The country’s above-target inflation will fall within the two percent to four percent target range by the fourth quarter of this year to 3.4 percent, according to forecast by the Bangko Sentral ng Pilipinas (BSP).

The BSP said that by the first quarter of 2024, the inflation rate will be around 2.4 percent but will “accelerate near the upper end of the target range” in the next two quarters, or the second and third quarters.

The expectation is that by the second quarter of 2024, the consumer price index (CPI) will average at 3.6 percent and by the third quarter next year, at 3.7 percent.

The factors behind the forecast levels are positive base effects, higher crude oil prices, and the lagged impact of minimum wage adjustments, before settling slightly above the midpoint of the target in 2025, the BSP said Monday, Aug. 21. 

“Estimated negative base effects until January 2024 will be favorable for the inflation path,” the BSP noted in August 2023 Monetary Policy Report (MPR), citing the normalization of global commodity prices after the sharp uptick in March 2022 amid the Ukraine war.

On the domestic front, the BSP said the waning impact of transport fare hikes in the last six months of 2022 were the negative base effects for the same period this year, hence the decelerating inflation. “However, base effects are estimated to turn positive from February to July 2024,” it also noted.

The CPI, currently at 6.8 percent as of end-July year-to-date, will return to the target range in the last quarter of the year “in the absence of further supply-side shocks.”

The 3.4 percent inflation projection for the fourth quarter is however higher than the May 2023 MPR forecast of a flat three percent.

At the time, back in May, the BSP was presenting the same upside risks to inflation that it showed on the August 2023 MPR, but excluding the CPI data of the lower June and July actual inflation.

Upside risks still include more transport fare hikes and minimum wage adjustments, as well as higher prices of key food items and the impact of El Niño weather conditions on food and electricity prices which could lead to renewed second-round effects.

As of its Aug. 17 Monetary Board policy meeting, the BSP forecasts CPI of 5.5 percent for this year which is still way beyond the target, while the projection for 2024 is 3.3 percent and 3.4 percent for 2025 -- both are within the target band.

The latest headline CPI number which was 4.7 percent for the month of July, was a significant decline from June’s 5.4 percent. The core CPI has also started to slow down to 6.7 percent in July from 7.4 percent in June. The difference between headline and core inflation is that the latter does not include certain items with volatile price pressures to allow inflation-targeting central banks such as the BSP to see see the underlying trend in consumer prices.

Meanwhile, as of its August analysis, the BSP said inflation expectations for 2023 has remained steady while factors indicate further easing of inflation for 2024 and 2025.

This was shown in the latest survey round on private sector economists’ inflation expectations which the BSP said showed unchanged mean inflation forecast from the July survey of 5.5 percent for 2023.

The mean inflation forecast for 2024 was also lower at 3.5 percent from 3.6 percent in the July survey. For 2025, analysts also predicted a lower inflation of 3.4 percent from the previous 3.6 percent estimate.

Analysts expect inflation to continue easing in the near term due mostly to negative base effects. However risks to the inflation outlook are still tilted to the upside in 2024 and 2025.

In July, inflation decelerated because most food items such as fish and sugar, showed slower price hikes. Meat prices also declined with lesser consumer demand.

Non-food inflation also slowed last month amid lower electricity rates, LPG prices, and slower increases in rents. Base effects also slowed the year-on-year transport inflation in July.