UBS ramps up inflation forecast on RP by 1.4 pts

04/19/2008

The continued increases in the prices of food and fuel products prompted UBS Investment Research to raise its inflation projection for countries in Asia with inflation in the Philippines at 6.7 percent from the previous 5.3 percent.

In a research note released April 17, 2008, UBS economist Edward Teather said the increase in the country’s consumer price index (CPI) forecast for this year is about 1.4 percentage points.

For 2009, the investment bank foresee inflation in the country at 4.2 percent, .5 percentage points higher than the earlier forecast of 3.7 percent.

UBS’ inflation forecast for this year is higher than the three to 5- percent target of the government while its 2009 forecast is within the 2.5 percent to 4.5-percent target of the government.

UBS said the rising price of rice “may have been triggered by major exporting countries curtailing supply.”

“It is also part of a broader trend within grain and hence food prices,” the research note said. The research note raised the possibility that this situation is “part of a signal to divert productive resources to that sector of the economy.”

“As such, the direct impact of the increase in rice prices in Asia is probably more about income transfer from food consumers to producers within and across economies,” it pointed out.

Teather added they consider the current situation “as part of an inflation trend, rather than the source of the trend itself.”

But he said “this could change depending on the policy response.”

“Governments and Central Banks will likely be greatly tempted to resort to monetary accommodation where incomes are low and the burden of rising food prices on household incomes high,” the note added.

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