Second-Round Effects and Asymmetry in Oil and Food Price Shocks to Inflation

Successive supply shocks led to above-target inflation for the Philippines from 2021 to 2023. Formulating the optimal policy response to bring inflation back to target requires central banks to have estimates of the direct and indirect pass through of supply shocks to domestic inflation. We estimate the direct and second round effects of shocks to global oil, global food, and domestic rice prices on various measures of inflation as well as inflation expectations using local projections methodology. In addition, we examine the asymmetry in the pass-through of price increases vis-à-vis a price reductions. Global oil and food price shocks produce significant and persistent inflationary responses that trigger further second-round effects and a significant but lagged impact on month-ahead inflation expectations. Decomposing realized inflation, the impact of global oil shocks has historically been larger than food shocks. Second-round effects from oil shocks are larger than its direct effects, while the latter is larger for global food and domestic price shocks. This is consistent with the role of oil as an intermediate good, which is in contrast with both food and rice which are considered final commodities. Assessing the asymmetry of shocks, headline and core inflation were found to respond asymmetrically to oil price shocks, although the effect does not persist for more than a month. Policymakers must continue to monitor the emergence of second-round effects and ensure that inflation expectations are well-anchored, especially during large, positive oil and food price shocks.