DOF blames faulty forecasting for high inflation expectations

MANILA, Philippines — The Department of Finance (DOF) said yesterday the faulty forecasting done by some analysts may have also contributed to high inflationary expectations and helped push up consumer prices this year.

Finance Undersecretary Karl Kendrick Chua said while the DOF recognizes that rising inflation was mostly driven by food supply issues, strong demand, peso depreciation, and higher global oil prices, inaccurate forecasts may have also pushed up inflation expectations, contributing to the higher prices of goods.

“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,” Chua said in a statement released over the weekend.

Chua, citing an analysis done by the DOF’s Strategy, Economics and Results Group (SERG), said the average inflation forecasts of several economists and analysts from 13 institutions from January to November were off the mark by as high as 0.4 percentage points, representing an estimated margin of error (MOE) of around 15 percent.

Meanwhile, the lowest average deviation recorded was 0.16 percentage points, or an MOE of six percent.

“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.

According to Chua, forecasts with margins of error above 10 percent are considered weak estimates.

He said some of the highest MOEs were observed in the forecast of analysts from two of the largest banks in the country.

The analysts covered by the SERG study include Alvin Ang of the Ateneo de Manila University; Angelo Taningco of Security Bank; Michael Ricafort of the 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 Philippines; Ildemarc Bautista of Metrobank; and Emmanuel Lopez of the University of Sto. Tomas.

Meanwhile, Chua said SERG also analyzed the quarterly gross domestic product (GDP) forecasts done by the same institutions.

He said the average absolute deviation in GDP forecasts covering the four quarters of 2016 and 2017, and the first three quarters of 2018 reached as low as 0.25 percentage points with an MOE of 7.4 percent to as much as 0.45 percentage points or an MOE of 13.7 percent.

“The method we used for analyzing both the inflation and GDP forecasts is standard and simple. In the case of inflation, for every month, we calculated the absolute deviation of each analyst’s forecast from the actual inflation and then averaged the results for the available data points,” Chua said.

“The margin of error was estimated by multiplying the average absolute deviation by two, and then dividing that figure by the 2018 year-to-date inflation.”

“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,” Finance assistant secretary Antonio Lambino said.