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. As such, we estimate and examine the asymmetry of 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. Global oil and food price shocks were found to produce significant and persistent inflationary responses that triggered further second-round effects. Decomposing realized inflation, the impact of global oil shocks has historically been larger than global food shocks. Second-round effects from oil shocks are as prominent as its direct effects, while the latter is larger for global food and domestic rice shocks. Additionally, core inflation and inflation expectations were found to respond asymmetrically to oil and rice price shocks, respectively. Policymakers should thus closely track second-round effects and ensure well-anchored inflation expectations, particularly during periods of significant shocks to oil and food prices.