The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse—Ludwig von Mises
In this issue
Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?
I. A Closer Look at the Flawed Foundations of the CPI
II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?
III. A Brief Look at Inflation Era 1.0; Key Questions
IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty
V. Demand Side Inflation: Record 11-Month Public Spending
VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System
VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields
VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave
Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?
A sharp increase in liquidity conditions last November, driven by BSP measures and bank activities, has likely spilled over into prices. Could December’s CPI signal the start of a third wave in the current inflation cycle?
I. A Closer Look at the Flawed Foundations of the CPI
Before we proceed with our exegesis of the Philippine Consumer Price Index (CPI) from last December, it is essential to clarify our position, which diverges from the mainstream acceptance of the inflation benchmark.
We argue that the CPI is structurally flawed for the following reasons:
1. Subjective Nature of Personal Utilities
Because people engage in exchanges to improve their well-being, prices reflect the subjective evaluations of individual economic participants.
As such, comparing personal utilities is inherently impossible because they are subjectively determined, depending on the specific circumstances of an individual, including their operating environment, preferences, values, and hierarchy of needs.
As we explained in 2022 (bold original):
Yet, the thing is, the most substantial argument against the CPI comes from its essence: it is impossible to quantify or average the spending activities of individuals. Everyone has different 'inflation.' The consumption basket varies from one individual to another. And the composition of an individual's consumption basket is never static or constant because it is subjectively determined; it is dynamic or consistently changes.
Therefore, because the assumption used to generate an estimated CPI is fallacious, the CPI is structurally flawed. (Prudent Investor 2022)
2. CPI as a Political Statistic
The CPI is not merely an economic measure; it is, arguably, the most significant political statistic.
From the Philippine Statistics Authority (FAQ): CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product. Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases.
In this context, the political objectives of the administration may influence the calculation of economic indicators, rather than reflecting actual estimates.
For example, the Consumer Price Index (CPI) plays a significant role in determining bond market rates and interest rates. By understating the CPI, the government can effectively engage in "financial repression," which entails the implicit and artificial lowering of interest rates to subsidize government debt.
Moreover, beyond facilitating government borrowing, an artificially suppressed CPI also inflates GDP figures, creating a perception of stronger economic performance.
The periodic (six-year) base year adjustments used for calculating the CPI—intended to reflect the most current composition of goods and services—are inherently biased toward reducing inflation rates. Consequently, CPI figures would likely be higher if calculated using the previous base year of 2006 compared to the current base year of 2018.
3. The CPI Data and Official Narrative on Inflation
CPI data and the official narrative often portray inflation as an inherently supply-side-driven phenomenon.
The sectoral composition of the CPI baskets appears biased, fostering the perception that price increases (inflation) are predominantly caused by supply-side factors. This perspective is consistently reinforced by official explanations, which highlight supply disruptions as the primary drivers of inflation.
Ironically, however, the Bangko Sentral ng Pilipinas (BSP)’s policy responses have been predominantly demand-side in nature. These responses include interest rate adjustments, reserve requirement ratio (RRR) changes, and regulatory relief measures such as the credit card interest rate cap, as well as quantitative easing or liquidity injections. On rare occasions, political interventions, like the Rice Tariffication Law, address supply-side issues directly.
In reality, if prices were allowed to function freely, supply-side imbalances would typically resolve themselves in the short term.
Moreover, with a fixed money supply, an increase in demand for specific goods or services, leading to higher prices, would naturally result in reduced demand for other goods or services, causing their prices to decline. This dynamic reflects changes in relative prices (increases and decreases), which do not equate to a general rise in overall price levels. For example, households operating within fixed budgets and without access to credit exemplify this principle.
However, when prices for most goods and services rise simultaneously, it indicates a condition of "too much money chasing too few goods." In other words, a generalized price increase arises when the growth of money supply (via credit expansion) outpaces the growth in goods and services.
In the immortal words of Nobel Laureate Milton Friedman in an interview: (bold mine)
It [Inflation] is always and everywhere, a monetary phenomenon. It's always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output…
If you listen to people in Washington and talk, they will tell you that inflation is produced by greedy businessmen or it's produced by grasping unions or it's produced by spendthrift consumers, or maybe, it's those terrible Arab Sheikhs who are producing it. Now, of course, businessmen are greedy. Who of us isn't? Trade unions are grasping. Who of us isn't? And there's no doubt that the consumer is a spendthrift. At least every man knows that about his wife.
But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money. (Friedman, Heritage Foundation)
This underscores the reality that inflation is driven by excessive
monetary expansion rather than purely supply-side factors.
Aside from this author, has anyone pointed out the deepening reliance of GDP on money supply growth? (Figure 1, topmost graph)
4. The CPI as a Tool for Narrative Control
The BSP and the government’s approach to inflation management often involves shaping public perception through strategic "narrative control." A clear example of this is the establishment’s "pin-the-tail-on-the-donkey" CPI forecasting exercise:
-At the close of each month, the BSP releases a forecast range for the monthly inflation rate, usually spanning a margin of approximately 80 basis points.
-"Establishment experts" then publish their single-point predictions, which the media aggregates into a "median estimate."
-When the Philippine Statistics Authority (PSA) announces the official inflation rate, it almost always falls within the BSP’s forecast range—except during anomalous periods, such as the CPI spikes in 2022-2023.
This practice reinforces the establishment narrative and helps frame the public’s understanding of inflation within a constrained Overton Window, limiting alternative interpretations of its causes and dynamics.
As I elaborated in 2024 (bold and italics original):
In essence, they blame the supply side for inflation, but use demand-side instruments to manage it. This disconnect is often lost on the lay public, who are unfamiliar with the technical details surrounding the mechanics of inflation.
The general idea is that distortions from the supply side are seen as representing market failure, namely greed, and that the BSP is considered immaculate, foolproof, and practices Bentham's utilitarianism (for the greater good) when it comes to its demand-side policies. Therefore, it would be easier to sell more interventions when the authorities are perceived as saints.
Ironically, the BSP has been advocating for the "trickle-down theory" in its policies: subsidize demand while controlling or restricting supply (Kling,2016)
More importantly, the public is unaware of the entrenched "principal agent syndrome" in action: the BSP regulates these mainstream institutions. As such, the BSP indirectly controls the narratives or dissemination of information on inflation.
Make no mistake: the structural flaws of the CPI arise not only from a critical economic perspective but, more significantly, from a political dimension designed to shift the blame for price instability onto the market economy.
II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?
Our dialectic of the CPI’s critical flaws serves as the foundation for examining December’s CPI data.
Let us explore the issue from the perspective of the mainstream viewpoint.
Reuters, January 7: Philippine annual inflation quickened for a third straight month in December due to the faster pace of increases in food and utility costs, the statistics agency said on Tuesday. The consumer price index (CPI) rose 2.9% in December, higher than the 2.6% forecast in a Reuters poll, and was above the previous month's 2.5% rate. December's inflation print brought average inflation in 2024 to 3.2%, well within the central bank's 2%-4% target for the year, marking the first time since 2021 that the Philippines has achieved its inflation goal.
Though December marked the third consecutive monthly YoY increase, boosting the month-on-month (MoM) change, the upward momentum has not been strong enough to signal a decisive breakout from its year-on-year (YoY) downtrend. (Figure 1, middle image)
Typically, a MoM rate exceeding 1% is required to achieve this.
However, while food prices continue to play a significant role in driving up the headline CPI, their influence has been diminishing. This shift indicates broader sectoral contributions, primarily driven by housing, utilities, and transport in December. (Figure 1, lowest diagram)
The uptrend has been most pronounced in the transport sector, while momentum in housing and utilities has recently gained strength. (Figure 2, topmost chart)
The broadening increase in prices has also led to an expansion in the non-food and energy CORE CPI. Both the CORE and headline CPI appear to have made a turn reminiscent of patterns seen in 2015 and 2022. (Figure 2, middle pane)
If this momentum persists, the headline CPI may be transitioning into the third wave of the current inflation cycle, which has now entered its tenth year.
III. A Brief Look at Inflation Era 1.0; Key Questions
Should the third wave, characterized by the current series of increases, be confirmed, the headline CPI is likely to surpass its 2022 high of 8.7%.
This inflation cycle is not an anomaly; it mirrors historical precedent, specifically the secular inflation era (1.0), which spanned three inflation cycles from 1958 to 1986. (Figure 2, lowest graph)
This brings us to several critical questions:
>How do supply-side (cost-push) factors contribute to driving an inflation cycle or even a prolonged era of inflation?
>Does the current inflation cycle mark the beginning of an "Inflation Era 2.0"?
>Which mainstream experts have anticipated and explained this phenomenon?
IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty
A striking contrast exists between the government's data on the bottom 30% of income earners and the Social Weather Stations (SWS) self-rated poverty survey.
Figure 3
The Consumer Price Index (CPI) for the bottom 30% income group presents one of the most fascinating – and somewhat contradictory – data points in CPI coverage. (Figure 3, topmost window)
It indicates that the food CPI for this income group has decreased at a faster rate than the overall headline CPI, resulting in a negative spread for the first time since at least 2022. This suggests that the bottom 30% has benefited from easing food inflation, ostensibly leading to ‘reduced inequality.’
This assumption appears to be based on the notion that stores have provided price discounts to this income group or that conditions have improved due to assistance from food banks.
Conversely, a private poll reported that instances of self-rated poverty surged to their highest level since 2003, reaching a 21-year high!
SWS Report, January 8 2025: The December 2024 percentage of Self-Rated Poor families of 63% was 4 points up from 59% in September 2024, rising steadily for the third consecutive quarter since the significant 12-point rise from 46% in March 2024 to 58% in June 2024. This was the highest percentage of Self-Rated Poor families in 21 years, since 64% in November 2003. (Figure 3, middle visual)
If this poll is accurate, it implies that a vast majority of households continue to suffer from the erosion of the peso’s purchasing power.
The recent decline in the CPI rate, far from indicating relief, might instead signify a “boiling frog syndrome”—a slow, almost imperceptible build-up of economic hardship. This is evidenced by deteriorating consumption patterns and increasing pessimism, despite near-record employment rates.
In November 2024, employment rates reached their third-highest level, continuing a trend of near-full employment since Q4 2023. (Figure 3, lowest chart)
Still, despite this robust employment dynamic, inflation has continued to decline.
Does this mismatch between self-rated poverty levels and employment gains highlight productivity improvements that are not reflected in wage and income growth?
Alternatively, could this gap reflect potential manipulation or "padding" of labor data for political purposes ahead of upcoming elections?
As I noted back in October 2024: (bold and italics original)
All these factors point to the SWS Q3 data indicating an increase in self-rated poverty, which not only highlights the decline in living standards for a significant majority of families but also emphasizes the widening gap between the haves and the have-nots.
As a caveat, survey-based statistics are vulnerable to errors and biases; the SWS is no exception.
Though the proclivity to massage data for political goals is higher for the government, we can’t discount its influence on private sector pollsters either.
In any case, we suspect that a phone call
from the office of the political higher-ups may compel conflicting surveys to
align as one.
Apparently, that phone call to influence the self-rated poverty survey has yet to occur.
Furthermore, the multi-year high in self-rated poverty could also be symptomatic of government policies involving "financial repression" or an "inflation tax," which redistributes finances and resources from the private sector to the government to subsidize its political spending.
This raises an important question: Whose sentiment truly reflects the public's conditions?
On one hand, government data suggests a vague improvement for low-income households due to easing food prices. On the other hand, SWS data indicates a historic rise in self-rated poverty.
The divergence between these two perspectives underscores the complex economic realities faced by different segments of society as they confront inflation.
V. Demand Side Inflation: Record 11-Month Public Spending
Let us now shift our focus to the demand side of the inflation cycle.
Figure 4
The first and most significant demand-side driver of inflation cycles is public debt-fueled deficit spending. (Figure 4, topmost image)
Thanks to robust tax collections, the 11-month fiscal deficit has fallen to its lowest level since 2020, despite reaching a historic high in public spending over the same period.
However, while current tax revenues have supported fiscal health, they are subject to the variability of economic conditions and the efficiency of tax administration, whereas government spending is determined by Congressional appropriations.
Still, diminishing returns and the crowding-out effect could slow GDP growth—or even trigger a recession—leading to reduced tax revenues. This could drive deficits back to record-high levels.
In any case, public spending at an all-time high inevitably fosters heightened competition with the private sector for resources and financing. This competition—the crowding out syndrome—serves political objectives but disrupts economic allocation, production, and pricing.
The Philippine budget is set to grow by 9.7% to Php 6.326 trillion in 2025, reinforcing its long-term upward trend in public expenditures.
Unsurprisingly, this accelerating trend in public spending has closely correlated with the first inflation cycle.
Also, this is in seeming response to the Q3 2024 GDP slowdown and a deflationary spiral in real estate prices, 'Marcos-nomics' stimulus measures have only intensified.
That’s in addition to the administration’s positioning for this year’s elections.
VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System
Despite the CPI gradually rising, the BSP cut interest rates twice in Q4 2024, supported by a significant reduction in the bank’s reserve requirements.
When similar measures were implemented during the pre-pandemic and pandemic phases (2018–2020), they fueled the first leg of the second wave of the inflation cycle. Is history repeating itself? (Figure 4, middle diagram)
After an 11-month plateau, the banking system’s net claims on the central government (NCoCG) surged to a record-high Php 5.31 trillion in November 2024! (Figure 4, lowest window)
Banks may have responded to an implicit directive from the BSP, which has contributed to the growth of the money supply.
Additionally, the BSP’s ‘easing cycle’ prompted a surge in bank lending, particularly to the struggling real estate sector and consumers.
Universal-commercial (UC) bank lending grew by 11.34% in November, driven largely by a 10.11% increase in lending to the real estate sector, which reached a record-high Php 2.57 trillion.
Meanwhile, UC consumer bank lending (excluding real estate) jumped 23.3% to a historic Php 1.54 trillion.
Figure 5
Overall, systemic leverage—defined as UC bank loans plus public debt—expanded by 11.1%, reaching an all-time high of Php 28.44 trillion. (Figure 5, topmost chart)
This growth drove a sharp increase in M3 money supply, from 5.43% in October to 7.7% in November.
Despite BSP claims of ‘restrictive’ financial conditions, growth rates of systemic leverage have been rising steadily since its trough in September 2023.
The BSP’s easing measures in the second half of 2024 have undoubtedly contributed to this systemic expansion in leverage.
The combination of liquidity injections through NCoCG and surging systemic leverage has also driven growth in M1 money supply, which again rose 7.7% in November—reaching levels seen in October 2023.
If history offers any guidance, reminiscent of 2014 and 2019, the current surge in cash circulation—which accounted for 30.83% of November’s M1—has likely contributed to the broadening increase in non-food and non-energy core inflation, supporting the notion that the headline and core CPI have already bottomed out. (Figure 5, middle graph)
Notably, M1’s influence on price pressures occurs with a time lag. This means that certain price increases, due to increased spending in sectors benefiting most from credit expansion—such as real estate and their principal lenders, the banks—eventually percolates into the broader economy.
This clearly reflects the BSP’s implicit backstop for the real estate sector and its key counterparties—the banking system.
VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields
Another factor that appears to be providing a behind-the-scenes support to inflation is the BSP’s US dollar Philippine peso USDPHP exchange rate cap.
As we previously noted,
Widening Trade Deficit: First, the cap widens the trade deficit by making imports appear cheaper and exports more expensive. An artificial ceiling exacerbates imbalances stemming from the historical credit-financed savings-investment gap. (Prudent Investor, 2024)
Although November’s trade deficit narrowed to USD 4.77 billion due to a 4.93% decline in imports and an 8.7% slump in exports, it remains within the record levels seen in 2022. (Figure 5 lowest window)
Figure 6
The risk of a sudden devaluation grows as the persistent trade deficits erode the BSP's ability to defend the USDPHP ceiling magnifying inflation risks. (Figure 6, topmost diagram)
Additionally, the recent shift in the Philippine treasury yield curve—from a flattening, belly-inverted slope to a steepening curve driven by surging bond rates—has further underscored this vulnerability. (Figure 6, middle image)
Besides, rising yields on US Treasury bonds could influence upward pressure on Philippine rates. (Figure 6, lowest chart)
US inflation can indirectly impact the Philippines through global trade, commodity prices, and capital flows. For example, rising US inflation may lead to higher prices for imported goods, thus contributing to increased inflation domestically in the Philippines.
Additionally, US Treasury yields act as a global benchmark for interest rates. When US yields rise, typically due to higher inflation expectations or tightening monetary policy by the Federal Reserve, it can exert upward pressure on bond yields in other countries, including the Philippines.
This dynamic occurs as foreign investors may seek higher returns, which in turn can push up domestic yields. The influence of rising US bond rates on Philippine yields underscores the interconnectedness of global financial markets and reflects the broader impact of US economic conditions on emerging market economies.
Furthermore, if the BSP insists on continuing its ‘easing cycle’ under such conditions, it risks stoking the embers of inflation, which could further weaken the USD-Philippine peso exchange rate.
Sure, while it’s true that the structural economic conditions of the Inflation Era 1.0 differ from today’s—marked by advances in technology, globalization, and other factors—the political landscape remains strikingly similar. Authorities are still using leverage both directly (through deficit spending) and indirectly (through asset bubbles) to extract resources from the private sector. As such, the outcome—an Inflation Era 2.0—seems increasingly likely to echo its predecessor.
VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave
To wrap things up, December’s CPI has shown signs of a potential bottom and has laid the groundwork for the third upside wave of this inflation cycle.
Aside from the turnaround in the CORE CPI, which indicates a broadening of price increases across the economy, the record quantitative easing by banks in support of record public spending and all-time highs in public debt have injected substantial liquidity into the system.
This, combined with the accelerating growth in bank lending, has intensified liquidity growth. As a result, this increased liquidity tends to diffuse into the economy with a time lag, eventually leading to higher prices.
___
References:
Prudent Investor, The President and the Markets
"Disagree" on the CPI; Global Financial Crisis Icebreaker: The
Collapse of Sri Lanka July
11, 2022
Philippine Statistics Authority Consumer Price Index and the Inflation Rate, Frequently Asked Questions
Milton Friedman, The Real Story Behind Inflation, The Heritage Foundation
Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10 2024
Prudent Investor, Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages October 13, 2024
Prudent Investor, How
the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine
Peso Exchange Rate, January 2, 2025
