Special Report: September 2014

Inflation Update and Outlook

September inflation eased to 4.4% from 4.9% in August, lower than the 4.5%
consensus and well within the BSP’s expectation of 4.1-4.9%. Year-to-date
inflation currently stands at 4.4%.

The slowdown in inflation is primarily driven by the deceleration of food inflation

to 7.4% from the peak of 8.3% in August due to ample supply of rice, cereals and
vegetables.

Housing, Water, Electricity, Gas and Other fuels (HW) index rose at a slower
pace of 2.2% (vs 2.7% in August 2014) due to lower electricity generation
charges and price rollbacks in LPG and kerosene.

Continued downtrend in global oil prices continue to weigh down local pump
prices prompting price rollbacks in diesel and gasoline, causing the slower
adjustment of the transport index at 0.7% (vs. 1.1% in August 2014).

Inflation growth rates, by commodity group

Inflation growth rates, selected food items

Inflation Outlook
Food prices have started easing and the trend should continue till year-end with
the advent of harvest season and as NFA rice imports come in by October 15.
Barring any major typhoon devastation in the 4th Quarter, decelerating food
inflation should slow overall consumer prices.

While outlook for global oil prices continue to be on the downside, we do not
discount any uptick in the Transport index as the DOTC announced that it may
grant a fare hike for the Metro’s rail systems by December.

With 2014 inflation expected to settle within target and a softer inflation outlook
until year-end, we see the BSP to take a breather from its tightening cycle
especially after being aggressive last September (hike in policy rates and SDA
rate).