Philippine Politics: Low Inflation? LPG Prices Skyrockets

I was stunned to discover that local LPG prices has risen steeply—by over 20%. So I checked on the web to verify, and found this.

From the Inquirer:

Retail prices of liquefied petroleum gas (LPG) grew to as much as P14.30 per kilogram starting on Monday, amid long lines at distribution hubs in Batangas. Tight supply would also lead to price hikes for gasoline and diesel.

More on the coming oil and energy price hikes. From the Philstar.com (bold mine)

Oil prices, meanwhile, are expected to go up again this week as local petroleum players track movements in the global crude market.

The price of diesel is expected to increase by P1.10 per liter while gasoline prices are projected to climb by 30 to 50 centavos per liter, marking the first adjustment for the month of December and the third price hike in three weeks.

Electricity rates are also expected to increase this month and in January 2014 because of the Malampaya shutdown.

“Malampaya is currently on shutdown because it needs maintenance,” Petilla explained.

Manila Electric Co. (Meralco) is expected to announce today the power rates for the month of December.

Electricity rates for the month of November went up by P1.24 per kilowatt-hour (kwh) on the back of maintenance shutdown of the Malampaya Deep Water Gas-to-Power project, which supplies natural gas to three power plants in Luzon. The maintenance shutdown started from Nov. 11 and will run up to Dec. 10.

Petilla said that during the shutdown, Malampaya plants would run on diesel, which is the “most expensive.”

It’s a wonder how the BSP can come up with a CPI of 2.9% to 3.6% when prices of basic goods appear to be running berserk.

Next oil and energy prices are hardly tracking movements in the global energy markets.

US WTIC crude has been in a decline.

Europe’s Brent crude has been drifting sideways albeit a recent uptick.

US Natural gas also reveals a sideways movement. However recent developments exhibit a bounce.

US gasoline has also been in a decline, again with a near term rally.

Again hardly any of the above exhibits the dynamic where domestic energy price inflation are supposed to be reflecting on global developments. 

Instead, “maintenance shutdown” on power generators have been local developments.

Moreover, the article explains partly the supply side aspects without delving deeper into demand-supply relationship.

Be reminded that while fuel, energy and transportation costs may be secondary to food and rental in terms of price sensitivity to domestic consumers (chart from ADB’s Hyun H. Son), we should expect that the former variables to have a spillover effect on food prices. 

I have already previously noted of how the Philippine property bubble has been raising rental prices that will eventually impact “consumer affordability, disposable income and consequently demand.”

So domestic consumers appear to be facing price pressures on these three fronts. The next will be on wages.

The real reason we are seeing incipient signs of the renaissance of the inflation monster has been due to the BSP’s policies. M3 growth has been exploding over the last one year and a half.

We can sum up the above as:

One, this has been a domestic dynamic

Two, domestic consumers are highly price sensitive to food, rental and energy costs.

Three, rising input costs will eventually impede profitability and reduce commercial activities

Four, thanks to the BSP’s policies, exploding M3 means those with access to the banking system have been benefiting more than those without access. Increased demand funded by credit has led to higher CPI.

Rising CPI means growing inequality as the poor will suffer from higher prices of basic goods. 

Fifth, higher CPI is a manifestation of the loss of purchasing power of the peso

Finally, sustained increases in CPI will postulate to greater risks of stagflation that implodes the bubble economy and markets.

As I wrote in 2011 

 

Consumer price inflation which is politically unpalatable especially for the Philippine setting, where the Philippines is shown as the most sensitive to food inflation in Asia (see chart from businessinsider.com), would eventually compel government to drastically tighten.

When this happens depends on the level or degree of rate of increases in consumer price inflation which will likewise be reflected in the interest rates.

But before that happens, expect the private sector to bear the brunt as the principal scapegoat for alleged economic 'greed', when the main culprit is no other than political greed.

And this will be met by a gamut of price controls which only exacerbates the situation.

Like in the 70s, negative real rate regime eventually leads to stagflation.

As the great Austrian economist Ludwig von Mises warned

The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be.