BSP study: Faster inflation expectations fuel higher spending among PH households

The discussion paper, authored by BSP Research Academy researchers Faith Christian Cacnio and Cymon Kayle Lubangco, explored the impact of households’ perception of future price changes on their consumption decisions. They used the BSP’s Consumer Expectations Survey as its main data source.

The researchers found that Filipinos increase their spending on essential commodities such as food, non-alcohol beverages, fuel and utilities in the near future if they expect prices to continue rising in the future.

They also found that households tend to raise their inflation outlook when shocks to international oil and rice prices occur. But monetary policy issues such as benchmark rate adjustments and the appreciation of the Philippine peso against the US dollar cause households to hold back on spending.

“This highlights the significant effects of supply-side shocks on inflation expectations and economic activity,” the researchers wrote.

The researchers also attributed the impact of exchange rate fluctuations on inflation expectations and consumption to the remittances received by households, as nearly a third of Philippine households rely on remittances to augment their income.

“Given the country’s dependence on imports for essential commodities like rice and oil, discussions about exchange rate movements also often include analyses of their potential effects on the pass-through of import prices to domestic prices,” they said.

The BSP found that remittances from Filipinos abroad grew to $34.6 billion in the first 11 months of 2024. (READ: Remittances from Filipinos abroad grew to $3.12 billion in November 2024)

In its latest Consumer Expectations Survey, the BSP found that Filipino households expect faster inflation and a weaker peso in the first quarter of 2025.

Filipinos also expect inflation to continue quickening in the near-term and go well-above the government’s target range of 2% to 4%. Inflation averaged at 3.2% in 2024 despite a last-month acceleration in December.

Since more households tend to expect elevated prices for goods like rice even when actual inflation is within target, the researchers suggest central banks to closely monitor price developments. “Effective communication is also important to temper households’ inflation expectations and ensure they remain aligned with the inflation target,” they said.

They also recommended central banks to remain vigilant to shocks to international oil prices and exchange rate fluctuations to prevent second-round effects. This is when agents pass on the inflationary impact to wages and prices.

The BSP began the easing cycle of the benchmark rate in August 2024 and ended the year with a 25-basis-point rate cut, bringing the policy rate to 5.75%.

Finance Secretary Ralph Recto earlier said the Philippine central bank may cut rates further by 75 basis points in 2025 but at a slower pace. – Rappler.com