InflationTargeting
March2020
DepartmentofEconomicResearch
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THEBSPANDPRICESTABILITY
1. Whatisinflation?
Inflationreferstotherateofchangeintheaveragepricesofgoods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Authority
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(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CPIbasket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.
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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thegovernment
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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InflationTargeting
March2020
DepartmentofEconomicResearch
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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ofRepublic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’smain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doneprimarily
bymovingitspolicyinterestrate.AdjustmentsintheinterestratefortheBSP’sovernight
reverserepurchase(RRP)facility,theprimarymonetarypolicyinstrument, 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bedriven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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InflationTargeting
March2020
DepartmentofEconomicResearch
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MONETARYPOLICYANDITSCURRENTFRAMEWORK
5. Whatismonetarypolicy?
Monetarypolicyisasetofmeasuresoractionsimplementedbythe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moneyand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?
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TheBSPimplementsmonetarypolicyusingvariousinstrumentsto achieve the inflation
targetsetbytheNationalGovernment.
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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.
InflationTargeting
March2020
DepartmentofEconomicResearch
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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velocity
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remainsstableovertime,changesinmoneysupplyaredirectlyrelatedto
pricechangesortoinflation.Giventhedesiredlevelofinflationconsistentwitheconomic
growthobjectives,itisassumedthatthe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wasmodified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timeperiod.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involvesmainlyadjustments
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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.
InflationTargeting
March2020
DepartmentofEconomicResearch
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intheBSP’skeypolicyinterestrate.TheBSPalsousesotherinstruments 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comeupwithmeasuresonhowtosteerinflation 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;
promotestransparencyintheconductofmonetarypolicythroughthe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asayardstickfortheperformanceof the BSP, and
thushelpsbuilditscredibility;and
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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.
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
withoutpoliticalinterference.Itmustbeabletouse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ofthe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of
InflationTargeting
IsitinplaceinthePhilippines?
CentralBankindependence
Yes,thelawprovidesfiscalandadministrative
independencetotheBSP
asthecentralmonetaryauthority.
CentralBankcommitment
Yes,thelawmandatesthattheBSPshouldbe
concernedprimarilywithmaintainingprice
stability.
Goodforecastingability
Inflationforecastingmodelsarecontinuously
beingimproved;thesearesupplementedby
judgmentanddiscretiongivenavailable
economicandfinancialindicators.
Transparency
Inadditiontoexistingreportsand
publications,theBSPalsopublishesthe
InflationReportandtheminutesofrelevant
MonetaryBoarddiscussionsonmonetary
policy(withalag).
Accountability
TheBSPstandsfirmlybehindtheinflation
targetand,shouldtherebeanydeviations,
explainsthereasonstothepublicandhigher
authorities.
Soundfinancialsystem
Thefinancialsystemisconstantlydeveloping,
partlyinviewofthemeasures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.
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interms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
I
I
NFLATION
NFLATION
T
T
ARGETING
ARGETING
F
F
RAMEWOR
K
RAMEWOR
K
-
•
•
•
•
•
•
•
•
•
BSPannounces
inflationtarget
BSP
Assessesmonetary
conditions
Forecastsinflation
Deliberatesonthe
monetarypolicystance
Is
inflationforecast
inlinewith
target?
YES
NO
Adjustpolicyinterestrate
Useothermonetary
policyinstruments
BSP
PublisheshighlightsofMB
meetingsonmonetarypolicy
discussions
PublishesInflationReport
Releasepressstatement
BSPissuesOpenletter
tothePresident
Governmentsetsinflation
target2yearsinadvance
(inconsultationwithBSP)
2019‐2022:3.0%±1%
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rangetargettoapointtargetwithatoleranceintervalof±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bythe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 and 2017‐2018. Meanwhile, through DBCC Resolution No.
2019‐2dated26February2019,theDBCCdecidedtokeepthecurrentinflationtarget
at 3.0 percent ± 1.0 percent for 2019‐2020 and set the inflation target at the same
rangefor2021‐2022basedontheassessmentthatthecurrenttargetcontinuestobe
anappropriatequantitativerepresentationof themedium‐termgoalofpricestability
that is optimal for the Philippines given the current structure of the economy and
outlookofmacroeconomicconditionsoverthenextfewyears.
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andwidely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bythe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tobeaffectedbythetransitoryeffectsofvolatilepricemovements
ofcertaincommoditycomponents.Temporaryshocks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fluctuationsintheCPI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andto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in2012,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withthechosen 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LettertothePresidentexplainingthereasons 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January2005,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ofthe
economy;(3)volatilityinthepricesofoil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havetoexplaincarefullyand
clearly to the public how the abovementioned factors caused the deviation of the
inflationoutcomefromthetarget.TheBSPalsocitestheactionstobetakenaswellas
thelengthoftimeentailedtoachievetheinflationtarget.
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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.
Year
Actual
Inflation
(inpercent)
1
Inflation
Target
(inpercent)
2
Actual
vs.
Target
Developments/Factorsaffectinginflation
2002 3.0* 4.5‐5.5 Lower
Slowdown in food inflation and subdued
demand‐pullinflationarypressures
2003 3.0 4.5‐5.5 Lower
Absenceofsignificantdemand‐drivenpressures
with the continued soft spots in overall
demand, soft labor market conditions, and
moderatecapacityutilizationinindustriessuch
asmanufacturing
Easingcost‐pushinflationarypressureswiththe
abatementoftheElNiñophenomenonandthe
downtrendininternationaloilprices
2004 5.5 4.0‐5.0 Higher
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 supply constraints
affecting the availability of certain food
products
Higher meat priceslinked to the recurrenceof
avianfluinothercountries
2005 7.6 5.0‐6.0 Higher
Continued rise in consumer prices particularly
thoseforfood,energy,andtransportation
Global increase in oil prices leading to higher
domestic pump prices, adjustments 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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Year
Actual
Inflation
(inpercent)
1
Inflation
Target
(inpercent)
2
Actual
vs.
Target
Developments/Factorsaffectinginflation
2006 6.2 4.0‐5.0 Higher
Higherworldoilprices,thetwo‐percentage
pointincreaseintheVAT,andtheremovalof
certainVATexemptionsin2005itenerary
2007 2.9 4.0‐5.0 Lower
Generallystablepricesformajorfooditems,
favorable supply conditions, particularly the
sustained growth in agriculture, and the
subsidingbaseeffectoftheRVATonCPI
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
2008 8.3 4.0±1
Higher
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
Supplyshocksoveralongerperiod,which
contributedtosecond‐roundeffects,affected
wageandprice‐settingbehaviorofbusinesses
and households; inflation expectations also
rose
2009 4.2 3.5±1 Within
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
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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Year
Actual
Inflation
(inpercent)
1
Inflation
Target
(inpercent)
2
Actual
vs.
Target
Developments/Factorsaffectinginflation
2010 3.8
r
4.5±1 Within
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
pricesincreasedasEl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.
2011 4.6
r
4.0±1 Within
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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.
2012 3.2
4.0±1 Within
Food inflation decelerated asdomestic supply
remainedsufficient.
Lower non‐food inflation, particularly for
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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Year
Actual
Inflation
(inpercent)
1
Inflation
Target
(inpercent)
2
Actual
vs.
Target
Developments/Factorsaffectinginflation
2013 3.0 4.0±1 Within
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.
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increasesinthe
pricesofgasoline,diesel,LPGandkerosene.
2014 4.1 4.0±1 Within
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 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.
InflationTargeting
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Year
Actual
Inflation
(inpercent)
1
Inflation
Target
(inpercent)
2
Actual
vs.
Target
Developments/Factorsaffectinginflation
2015 1.4 3.0±1 Below
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 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.
2016 1.8 3.0±1 Below
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 pricesin late2016
pushed up the prices of domestic petroleum
products.
Non‐fooditems:Thepriceindicesfornon‐food
items (which include recreation and 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forhousing,
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wellasoilsandfatsoffsettheyear‐on‐
yeardeclineinriceprices.
InflationTargeting
March2020
DepartmentofEconomicResearch
17
Year
Actual
Inflation
(inpercent)
1
Inflation
Target
(inpercent)
2
Actual
vs.
Target
Developments/Factorsaffectinginflation
2017 3.2 3.0±1 Within
Inflation rose during the first quarter of 2017
due to an increase in both food and non‐food
inflation.Foodinflationwent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
inflationwere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.
2018 5.2 3.0±1 Above
Headline inflation increased year‐on‐year
duringQ1and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 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.
InflationTargeting
March2020
DepartmentofEconomicResearch
18
2019 2.5 3.0±1 Within
Headline inflation decreased year‐on‐year
duringQ1andQ22019asfoodinflationeased
due to sufficient domestic food supply, while
non‐food inflation also moderated. Inflation
settledat3.8percentand3.0percentduring
Q1 and Q2 2019, respectively. Headline
inflationeasedfurtherduringthesecondhalfof
2019to1.7percentduringQ3and1.6percent
duringQ4.Thelowerinflationfigurescanbe
attributed to the slowdown in food and non‐
food inflation during the quarter. The average
inflationratefor2019wasrecordedat2.5
percent, which was well within the National
Government’s (NG) announced target range of
3.0percent±1.0percentagepointfortheyear.
2020 2.7* 3.0±1 Within
Year‐on‐year headline inflation rose to 2.7
percentinQ12020,higherthanthe1.6percent
in Q4 2019 but within the National
Government’s(NG)targetrangeof3.0percent
±1.0percentagepointfortheyear.Thehigher
inflation rate could be attributed to price
increasesforselectedfoodandnon‐fooditems
duringthequarter.Similarly,coreinflationwas
higher at 3.2 percent in Q1 2020 from 2.7
percentinthepreviousquarter.
Food inflation increased as prices of prime
commoditiessuchasfishwentupduepartlyto
the fishing ban imposed in certain provinces.
Likewise, inflation for fruits and vegetables
were also higher during the review quarter
owingtoweather‐relatedsupplydisruptions.
Year‐on‐yearinflationforrice,corn,aswellas
sugarand othersweeteneditemscontinuedto
decline in Q1 2020, while inflation for tobacco
remained elevated following the
implementation of the higher excise tax on
tobaccoproducts.
Non‐foodinflationalsoacceleratedinQ12020
drivenlargelybytheturnaroundintransport
inflation.Year‐on‐yearinflationforoperationof
personal transport equipment went up while
the approved fare hikes for public utility
jeepneys (PUJs) minimum fare in selected
provinces also exerted some upward pressure
oninflationfortransportservices.
InflationTargeting
March2020
DepartmentofEconomicResearch
19
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March2020
**Note onrevisionofthe 2002 inflationrate:1994‐based annual inflation for 2002wasoriginallypublished at3.1 percent;
however,laterCPIrevisionsplaceditat2.9percentbasedonBSP computations,whichat the time used expanded decimal
formwhenaveragingcumulativeCPIfigures.However,PSA(formerlyNSO)treatmentofcumulativeinflationistoroundoffCPI
toonedecimalpriortocomputingfortheannualpercentchange.BSPonlyadoptedsimilarpracticearound2012‐2013.Tobe
consistentwithPSApractice,the2002inflationratewasrevisedto3.0percentfrom2.9percentpreviously.
‐2
0
2
4
6
8
10
12
ActualHeadlineInflation
TargetRange
CoreInflation
Actualvs.Target Inflation
(year‐on‐year inpercent;2012=100)
2020InflationTarget:3percent± 1.0percentagepoint
2020YTD(Jan‐ Mar)HeadlineInflation:2.7percent