## Decomposing the Inflation Dynamics in the Philippines

_IMF Working Papers, July 12, 2019_

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**Canonical URL:** [Decomposing the Inflation Dynamics in the Philippines](https://www.imf.org/en/publications/wp/issues/2019/07/12/decomposing-the-inflation-dynamics-in-the-philippines-46988)

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## Bibliographic details
- Authors: Si Guo, Philippe D Karam, Jan Vlcek
- Published: July 12, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498319324.001

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### Overview
- Inflation rates rose sharply in the Philippines during 2018.
- Understanding demand and supply sources of inflation pressures is key to the monetary policy response.
- Qualitatively, indicators pointed to inflation pressures from both supply and demand in 2018:
  - Supply factors were largely associated with commodity-price shocks.
  - Demand factors were inferred from wider non-oil trade deficits seen in the Philippines.
- Quantitatively, a semi-structural model was deployed to decompose contributions of various shocks to inflation.

### Methodology
- A semi-structural model was used to decompose inflation into contributions from supply and demand shocks and other drivers.
- A counterfactual exercise was conducted to assess implications of delayed monetary policy tightening.

### Key Findings
- Supply factors (mainly global commodity prices) played a prominent role in explaining the rise in inflation in 2018.
- Demand factors also contributed to inflation in a non-negligible way, supporting the need for tighter monetary policy in 2018.
- The size of the estimated output gap (an important indicator of demand pressures) could be larger when considering the widening trade deficits in 2018.
- A delayed monetary policy tightening can be costly:
  - It can result in higher inflation rates.
  - It may require larger and more aggressive interest rate hikes to bring inflation under control, based on the counterfactual exercise.

### Policy Implications and Recommendations
- Monetary policy tightening in 2018 was justified by the combined role of supply and demand factors.
- Early and decisive policy action can reduce the costs associated with stabilizing inflation; delays can necessitate more aggressive interest-rate responses.
- Monitoring both global commodity-price developments and domestic demand indicators (including non-oil trade deficits and the output gap) is important for timely policy decisions.

*Si Guo, Philippe D Karam, and Jan Vlcek. "Decomposing the Inflation Dynamics in the Philippines", July 12, 2019.*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/07/12/decomposing-the-inflation-dynamics-in-the-philippines-46988_