Headline inflation eased to 6.8 percent in May from 7.2 percent in April, helped by fuel price rollbacks and slower increases in selected food items. Core inflation, however, accelerated to 4.1 percent from 3.9 percent, signaling that broader price pressures remain sticky.
For the first five months of the year, headline inflation averaged 4.5 percent, while core inflation stood at 3.4 percent.
Fuel relief
The latest inflation reading reflected the impact of fuel price rollbacks implemented over the past month, with transport's contribution to inflation declining to 1.5 percent from 1.9 percent previously, BPI lead economist Emilio S. Neri Jr. said in a statement.
More stable global oil prices in May, partly supported by a ceasefire in the Middle East, also helped ease price pressures.
Inflation for food, housing, and utilities moderated during the month as price increases for fish, fruits, and vegetables slowed. Rice prices, however, continued to rise at a faster pace year-on-year.
Policy signal
Despite the softer headline figure, the BSP should view the latest inflation data as an opportunity to reinforce its commitment to price stability rather than delay monetary tightening, the economist said.
"The softer inflation print should be viewed less as an opportunity to delay rate hikes and more as a chance for the BSP to demonstrate its commitment to restoring price stability and counter perceptions that it is behind the curve on inflation," Neri said.
While higher interest rates could dampen economic activity by raising borrowing costs for businesses and consumers, the long-term economic damage from persistently elevated inflation may be more severe, warranting a stronger policy response.
Peso support
The case for tighter monetary policy extends beyond inflation management.
According to the economist, preserving the country's foreign reserves and supporting the peso provide additional reasons for raising rates.
Persistently high inflation could reduce the attractiveness of peso-denominated assets, potentially triggering portfolio outflows and placing further pressure on the local currency.
Rate hikes could help stabilize the peso and ensure that any depreciation remains orderly.
Managing expectations
Although much of the current inflationary pressure remains supply-driven, monetary policy can still play an important role in shaping inflation expectations and limiting currency volatility.
A decisive policy response from the BSP would help anchor expectations that inflation will eventually return to target levels while mitigating the inflationary effects of peso weakness.
"A strong monetary response would reinforce the BSP's commitment to price stability and help anchor inflation expectations," the economist said. —Ed: Corrie S. Narisma
