Economists raise inflation forecasts for 2018-2020

Private sector economists surveyed by the central bank raised their inflation forecasts for 2018 up to 2020 even as they see the impact of tax measures starting to ease by next year.

Higher inflation means that the general level of prices is going up. This means that more money will be needed to pay for goods and services.

Based on the Bangko Sentral ng Pilipinas (BSP) inflation quarterly report, analysts' inflation forecast was raised to 4.5 percent for 2018, up from 4.1 percent earlier estimated due to higher oil prices, weaker peso, and recent taxes.

Mean inflation forecasts for 2019 and 2020 were also adjusted higher to 3.8 percent from 3.7 percent previously (March survey) and 3.6 percent, respectively.

According to the BSP, analysts pointed to “key upside risks to inflation in 2018 (which) include higher and volatile global oil prices, weakening peso, effects of the implementation of the TRAIN (Tax Reform for Acceleration and Inclusion or Republic Act 10963) law on prices of domestic goods (as well as) rising global inflation, among others.”

Analysts noted that risks to inflation in 2018 remain tilted to the upside due to these factors. It added that the higher government spending on infrastructure, potential rise in wages, adverse weather conditions, and higher utility rates are also inflationary pressures.

The key downside risk to inflation, in the meantime, should come from the removal of quantitative restrictions on rice importation which could reduce domestic rice prices.

But, after a year or two, economists expect inflation to “moderate, stabilize, and settle within the two-four percent target range in 2019 to 2020 as TRAIN’s inflationary impact tapers off.”

Based on the probability distribution of the forecasts provided by 20 out of 24 economists surveyed during the second quarter, it indicated a small 16.6-percent probability that average inflation for this year will settle within the target band of two-four percent and much wider 82.8 percent chance that it will breach four percent. In the first six months, the average stood at 4.3 percent.

Next year, they think there is a 60.8-percent probability that inflation will stay within the target range.

Another survey, the June, 2018 Consensus Economics inflation forecast, showed a slightly lower estimate of 4.4 percent but still higher than previous survey of four percent (March 2018). The mean inflation forecast for 2019 was also higher at 3.7 percent from 3.5 percent previously.

Two other BSP surveys such as the second quarter 2018 Business Expectations Survey showed most businesses do expect inflation to increase in the next quarter but they see consumer prices keeping within the BSP inflation target in the third quarter at about 3.8 percent.

The Consumer Expectations Survey, on the other hand, said Filipino consumers expect inflation to shot up beyond the government target in the next 12 months, or about 4.2 percent.

There were 24 respondents in the BSP’s survey of private sector economists last month. The survey was conducted from June 13 to 18. The BSP included 16 respondents in the Consensus Economics’ survey in the same period.

During the inflation quarterly report presentation before the weekend, BSP Governor Nestor A. Espenilla Jr. particularly noted the private sector economists’ higher inflation forecasts for 2018 until 2020, but stressed on the temporary and transitory effects of tax measures on the prices of domestic goods and services.

Espenilla said the Monetary Board will now consider what he called “strong follow-through monetary adjustment” on August 9 as they assess the weight of supply-side price pressures. How aggressive the policy action will be will depend on the relevant data, particularly the August inflation which will be released two days earlier, on August 7.

The BSP currently has a 2018 average inflation forecast of 4.5 percent and 3.3 percent for 2019.