DON’T just blame the higher taxes or global factors like oil prices. “Faulty” forecasting that morphed into a “self-fulfilling prophecy” was one of those that fueled inflation in 2018, according to a ranking Department of Finance (DOF) official who had been the agency’s pointman in lobbying Congress to pass the Tax Reform for Acceleration and Inclusion (TRAIN) law.
Inflation this year, said Finance Undersecretary Karl Kendrick T. Chua, was also driven by expectations of a faster climb in prices resulting from faulty forecasting done by some analysts, whose projections were off the mark by as high as plus or minus 0.4 percentage points from the official rates announced by the Philippine Statistics Authority (PSA).
Chua said an analysis done by the DOF’s Strategy, Economics and Results Group (SERG) on the inflation forecasts of several economists and analysts from 13 prominent institutions from January to November this year show that the absolute deviations were as high as 0.4 percentage points, representing an estimated margin of error of around 15 percent.
In statistics, forecasts with MOE above 10 percent are considered weak estimates, the DOF explained.
“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 an MOE of between 11 and 14.9 percent,” Chua said.
He said the DOF recognizes that rising inflation, especially in the third quarter, was mostly driven by food supply issues, the peso depreciation, growing consumer demand, and higher oil prices in the global market. However, inaccurate forecasts, such as these, may have pushed up inflation expectations as well, ultimately contributing to higher prices for Filipino families.
The average absolute deviations from the official inflation rate computed by SERG from January to November this year ranged from 0.16 percentage points, or an MOE of 6 percent, to a high of 0.39 percentage points, with an MOE of 14.9 percent.
“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.
The TRAIN law, as projected by the DOF, accounted for only 0.4 to 0.7 percentage points of the 5.2 average inflation rate for the first 11 months of the year.
The 13 institutions and their analysts covered by the SERG study on inflation forecasts were: Alvin Ang of the Ateneo de Manila University; Angelo Taningco of Security Bank; Michael Ricafort of Rizal Commercial Banking Corp.; Euben Paracuelles of BDO-Nomura; Victor Abola of the University of Asia and the Pacific; Ruben Asuncion of Union Bank; Nicholas Mapa and Joey Cuyengkeng of ING; Shashank Mendiratta, Eugenia Victorino, Jennifer Kusuma and Betty Rui Wang of ANZ; Emmanuel Leyco of the Asian Institute of Management; Mitzie Conchada of De La Salle University; Guian Dumalagan of Land Bank of the Philippimes; Ildemarc Bautista of Metrobank; and Emmanuel Lopez of the University of Santo Tomas.
“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,” said Assistant Finance Secretary Antonio Joselito G. Lambino II.