THE DEPARTMENT of Finance (DoF) said “faulty” inflation forecasts by analysts in 2018 raised inflation expectations, thereby contributing to the actual rise in prices.
In a statement on Sunday, the DoF said analysts’ inflation forecasts between January and November were off by as much as 0.4 percentage points from the actual data released by the Philippine Statistics Authority (PSA).
The Finance department’s Strategy, Economics and Results Group (SERG) conducted a study based on the forecasts of analysts and economists from various private and academic institutions in BusinessWorld’s monthly poll during the first 11 months of the year.
“The 13 analysts included in the SERG study are from prominent institutions which publicly announce their forecasts in major leading newspapers. However, some of the forecasts swung so much that some of the calculations we did yielded a margin of error (MOE) of between 11 and 14.9%,” Finance Undersecretary Karl Kendrick T. Chua said.
“We did the assessment to see how well analysts are in forecasting inflation and the results show how far off some of them were in their projections. We think that these forecasts have also driven inflation expectations that, as we know from global experience, have a tendency to become self-fulfilling prophecies,” he added.
Expectations of higher inflation tend to encourage consumers to buy goods ahead of the price increases, effectively feeding into actual inflation.
Inflation in consumer prices rose to as high as 6.7% in September and October, before falling to 6% in November. Average inflation in the January-November period was 5.2%, above the central bank’s 2-4% target. The average is at the high end of the government’s official 4.8-5.2% forecast for this year.
The government itself has likewise been off with its inflation forecasts. The Development Budget Coordination Committee (DBCC) initially set a 2-4% inflation target band for 2018 and 2019 in December 2017, but revised the 2018 forecast to 4-4.5% in April. In its October meeting, it adjusted upwards the 2018 and 2019 forecast to 4.8-5.2%, and 3-4%, respectively.
The DoF’s Tax Reform for Acceleration and Inclusion (TRAIN) law was largely blamed as a trigger for rising prices as it added taxes on fuel, sugar-sweetened beverages, automobiles, tobacco, coal, and minerals, among others. It also removed some value-added tax exemptions, although it lowered personal income taxes, estate, and donor’s taxes.
The DoF said that TRAIN only accounted for about 0.4 percentage points of inflation, and that its effects were more pronounced only in the first three months of the year. In the succeeding months, inflation was mainly caused by high world oil prices, a weak peso, food supply and distribution issues, especially rice, fish, and vegetables, as well as the effect of typhoons.
The government addressed inflationary concerns by issuing administrative orders to boost food supply, and ease red tape in connection with food imports and distribution.
Mr. Chua also said analysts were also off on their quarterly gross domestic product (GDP) growth forecasts.
He said that deviations of the forecasts from the actual figure for the first three quarters of 2018 ranged from 0.25 percentage points with a 7.4% MOE, to 0.45 percentage points with a 13.7% MOE.
The DoF said that only eight of the 13 institutions had acceptable margins of error.
“All of us should remain cognizant of negative unintended consequences. Researchers are taught that early on in college and graduate school. It is an even more crucial lesson when your research is no longer subject to a university’s Institutional Review Board,” Assistant Finance Secretary Antonio Joselito G. Lambino II said. — Elijah Joseph C. Tubayan

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