Insights on inflation expectations in the Philippines from a household survey

Abstract

The study contributes to the literature on expectations by providing insights on household expectations from an emerging market and inflation targeting country like the Philippines. Using the results of the Consumer Expectations Survey (CES), a quarterly household survey conducted by the Bangko Sentral ng Pilipinas (BSP), the study is the first to look at the characteristics and determinants of household inflation expectations in the Philippines at a granular level. Results show that survey-based household expectations in the country are not rational. Filipino households exhibit an upward bias in their forecast of future inflation and they tend to rely more on information about past inflation to form their expectations. Nonetheless, in recent years, households have started to incorporate information about future outcomes in their inflation expectations process. To determine the factors that drive household expectations in the Philippines, aggregated (i.e., time series) and disaggregated (i.e., pooled data) data from CES quarterly survey rounds between 2010 and 2020 are used on a standard inflation expectations model. Empirical results point to a significant effect of income conditions, perceptions on economic and financial conditions, the inflation target, and demographic factors (e.g., educational attainment, marital status) on the formation of household expectations in the Philippines. Based on the findings and observations, the study draws insights for central bank communication strategy, particularly in influencing household expectations.