New Year’s Inflation

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By Atty. Ignacio R. Bunye

Speaking Out

Sunday, December 29, 2013


WITH Christmas already done, Filipinos are now looking ahead to year 2014, not just the celebration of its arrival on New Year’s Eve but all of its 365 days.

At this time, some maybe busy preparing their targets and resolutions for the incoming year with the hope that next year will be prosperous as - or better than - 2013.

The fourth quarter Consumer Expectation Survey (CES) of the Bangko Sentral ng Pilipinas (BSP) offers some insights on the outlook of households in the days ahead. Based on the study, which was conducted on almost 6,000 households nationwide last October 2013, 39.1 percent of households expected that their expenditure on basic goods and services such as food, housing, and electricity will rise within January to March 2014.

Consumers were also in tune with BSP’s outlook of manageable inflation environment in 2014, which implies that though many of them expect to spend more, few think that there will be significant changes in the prices of commodity.

It must be noted, however, that this survey was done before Super Typhoon Yolanda, and consumers may have different answers by now. BSP Governor Amando M. Tetangco, Jr. though asserted that the recent calamity’s effect on prices is contained and inflation outlook remains the same.

What is inflation anyway and why is it important for every Juan and Maria to understand it?

Inflation is the annual percentage of change in the Consumer Price Index (CPI), a table that shows the average price of goods and services consumed by a typical Filipino family for a given period.

The ideal is for inflation to remain low and stable. Aside from protecting the people’s purchasing power, a low and stable inflation enables households and businesses to plan ahead and make better financial decisions.

The BSP, as the country’s central monetary authority, regularly monitors the changes in prices, understanding the importance of price stability in keeping the health of our economy and supporting growth.

It also uses its ability to influence the amount of money circulating in the market to manage inflation. Simply put, when there is high money supply in the economy, consumers tend to spend more, raising demand for goods and services, which can then increase the level of prices.

Meanwhile, less money supply means less support for consumption and investment, which may reduce demand, and eventually prompt businesses to lower prices.

Still, there are many other factors that influence inflation, such as weather disturbances and movements in oil prices.

In 2000, the BSP’s Monetary Board approved the shift to inflation targeting as framework in conducting monetary policy. Under this framework, the central bank makes an explicit inflation target and tries to achieve it over a given time period using various monetary policy instruments. These are measures or actions that can affect supply of money and credit in the economy. The goal is to use monetary policy to achieve price stability.

The primary tool used by the Bangko Sentral is the policy interest rate – the rate at which the BSP borrows from and lends to banks. Other tools include, but are not limited to, setting of reserve requirements and setting of interest rates on Special Deposit Accounts (SDA).

For 2014, the inflation target of BSP is between 3-5 percent, same as in 2013 – a target deemed achievable despite price pressures arising from production losses and supply disruptions caused by the recent calamities.

BSP’s track record for hitting its inflation targets gives us the necessary comfort to plan better how we will spend, save and invest in 2014.

Note: My book, Central Banking for Every Juan and Maria is now available in main branches of Fully Booked, Power Books, National Book Store, and University of the Philippines Press.

Opinion

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Holy Week 2014

FOREX: US$ 1.00 = PhP 44.487

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