The Bangko Sentral ng Pilipinas (BSP) has developed another surveillance tool to determine and assess the impact of supply-related shocks on domestic prices, second-round effects and inflation expectations.

Based on a report, the BSP said it was necessary to construct the Philippines Supply Chain Pressure Index (PSPI) since during and after the Covid crisis, the BSP needed to have an additional monitoring tool to accurately assess the impact of the global supply shocks, the shortages and resulting price increases, on the domestic prices.

So far, the BSP said that preliminary estimates and based on potential applications of the PSPI, it showed that it could effectively capture “notable events that precipitated supply-related shocks in the domestic economy.”

These events include the tight domestic supply conditions due to weather disturbances and typhoon Yolanda in 2013; the imposition of a truck ban in Manila and ensuing port congestion in 2014; elevated crude oil inventory from 2015 to 2017 following the US shale boom; the delay of rice imports in 2018; and the impact of the rice tariffication law on domestic grains inventory in 2019.

More significantly, the BSP said PSPI captured the disruptions caused the pandemic lockdowns in 2020; global supply chain disruptions in 2021; Russia's invasion of Ukraine starting in 2022; and the food export bans implemented by several countries amid a global shortage of fertilizers in 2023.

According to the BSP, “to enhance the analysis of the current study and capitalize on the potential applications of the new indicator, the BSP will develop econometric models to quantitatively assess the impact of supply shocks—as measured by the PSPI—on key macroeconomic variables such as domestic prices, second-round effects, and inflation expectations, among others.”

Furthermore, the BSP said it “intends to extend the PSPI to include supply pressures emanating from the service sector, including labor shortages resulting from demographic shifts and migration.”

Potential for the new index

During the height of the pandemic, the BSP said available indicators “failed to provide a comprehensive overview of supply chain-related developments” and “this prompted the BSP to develop an indicator that can quantitatively assess the supply-side pressures impacting the domestic economy.”

The PSPI is a tool for the BSP to “estimate the impact of supply-related shocks on domestic prices, second-round effects, and inflation expectations (as it) offers a systematic approach to analyzing supply chain dynamics by breaking down shocks into components that can be easily monitored and assessed.”

The central bank also said that “integrating the PSPI into the BSP's analytical framework will enhance the institution's capacity to monitor developments that pose risks to the inflation outlook, thereby strengthening its ability to fulfill its primary mandate of maintaining price stability.”

Basically, the new index is a surveillance toolkit to monitor supply-related risks that could potentially impact the formation of inflation expectations, said the BSP.

During the years 2020 until 2021 when the Global Supply Chains (GSCs) were disrupted due to lockdowns which halted business operations, there was delayed production of manufacturers while critical logistics facilities were also limited.

By 2022, when the pandemic restrictions have started to ease, GSCs continued because of geopolitical tensions in Eastern Europe and the Middle East, along with adverse weather disturbances, said the BSP.

Governments then turned to non-monetary interventions to resolve the shortfall in supply while central banks “tightened financial conditions to anchor inflation expectations and prevent second-round effects from materializing.”

Meanwhile, the BSP said that to ensure PSPI will correctly interpret supply shocks, it integrated global  and domestic supply indicators into the index's structure. These include inventory Purchasing Manager’s Index; domestic supply of select food commodities; global oil inventory; and world food prices.

Logistics indicators were also included to monitor transport disruptions and how it affects the cost of moving goods across domestic industries and GSCs.