THE Bangko Sentral ng Pilipinas (BSP) said household estimates of inflation have been improving in accuracy since 2014, possibly influencing monetary policy because household expectations are a factor in policy decisions.
In an economic newsletter written by Alan Chester T. Arcin and Michael Lawrence G. Castañares, the BSP’s Department of Economic Research said household views on inflation have been demonstrating a narrower upside bias, first noted during the 2008 financial crisis, when high inflation may have conditioned their expectations.
According to the study, inflation was high between 2005 and 2008, possibly skewing households’ inflation expectations upwards.
Inflation peaked at 9.1% in November 2008, at the height of the Global Financial Crisis.
“However, from 2014 onwards, this bias was considerably reduced, coinciding with more favorable inflation outturns,” the study found, adding that inflation was mostly within target in 2014 to 2020.
Household inflation expectations are tracked in the central bank’s Consumer Expectations Survey (CES). The BSP also conducts a Business Expectations Survey (BES), and Survey of Professional Forecasters (SPF). The survey findings ultimately serve as inputs for monetary policy setting.
“This improvement may be due to the inclusion of reference inflation rates in the CES questionnaire, some gains in the BSP’s advocacy for economic and financial literacy, improved inflation environment, and better anchoring of inflation expectations with increased credibility of the BSP,” according to the study.
According to the central bank, inflation expectations of businesses also tend to exhibit a bias to the upside, possibly reflecting companies’ sensitivity to changes in production costs.
Meanwhile, private-sector economists produce more accurate inflation forecasts compared with households and businesses, with a margin of error closer to zero.
The data analyzed in the study is from the CES surveys between the first quarter of 2020 and the first quarter of 2022. BES surveys studied were from the fourth quarter of 2018 to the second quarter of 2022.
The SPF results are from between January 2014 and August 2022.
“Expectations of future inflation can influence the consumption and savings decisions of households as well as the price-setting behavior of firms,” the study added.
“For instance, expectations that future prices would increase could entice households to purchase sooner rather than later, translating to stronger current demand. In turn, firms could raise prices in response to the observed pick-up in sales,” it said.
“Moreover, if households continue to anticipate faster inflation in the future, clamor for wage hikes could emerge and further fuel the inflationary process. Inflation expectations, therefore, are an important determinant of actual inflation as they shape the decisions of economic agents,” it added.
In the central bank’s latest CES and BES survey, consumer and business sentiment declined in the fourth quarter due to elevated prices of goods, higher interest rates, and a weakening of the peso.
The consumer confidence index slipped to -14.6% from -12.9% in the third quarter, the 10th straight quarter when the survey returned a pessimistic view. The business confidence index fell to 23.9% from 26.1% in the prior quarter, marking a second straight decline.
Last week, BSP Governor Felipe M. Medalla said the central bank is likely to raise benchmark interest rates by 25 or 50 basis points (bps) next month, citing the need to anchor inflation expectations.
The Monetary Board has raised rates by a total of 350 bps last year to tame inflation and slow the peso’s decline. This brought the policy rate to a 14-year high of 5.5%.
Monetary authorities are scheduled to meet on Feb. 16 for their first policy meeting this year. — Keisha B. Ta-asan