Inflation target stays despite year rebasing

The Bangko Sentral ng Pilipinas (BSP) is keeping its medium-term two to four percent inflation target despite the rebasing undertaken by the Philippine Statistics Authority (PSA).

BSP Deputy Governor Diwa Guinigundo told reporters there is no need to adjust the inflation target for 2018 to 2020 with the release of the consumer price index (CPI) for all income households with base year 2012 from the current series of 2006.

“I don’t think we need to change our targets because no matter how you measure inflation, no matter what base year you use, two to four percent inflation target makes sense given our stage of development as well as the inflation dynamics,” Guinigundo said.

The CPI is an indicator of the change in the average prices of a fixed basket of goods and services commonly purchased by an average Filipino household for their day-to-day consumption relative to a base year.

As an indicator, the CPI is most widely used in the calculation of the inflation rate and purchasing power of the peso. Inflation rate measures the changes in the CPI over a specific period of time usually a month or a year.

The purchasing power of the peso, on the other hand, gives an indication of how much the local currency is worth in a given period relative to its value in a base period.

“In terms of direction I think the direction will remain the same. Under the new base year and consumer basket, I think the composition will be more relevant. It will be more relevant because this will be based on current taste and preferences of the general public,” Guinigundo said.

Any changes to the inflation target would require policy action from the central bank’s Monetary Board, Guinigundo said.

“If you lower it by one percent or two percent, you will tighten monetary policy and you will affect the trajectory of economic growth. So two to four percent, we believe, continues to be appropriate,” he said.

Rebasing is necessary when the basket of the reference year no longer represents what is commonly purchased by the households. The CPI then becomes irrelevant and would tend to give wrong market signals.

The central bank’s Department of Economic Research (DER) expects inflation to hit a range of four to 4.8 percent in February due to higher electricity rates and food prices as well as the impact of the new tax reform law.

“Higher electricity rates and food prices, along with the full pass-through of higher excise taxes on petroleum products and sugar sweetened beverages could lead to upward price pressures for the month of February,” the BSP said.