Philippine inflation to rocket to 5.4% by end 2012

This rise will reflect the country's pending electricity tariff adjustments.

According to Nomura's Asia Special Report, headline and core inflation are highly sensitive to changes in commodity prices, and so is monetary policy.

Here's more from Nomura:

In our baseline scenario, we expect inflation to rise in H2 2012 but only gradually, in part reflecting the pending electricity tariff adjustments. Core inflation should also follow a similar path as domestic demand remains steady. For 2013, we expect it to rise further as election-related spending rises.

Under scenario 1, headline inflation would accelerate rapidly, reaching 5.4% by Q4 (versus our baseline of 3.7%) and peak at 6.9% by Q2 2013. Exacerbating the increase in the electricity tariffs, increases in food prices will translate to large increases in headline CPI, given its 39% weight on the CPI basket and the absence of subsidies.

The pass through to inflation expectations is quick as a result. Alternatively, a sharp drop in food and energy prices, as envisaged in scenario 2, would lead to a sharp decline in CPI, although CPI tends to be more sticky when declining. This is why in scenario 2 we only see the drop in CPI more prominently to 1.5% by Q1 2013 from 2.4% in Q4 2012.