic growth objectives, it is assumed that the BSP can
determine the level of money supply needed; thus, the BSP indirectly controls
inflation by targeting money supply. In the second semester of 1995, the monetary
aggregate targeting approach was modified to put greater emphasis on price
stability instead of rigid adherence to the targets set for monetary aggregates. The
modified framework also aimed to address the inability of monetary targeting to
account for the long and variable time lag in the effects of monetary policy on the
economy. Under the modified approach, the BSP can exceed the monetary targets
as long as the actual inflation rate is kept within program levels. Also, policymakers
monitor a larger set of economic variables in making decisions regarding the
appropriate monetary policy stance that includes movements in key interest rates,
the exchange rate, domestic credit and equity prices, indicators of demand and
supply, and external economic conditions, among other variables.

THE SHIFT TO INFLATION TARGETING

8. What is inflation targeting?

On 24 January 2000, the Monetary Board, the BSP’s policy-making body, approved
in principle the shift by the BSP to inflation targeting as a framework for conducting
monetary policy. Inflation targeting focuses mainly on achieving price stability as
the ultimate objective of monetary policy. With this approach, the central bank
announces an explicit inflation target and promises to achieve it over a given time
period. The target inflation rate is set and announced jointly by the BSP and the
government through an inter-agency body. Although the responsibility of achieving
the target rests primarily with the BSP, this joint announcement reflects active
government participation in achieving the goal of price stability and government
ownership of the inflation target.

Under inflation targeting, the central bank compares actual headline inflation
against inflation forecasts. The central bank uses various monetary policy
instruments at its disposal to achieve the inflation target. In the Philippines, this

2
The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of
time.

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involves mainly adjustments in the BSP’s key policy interest rate. The BSP also
uses other instruments such as rediscounting and reserve requirements. The BSP
provides regular reports explaining its policy decisions, assessment of the inflation
environment, and inflation outlook. If the central bank fails to meet the inflation
target, it is required to explain to the public why the target was not met and come up
with measures on how to steer inflation towards the target level.

The BSP formally adopted inflation targeting as the framework for monetary policy
in January 2002. The Philippines joined a long list of inflation targeters such as
Australia, Canada, Finland, Sweden, New Zealand, the United Kingdom, Israel,
Brazil, Chile and Thailand, which have moved from high inflation to low inflation
following the successful implementation of inflation targeting in their countries.

9. What are the features of inflation targeting?

Over the past two decades, financial deregulation and liberalization resulted in the
introduction of new products and changes in the structure of the financial system.
These changes, however, appeared to have weakened the traditional relationship
linking money supply to income and prices. This has prompted many central banks,
including the BSP, to review their approach to monetary policy.

Like other central banks, the BSP recognized the important features of inflation
targeting as follows:

• simple framework which can, therefore, be easily understood by the public;

• allows greater focus on the goal of price stability, which is the primary mandate
of the BSP;

• forward-looking and recognizes that monetary policy actions affect inflation with
a lag;

• reflects a comprehensive approach to policy by taking into consideration the

widest set of available information about the economy;

• promotes transparency in the conduct of monetary policy through the

announcement of targets and the reporting of measures that the BSP will adopt
to attain these targets, as well as the outcomes of its policy decisions;

• increases the accountability of monetary authorities to the inflation objective

since the announced inflation target serves as a yardstick for the performance of
the BSP, and thus helps build its credibility; and

• does not depend on the assumption of a stable relationship between money,

output and prices, and can still be implemented even when there are shocks that
could weaken the relationship.

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10. What are the requirements for the successful adoption of inflation targeting?

The success of implementing inflation targeting as the framework for monetary

policy depends on the following preconditions that complement and reinforce each
other:

• Firm commitment to price stability. The primary objective of the central bank is to
maintain price stability that is conducive to a balanced and sustainable
economic growth. As such, the central bank should not be bound by multiple
objectives such as financing the government’s deficit, keeping the exchange rate
at a given level, or other policy agenda of the government unless these are
necessary to achieve the goals of price stability.

• Central bank independence. The central bank must be able to conduct

monetary policy without political interference. It must be able to use whatever
monetary policy instrument is needed to achieve price stability. The central bank
should also have fiscal independence, i.e., it must not be constrained by the
need to finance the fiscal deficit.

• Good forecasting ability. The central bank should have a good statistical model
for forecasting inflation.

• Transparency. The central bank should promote transparency by

communicating clearly to the public its policy actions and the reasons behind
them.

• Accountability. There should be accountability on the part of the central bank

should actual inflation deviate from the target.

• Sound financial system. The financial system should be fundamentally sound to

make monetary policy more effective in influencing output and prices. The
financial system acts as the intermediary by which the BSP influences the
supply of money and credit in the economy.

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11. Does the Philippines satisfy all the requirements of inflation targeting?

As the table below suggests, the basic requirements for the successful adoption of
inflation targeting are already in place in the Philippines.

Requirements for the Adoption

Is it in place in the Philippines?
of Inflation Targeting

Yes, the law provides fiscal and

Central Bank independence administrative independence to the BSP
as the central monetary authority.

Yes, the law mandates that the BSP

Central Bank commitment should be concerned primarily with
maintaining price stability.

Inflation forecasting models are

continuously being improved; these are
Good forecasting ability supplemented by judgment and discretion
given available economic and financial
indicators.

In addition to existing reports and

publications, the BSP also publishes the
Transparency Inflation Report and the minutes of relevant
Monetary Board discussions on monetary
policy (with a lag).

The BSP stands firmly behind the inflation

target and, should there be any deviations,
Accountability
explains the reasons to the public and
higher authorities.

The financial system is constantly

developing, partly in view of the measures
Sound financial system
implemented by supervisory authorities to
strengthen it.

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MAKING INFLATION TARGETING OPERATIONAL IN THE PHILIPPINES

12. How did the BSP make the shift to inflation targeting?

Since 2002, the BSP has observed the following operational process in its
implementation of inflation targeting.

INFLATION TTARGETING F RAMEWORK

BSP
Government sets inflation • Publishes highlights of MB
target 2 years in advance meetings on monetary policy
(in consultation with BSP) YES
discussions
20182010: 4.5%±1%
- 2020: - 3.0%±1% S •
• Publishes Inflation Report
2011: 4.0%±1% •
• Release press statement
Is
inflation forecast
in line with
BSP announces
target?
inflation target

BSP issues Open letter

NO to the President

BSP
• Assesses monetary
• conditions
• Adjust policy interest rate
• • Forecasts inflation
• • Use other monetary
• Deliberates on the policy instruments
monetary policy stance

• Setting of the inflation target. The target-setting process is largely based on

the existing framework for coordination among government economic agencies
under the Development Budget Coordinating Committee (DBCC), an
inter-agency body responsible for setting the annual government targets for
macroeconomic variables, particularly the Gross National Income (GNI) and
Gross Domestic Product (GDP) growth rates and inflation, which are important
inputs in the formulation of the revenue, expenditure and financing programs of
the National Government. The National Government, through the DBCC, sets
the inflation target two years ahead in consultation with the BSP. The inflation
target is defined in terms of the average year-on-year change in the CPI over
the calendar year. The BSP Governor makes the public announcement of the
inflation target in line with the BSP’s commitment to greater transparency and
accountability in its conduct of monetary policy.

When the BSP adopted the inflation targeting framework in 2002, the inflation
target was defined in terms of a range (e.g., the target range for 2006-2007 was
4.0-5.0 percent). In December 2006, the Government’s inflation target was
re-specified from a range target to a point target with a tolerance interval of

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±1 percentage point starting in the target for 2008. The inflation target for
2010 was 4.5 percent ±1 percentage point (or a range equivalent to
3.5-5.5 percent); while the target for 2011 was 4.0 percent ±1 percentage point
(or a range equivalent to 3.0-5.0 percent). On 15 July 2010, the Monetary Board
announced the BSP’s shift from a variable annual inflation target to a fixed
inflation target of 4 ± 1 percent for the medium term starting from 2012 to 2014,
which was approved by the DBCC on 9 July 2010 under DBCC Resolution No.
2010-3. This shift from a range target to a point target with a tolerance interval
effectively widens the BSP’s target band. A broader target band is seen to
provide added flexibility to monetary authorities in steering inflation. It helps
ensure that the design of the inflation target is more consistent with the country’s
economic circumstances, and safeguards the credibility of the inflation targeting
framework. It also helps align monetary policy practices in the Philippines with
those in other inflation targeting countries.

The inflation target was set at 4.0 +/- 1.0 percent for 2013-2014, and at
3.0 percent ± 1.0 percent for 2015-2016. Meanwhile, based on its recent
assessment of the prevailing inflation environment, the Government kept its
inflation target at 3.0 percent ± 1.0 percent for 2017-2018, and approved an
inflation target of 3.0 percent ± 1.0 percent for 2019-2020 consistent with the
desired disinflation path over the medium term, favorable trends in the structure
of inflation, and expected higher capacity of the economy for growth under a low
inflation environment.

Under the inflation targeting framework, the inflation target is different from the
inflation forecast. The inflation target represents policymakers’ desired inflation
rate, which they commit to achieve over the policy horizon. Inflation targets,
because of their institutional nature, tend to be less susceptible to revisions —
although countries with a history of high inflation tend to set a decelerating path
for inflation targets across several years. Meanwhile, the inflation forecast
represents the expectation or prediction of the inflation rate over the policy
horizon, given current and available information. The inflation forecast can
change over time as important new information is incorporated in the
assessment of future inflation. The forecast is a major factor considered by
monetary authorities when deciding on whether monetary policy instruments
should be adjusted to attain the inflation target.

• Measure of inflation. The BSP uses the rate of change in the CPI in expressing
its target for monetary policy. Also known as the “headline” inflation rate, the
rate of change in the CPI is a commonly used and widely known measure of
inflation. It is also monitored by an independent statistical agency namely, the
PSA, thereby ensuring data integrity, and is announced to the public with a
relatively short time lag. The CPI itself represents the average price of a
standard “basket” of goods and services consumed by a typical family. In the
Philippines, this CPI is composed of various consumer items as determined by
the nationwide Family Income and Expenditure Survey (FIES) conducted every
six years by the PSA.

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In conducting monetary policy, the BSP also monitors “core” inflation.

Historically, the CPI inflation tends to be affected by the transitory effects of
volatile price movements of certain commodity components. Temporary shocks
or disturbances in certain areas of the economy, often attributed to factors
outside the direct control of economic policy such as oil price shocks, may cause
fluctuations in the CPI inflation that may not necessarily require a monetary
response. By eliminating the impact of such disturbances on price data, core or
underlying inflation serves as a useful alternative indicator of the path of
inflation. The PSA computes the core inflation by excluding selected
unprocessed food and energy-related items from the CPI.

• Models for inflation forecasting. The BSP uses a suite of quantitative

macroeconomic models to forecast inflation over a policy horizon of two years.
These economic models are also employed in conducting policy simulations and
analysis. Based on statistical tests, these models track the actual inflation
outcomes reasonably well. The BSP continuously exerts efforts to develop new
economic models and to refine its existing macroeconomic models for
forecasting inflation and other macroeconomic variables to address the growing
demands of policy studies.

• Meetings on monetary policy. Starting in 2012, the Monetary Board (MB) has
held monetary policy meetings eight (8) times a year, with meeting intervals of
six (6) to eight (8) weeks, to deliberate, discuss, and decide on the appropriate
monetary policy stance of the BSP in order to keep inflation within the target.
Based on its assessment of the macroeconomic environment and the price
situation of commodities, the Monetary Board takes the necessary actions
consistent with the chosen monetary policy stance. These actions would involve
the use of various instruments discussed in Item No. 6. The decisions of the
Monetary Board concerning monetary policy are determined by a majority vote.
The votes of individual Board members are not publicly disclosed to emphasize
the collegial, consensus-based nature of the decision-making process.

To strengthen the decision-making process, the Monetary Board of the BSP

receives recommendations from the Advisory Committee (AC). The AC is the
technical body composed of the following members: (1) the BSP Governor, who
serves as Chairman; (2) the Deputy Governor for Monetary and Economics
Sector; (3) the Deputy Governor for Corporate Services Sector; (4) the Deputy
Governor for Financial Supervision Sector; (5) the Senior Assistant Governor of
the Financial Market Operations Sub-Sector; (6) the Assistant Governor of the
Office of Systemic Risk Management; and (7) the Assistant Governor of the
Monetary Policy Sub-Sector. The AC meets regularly a few days prior to each
MB monetary policy meeting. The AC meetings serve as a forum for in-depth,
comprehensive, and balanced assessment of monetary conditions, the
economic outlook, inflation expectations and the forecast inflation path. The AC

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members agree, by a majority vote, on a set of recommendations which are

submitted to the Monetary Board.

• Transparency and accountability mechanisms. The BSP has a number of

disclosure and reporting mechanisms to help the public gauge the BSP’s
commitment to achieve the inflation target. In addition to various reports and
publications, the BSP publishes the Quarterly Inflation Report and the Highlights
of the Meeting of the Monetary Board on Monetary Policy. The BSP also holds
regular seminars and conferences involving the discussion of monetary
developments and policy issues.

To ensure accountability in case the BSP fails to achieve the inflation target, the
BSP Governor issues an Open Letter to the President explaining the reasons
why actual inflation did not fall within the target, along with the steps to be done
to bring inflation towards the target. Open Letters to the President have been
issued on 16 January 2004, 18 January 2005, 25 January 2006,
19 January 2007, 14 January 2008, 26 January 2009, 28 January 2016,
20 January 2017, and 25 January 2019.

• Explanation clauses, or exemptions to the inflation target. Explanation clauses

refer to the predefined set of acceptable circumstances under which an
inflation-targeting central bank like the BSP may fail to achieve its inflation
target. These exemptions recognize that the limitations to the effectiveness of
monetary policy and deviations from the inflation target may sometimes occur
due to factors beyond the control of the central bank. They include price
pressures arising from: (1) volatility in the prices of agricultural products;
(2) natural calamities or events that affect a major part of the economy;
(3) volatility in the prices of oil products; and (4) significant government policy
changes that directly affect prices such as changes in the tax structure,
incentives and subsidies. In using explanation clauses, the BSP will have to
explain carefully and clearly to the public how the abovementioned factors
caused the deviation of the inflation outcome from the target. The BSP also
cites the actions to be taken as well as the length of time entailed to achieve the
inflation target.

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13. Since the BSP adopted inflation targeting, has the inflation target been
achieved?

Below is the summary of inflation developments since the BSP shifted to inflation
targeting framework, indicating among others, the actual inflation compared to the
target.
Actual Inflation Actual
Developments/Factors affecting
Year Inflation Target vs.
inflation
(in percent)1 (in percent)2 Target

• Slowdown in food inflation and subdued

2002 2.9 4.5-5.5 Lower
demand-pull inflationary pressures

• Absence of significant demand-driven

pressures with the continued soft spots in
overall demand, soft labor market
conditions, and moderate capacity
2003 3.0 4.5-5.5 Lower utilization in industries such as
manufacturing

• Easing cost-push inflationary pressures with

the abatement of the El Niño phenomenon
and the downtrend in international oil prices

• Supply-side shocks including the increase

in global oil prices (which led to higher
domestic pump prices of petroleum
products and hikes in transport fares) as
well as the spate of typhoons and domestic
2004 5.5 4.0-5.0 Higher
supply constraints affecting the availability
of certain food products

• Higher meat prices linked to the recurrence

of avian flu in other countries

• Continued rise in consumer prices

particularly those for food, energy, and
transportation

• Global increase in oil prices leading to

higher domestic pump prices, adjustments
2005 7.6 5.0-6.0 Higher in minimum wage throughout the country,
as well as hikes in the transport fares and
utility charges

• Adverse effect of El Niño dry weather on

agricultural output, especially on rice and
corn production

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Actual Inflation Actual

Developments/Factors affecting
Year Inflation Target vs.
inflation
(in percent)1 (in percent)2 Target
• Higher world oil prices, the two-percentage
point increase in the VAT, and the removal
2006 6.2 4.0-5.0 Higher
of certain VAT exemptions in 2005
itenerary

• Generally stable prices for major food

items, favorable supply conditions,
particularly the sustained growth in
agriculture, and the subsiding base effect
of the RVAT on CPI
2007 2.9 4.0-5.0 Lower
• Firm peso tempering the impact on
domestic prices of increasing global
commodity prices, including food and oil,
which rose during the latter part of the year

• Confluence of global and supply-side

factors beyond the direct control of the
BSP such as the big surge in the
international prices of oil and food
commodities, resulting in higher domestic
rice and pump prices of fuel
2008 8.3 4.0±1 Higher
• Supply shocks over a longer period, which
contributed to second-round effects,
affected wage and price-setting behavior
of businesses and households; inflation
expectations also rose

• Slowdown in inflationary pressures during

the early until the middle part of the year
owing to lower oil and other commodity
prices due, in large part, to subdued
demand conditions

2009 4.2 3.5±1 Within • Slight uptick in consumer prices towards the
latter part of the year, particularly those for
food and petroleum products, due to
weather disturbances and lifting of price cap
on petroleum products

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Actual Inflation Actual

Developments/Factors affecting
Year Inflation Target vs.
inflation
(in percent)1 (in percent)2 Target

• Food inflation was lower especially in

the first half of the year as domestic
supply recovered from the impact of the
previous year’s typhoons. It posted an
uptick in the third quarter as prices of
agricultural commodities went up; in
particular, sugar prices increased as El
2010 3.8r 4.5±1 Within Niño affected the harvest and delayed
the milling season.

• This was more than offset by higher non-

food inflation which can be traced to the
surge in the prices of electricity and
petroleum products.

• Food inflation was generally stable as

ample supply in the aftermath of
typhoons tempered the price increases,
despite supply shocks triggered by
weather-related factors which resulted in
production disruptions and agricultural
damages thus initially pushing food
2011 4.6r 4.0±1 Within inflation higher.

• Meanwhile, non-food inflation trended

upwards during the year as domestic
prices of petroleum crude tracked the
movement in the international market.
Adjustments in electricity and water rates
also contributed to the increase.

• Food inflation decelerated as domestic

supply remained sufficient.

• Lower non-food inflation, particularly for

2012 3.2 4.0±1 Within electricity, gas and other fuels as well as
transportation, was also posted. The
reduction in power generation charges in
March, September, and December
contributed to the decline.

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Actual Inflation Actual

Developments/Factors affecting
Year Inflation Target vs.
inflation
(in percent)1 (in percent)2 Target

• Inflation was higher during the first quarter

as prices of food and alcoholic beverages
increased due to weather-related
production disruptions and the implementa-
tion of the Sin Tax Reform Act of 2012.
Meanwhile, inflation decelerated in July and
August due to the reduction in prices of
domestic petroleum products and power
rates.

2013 3.0 4.0±1 Within • However from September and towards the
end of 2013, tight supply conditions caused
by weather-related disruptions and stronger
demand during the holiday season pushed
food inflation higher. Likewise, non-food
inflation rose due to the upward adjustment
in electricity rates brought by the
maintenance shutdown of Malampaya Gas
Field and other generating plants coupled
with increases in the prices of gasoline,
diesel, LPG and kerosene.

• Food inflation slowed down in Q4 2014

amid adequate domestic supply of major
food items, easing port congestion, and
moderate prices of imported commodities
as compared with the higher food inflation
during the first nine months of 2014 brought
by weather-related production disruptions,
bottlenecks in the supply chain caused by
2014 4.1 4.0±1 Within port congestion, and changes in
transportation policies.

• Likewise, non-food inflation eased due to

lower prices of electricity, gas, and other
fuels (reflecting declines in international oil
prices), which is in contrast to the high non-
food inflation during the first three quarters.

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Actual Inflation Actual

Developments/Factors affecting
Year Inflation Target vs.
inflation
(in percent)1 (in percent)2 Target

• Easing petroleum prices and ample food

supply contributed largely to the low
inflation readings during the year.

• Inflation gained momentum in the fourth

quarter of the year, traced mainly to
2015 1.4 3.0±1 Below seasonal demand for certain food items as
well as the adverse impact of recent
typhoons on food supply.

• Non-food inflation likewise inched higher

owing in part to passenger fare increases
for air and sea transport.

• Monthly inflation rates for the first eight

months of 2016 fell below the target range
due to lower food and energy prices.
Inflation gained traction starting September
to December, exceeding the lower bound of
the target as weather-related production
disruptions pushed up inflation of key food
items such as vegetables and fruit and as
the rebound in international oil prices in late
2016 pushed up the prices of domestic
petroleum products.

• Non-food items: The price indices for non-

food items (which include recreation and
2016 1.8 3.0±1 Below
culture, and restaurants and miscellaneous
goods and services) and alcoholic
beverages and tobacco recorded an
increase in average inflation rates. On the
other hand, the inflation for housing, water,
electricity, gas and other fuels continued to
decline during the year.

• Food items: Inflation rate of food and

non-alcoholic beverages was unchanged in
2016 as higher price increases in
vegetables, meat as well as oils and fats
offset the year-on-year decline in rice
prices.

Department of Economic Research 16

 Inflation Targeting
June 2019

Actual Inflation Actual

Developments/Factors affecting
Year Inflation Target vs.
inflation
(in percent)1 (in percent)2 Target

• Inflation rose during the first quarter of 2017

due to an increase in both food and non-
food inflation. Food inflation went up owing
to some tightness in domestic supply
conditions, while the higher non-food
inflation was attributed to upward
adjustments in electricity rates and
domestic petroleum prices. Meanwhile,
inflation held steady in the second and third
quarter of the year as food and non-food
2017 3.2 3.0±1 Within
inflation were generally stable. Inflation
gained traction in the fourth quarter due to
upward adjustments in the prices of
domestic petroleum products as well as
higher price increases in selected services.
Nonetheless, inflation averaged at
3.2 percent in 2017, well within the National
Government’s announced target range of
3.0 percent ±1.0 percentage point for the
year.

• Headline inflation increased year-on-year

during Q1and Q2 2018 due largely to the
uptick in selected food and non-food
prices. During the first two quarters of
2018, food prices went up owing mainly to
weather-related food supply disruptions,
while non-food prices generally rose due
to upward adjustments in electricity rates.
For the third quarter of 2018, headline
inflation also rose owing to higher food
2018 5.2 3.0±1 Above and energy prices. Nonetheless, headline
inflation moderated to 5.9 percent in
Q4 2018 from 6.2 percent in the previous
quarter as both food and non-food
inflation eased due to improved supply
conditions and lower international oil
prices. This brought the full year average
inflation to 5.2 percent, which is above the
National Government’s (NG) announced
target range of 3.0 percent
± 1.0 percentage point for 2018.

Department of Economic Research 17

 Inflation Targeting
June 2019

• Food inflation slowed down in Q2 2019 as

sufficient domestic food supply continued to
support easing food prices during the
quarter. Rice prices declined with the
ongoing harvest season and continued
arrival of rice imports. Likewise, corn prices
decreased during the quarter relative to
year-ago levels. Slower price increases of
other large-weighted food items such as
meat, fish, as well as milk, cheese, and
2019 3.4* 3.0±1 Within eggs also contributed to the slowdown in
food prices.

• Likewise, non-food inflation moderated

during Q2 2019 as inflation for utilities such
as water supply and electricity fell, while
health-related components, namely,
medical products and hospital services also
posted slower y-o-y inflation rate in
Q2 2019 compared to the previous quarter.
1
Actual inflation figures used for 2002-2004, 2005-2006, 2007-2017, and 2018 were the 1994-, 2000-, 2006-, and 2012-based CPI
series, respectively.
2
Annual targets
*January to June 2019, using the 2012-based CPI series

Actual vs. Target Inflation

(year-on-year in percent; 2012=100)

12

2019 Inflation Target: 3 percent ± 1.0 percentage point

10
2019 YTD (Jan - Jun) Headline Inflation: 3.4 percent

8 Actual Headline Inflation

Target Range
Core Inflation
6

0
Mar
Jun
Sep

Mar
Jun
Sep

Mar
Jun
Sep

Mar
Jun
Sep

Mar
Jun
Sep

Mar

Mar
Jun
Sep

Jun
Dec

Dec

Dec

Dec

Dec

Dec

-2 2013 2014 2015 2016 2017 2018 2019

Department of Economic Research 18