Fare hikes to push inflation to 7.9%

The Bangko Sentral ng Pilipinas (BSP) has said the newly approved increase in transportation fares would push inflation to an average of 7.9 percent this year.

The BSP said its previous simulations already assumed the P2 adjustment in the jeepney fares for its 2005 projections and for 2006, the fare adjustments are expected to increase the national average inflation by half a percentage point.

BSP Assistant Governor Diwa Guinigundo said, however, that the BSP is not changing its inflation target of five to six percent for the whole of 2005, adding that only its projected inflation rate was being updated to factor in the latest available data.

However, Guinigundo, said the BSP will still have to wait for the impact of the new fares on the adjustment of wages in regions that have not adjusted their minimum wages.

The National Capital Region already adjusted its minimum wage before the transport fares were increased and areas outside the capital are expected to adjust their wages with the fare increase.

Gunigundo said the 7.9-percent estimate also did not include the impact of the reduction of import duties from five percent to three percent for diesel, kerosene and bunker fuel oil.

"Overall we still have to see its impact on consumer prices starting July," Guinigundo said. "We also have to monitor the effect on consumption expenditures as well as on wage demand in other regions."

The national average inflation rate in May was recorded at 8.5 percent, bringing the year-to-date average to 8.4 percent – way above the official government target of five percent and still above the full-year projection of 7.9 percent.

The headline inflation – representing the change in prices, including food – remained steady year-on-year although there was a slight surge in May compared to the previous month.

The core inflation, on the other hand, actually decelerated from 7.8 percent in April to 7.6 percent in May. Core inflation represents the movements in the prices of goods, excluding food items that are dependent on domestic agricultural production.

According to BSP officer-in-charge Amando M. Tetangco, the deceleration in the month-on-month core inflation is an indication that domestic supply shocks remain the dominant driver of price pressures.

The BSP differentiates between headline and core inflation since monetary policies do not affect supply-related factors in price movements. Therefore, monetary officials look at inflation based on whether real increase in demand is beginning to push prices up instead of declines in supply.

"Since price pressures are mainly still driven by supply-related factors, this does not seem to indicate a need to change our monetary policy stance at this point," Tetangco said.

"But we will continue to monitor developments and their impact on our inflation outlook," Tetangco said.