Forecasting monthly inflation in the Philippines

Abstract

Inflation, in recent years, has become a concern not only of national pollcymakers but also of individual households. The unprecedented rise in the prices of goods and services in the country in 1984 had invariably affected many sectors of society and understandably made planners and decision-makers more concerned about closely monitoring price increases and keeping them clown to a minimum. This Monograph Series No. 10 features a model for forecasting domestic inflation on a monthly basis. The model was developed by Roberto S. Mariano and associates at the Philippine Institute for Development Studies (PiDS) with the aim of having it adopted and used by the National Economic and Development Authority (NEDA) and other interested parties for short-term forecasting purposes, The Monograph describes a statistical procedure for forecasting monthly inflation as measured by changes in the consumer price index (CPI) for the entire Philippines. The procedure centers around a statistically estimated price equation which explains the dynamic behavior of monthly CPI levels in terms of their own past values and cost-push and demand-pull factors. As a response to an immediate concern, this central price equation offers the novelty of its being of a short-term nature and its incorporation of institutional realities, such as the inclusion of a dollar black market premium. It is hoped that the model will be useful in anticipating inflationary movements and in instituting the appropriate policy adjustments that could ultimately assist in lessening the woes of the consuming public.