EXPECTATIONS of rising prices encourage households to grow Inflation may become more persistent, according to a discussion paper by researchers at the Bangko Sentral ng Pilipinas (BSP).
“Our empirical results indicated that households tend to increase their planned consumption in the short run when they expect higher prices. This is especially true for essential goods such as food and non-alcoholic beverages, fuel and utilities,” the researchers said.
The discussion paper, written by BSP Research Academy Principal Investigator Faith Christian Q. Cacnio and Cymon Research Associate Cymon Kayle Lubangco, examines the effect of inflation expectations on household consumption.
“In addition, the share of households planning to increase their consumption in the near term is growing within higher inflation expectations,” she added.
In its latest Consumer Expectations Survey, the BSP said households still expect inflation to rise in the near term. Household inflation expectations may remain above the target range of 2-4% in the short term.
“We also observed that a greater number of households tend to expect higher prices for commodities with a greater weight of the Consumer Price Index (CPI) when actual inflation is within target than during periods of low and high inflation,” the BSP said researchers.
“This results in higher average expected inflation during the quarters in which inflation remains within the target.”
Total inflation averaged 3.2% in 2024. The BSP also expects inflation to remain within the target range of 2-4% from this year to next, as the baseline projections for 2025 and 2026 are 3.3% and 3.5% respectively.
However, the central bank has warned that risks to the inflation outlook until 2026 remain positive.
“Planned expenditures for a specific commodity are more responsive to expected price changes for that commodity than to general household inflation expectations,” the researchers said.
They found that inflation expectations tend to be sensitive to price movements of key commodities such as oil and rice, as well as to the appreciation of the currency.
“In assessing the potential impact of certain shocks, we have seen that household inflation expectations rise with increases in international benchmark oil and rice prices, and fall in response to higher policy rates and an appreciation of the Philippine peso,” they said.
“Conversely, higher international prices for oil and rice cause households to increase their consumption in the short term in anticipation of higher future inflation,” she added.
Fuel and rice tend to be among the main sources of local inflation. Rice in particular tends to be the largest contributor to overall inflation.
However, rice inflation has been on a downward trend in recent months after the government cut rice import duties in July.
“After an oil price shock, the likelihood of purchasing durable goods within the next twelve months also increases significantly,” the researchers said.
“Moreover, a depreciation of the Philippine peso results in a notable increase in the average probability of increased consumption of various goods in the coming period.”
The peso has been under pressure in recent months as the dollar soared following US President Donald J. Trump’s victory and expectations of slower rate cuts by the US Federal Reserve.
Last year, the peso fell three times to a record level of P59 per dollar.
“By linking changes in household inflation expectations to consumption behavior, our simulation results suggest that an increase in the policy rate will cause households to delay increasing their consumption of most commodities.”
The study’s simulation results showed that an increase in the policy rate contributes to “moderate inflation expectations, which in turn affects consumer spending.”
However, it noted that shocks in international oil prices and currency movements have a “more pronounced impact” on inflation expectations and spending versus changes in policy rates.
“This underlines the significant effects of supply-side shocks on inflation expectations and economic activity.”
“Supply-side shocks are generally considered temporary and short-lived effects on prices and do not necessarily justify a monetary policy response,” she added.
The BSP researchers said central banks “must remain vigilant to prevent these shocks from leading to second-round effects.”
“Central banks should continue to closely monitor price developments of goods and services, even if inflation is within target, as households tend to form higher inflation expectations during this period.”
“Clear communication is crucial to curb these expectations and keep them in line with the inflation target. Understanding the potential effects of supply-side shocks on inflation expectations and subsequently on household consumption could also help tailor the necessary responses from central banks.”
The BSP began its easing cycle in August last year, cutting rates by a total of 75 basis points to bring the benchmark to 5.75%.
BSP Governor Eli M. Remolona Jr. has said there is still room to cut rates further as the current policy rate is still restrictive.
The next interest rate-setting meeting of the Monetary Board is on February 13. Luisa Maria Jacinta C. Jocson