THE ANTICIPATIONS of escalating prices encourage households to boost expenditure, which can result in inflation becoming more enduring, according to a discussion paper by scholars at the Bangko Sentral ng Pilipinas (BSP).
“Our empirical findings demonstrated that households typically plan to elevate their consumption in the short term when they foresee rising prices. This is particularly applicable to essential goods such as food and non-alcoholic drinks, fuel, and utility services,” the researchers stated.
The discussion paper, co-authored by BSP Research Academy Lead Researcher Faith Christian Q. Cacnio and Research Associate Cymon Kayle Lubangco, investigates the impact of inflation expectations on household spending.
“Additionally, the percentage of households planning to raise their consumption in the near future increases with higher inflation expectations,” they remarked.
In its most recent Consumer Expectations Survey, the BSP indicated that households still foresee an increase in inflation shortly. Household inflation expectations might persist above the 2-4% target range in the near future.
“We further noted that a greater number of households tend to anticipate heightened prices for goods with higher consumer price index (CPI) weights when actual inflation remains within target compared to periods of low and high inflation,” the BSP team said.
“This leads to a higher average expected inflation during quarters when inflation aligns with the target.”
Headline inflation averaged 3.2% in 2024. The BSP also foresees inflation to stay within the 2-4% target range from this year to the following year, with its baseline forecasts at 3.3% and 3.5% for 2025 and 2026, respectively.
Nevertheless, the central bank cautioned that the balance of risks to the inflation outlook until 2026 remains tilted towards the upside.
“The intended expenditure for a given commodity is more reactive to expected price changes for that specific commodity than to the overall household inflation expectations,” according to the researchers.
They observed that inflation expectations tend to be responsive to price fluctuations of significant commodities such as oil and rice, as well as the appreciation of the currency.
“In evaluating the potential effects of certain shocks, we found that households’ inflation expectations rise with increases in international benchmark prices of oil and rice and fall in response to higher policy rates and an appreciation of the Philippine peso,” they commented.
“Conversely, escalating international prices of oil and rice prompt households to elevate their near-future consumption in anticipation of increased future inflation,” they added.
Fuel and rice are frequently among the primary contributors to local inflation. In particular, rice is often the largest contributor to overall inflation.
However, rice inflation has been decreasing in recent months after the government reduced tariffs on rice imports in July.
“Following an oil price shock, the probability of purchasing durable goods within the ensuing 12 months also rises significantly,” the researchers observed.
“Furthermore, a depreciation of the Philippine peso leads to a significant increase in the overall likelihood of heightened consumption of various goods in the upcoming period.”
The peso has faced pressure in recent months as the dollar surged after US President Donald J. Trump’s election and expectations of slower rate cuts by the US Federal Reserve.
Last year, the peso plummeted to the all-time low of P59-per-dollar level on three occasions.
“Connecting variations in household inflation expectations to consumption behavior, our simulation outcomes suggest that an increase in the policy rate will result in households delaying the increase in their consumption of most goods.”
The study’s simulation outcomes indicated that an increase in the policy rate aids in “moderating inflation expectations, which, in turn, influences consumption spending.”
However, it noted that shocks to international oil prices and currency variances have a “more significant effect” on inflation expectations and expenditure compared to changes in policy rates.
“This underscores the considerable impact of supply-side shocks on inflation expectations and economic activity.”
“Supply-side shocks are generally regarded to have temporary and short-lived effects on prices and do not automatically warrant a monetary policy response,” they added.
The BSP researchers indicated that central banks must “stay alert to prevent these shocks from triggering second-round effects.”
“Central banks should maintain vigilant oversight of price developments in goods and services, even when inflation is on target, as households tend to form higher inflation expectations during this time.”
“Open communication is vital to mitigate these expectations and align them with the inflation target. Grasping the potential impacts of supply-side shocks on inflation expectations and subsequently on household consumption could also aid in fine-tuning central banks’ necessary responses.”
The BSP commenced its easing cycle in August last year, cutting rates by a total of 75 basis points to adjust the benchmark to 5.75%.
BSP Governor Eli M. Remolona, Jr. has stated that there is still room for further reductions in interest rates as the current policy rate remains restrictive.
The Monetary Board’s upcoming rate-setting meeting is scheduled for Feb. 13. — Luisa Maria Jacinta C. Jocson
