October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

Prosperity, built on debt, inflation, and false government promises, is illusionary and can disappear quickly. It will be necessary that the people learn, or relearn, that debt is not wealth, paper is not money, free stuff is not justice, war is not peace, and government coercion is not liberty. Signs of social chaos are readily apparent and are a predictable consequence of the economic distortions created by the excesses of the QE bubble—Ron Paul

In this issue

October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

-Food CPI Stalls as Core Inflation Ramps Headline CPI to 6.7%

-As Prices Rage Elsewhere, Education CPI in Four Straight Months of Deflation! Why Price Indices Mislead

-Another Anomaly: Despite TRAIN, Alcoholic Beverage and Tobacco CPI Below 2013

-Why Does the Government Panic Over 6.7% CPI? Will the BSP Raise Rates Anew?

October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

Food CPI Stalls as Core Inflation Ramps Headline CPI to 6.7%

Last week, the National Government’s PSA and the Bangko Sentral ng Pilipinas reported on October’s CPI as unchanged at 6.7% from a month ago.

The draconian measures undertaken by the National Government to suppress prices, particularly food prices, had done little contain the statistical inflation.

Food CPI did back off slightly to 9.43% in October from 9.72% a month ago. But its loss had been neutralized by increases in non-food and non-energy CPI. (figure 1 upper window)

Figure 1

International oil prices can't justify the stubborn October CPI. Measured from the US West Texas Intermediate benchmark, WTI prices have dropped to $65 per bbl level. It fell below $60 last Friday. (figure 1 lower window)

Core inflation jumped to 4.9% in October from 4.7% a month ago, a multi-year high.

Food accounts for 35.46% or the second largest share of the CPI basket while non-food which includes clothing, household utilities, health, transport, recreation, education, and restaurant, has the largest with a 60.08% share. And the residual 1.58% share consists of alcoholic beverages and tobacco

 

Figure 2

Two of the three significant components of the CPI continued to streak higher.

Housing, water, electricity, gas and other fuels, which carried a 22.04% share weight, advanced to 4.76% but was down from its peak of 5.6% in June.

The second and third most significant component of the non-food CPI, the restaurant and miscellaneous goods and the transport, with a weighting share of 12.59% and 8.06% respectively, did most of the marginal lifting of the headline CPI. 

Both segments reached its highest level since at least 2013.  Restaurant CPI jumped 4.19% in October from 4.0% in September while Transport CPI vaulted 8.75% from 7.96% a month ago.

While restaurant CPI may lag the food and beverage CPI, transport CPI may reflect on the distortions from excise taxes and other mandated increases rather than from international oil prices.

The most recent mandated fare hikes on public transportation are likely to add these pressures. Power rates have also been slated rise.

As Prices Rage Elsewhere, Education CPI in Four Straight Months of Deflation! Why Price Indices Mislead

Of course, the statistical economy is different from the real economy.

Proof? 

 

Figure 3

Take a look at the education CPI. (figure 3 upper window)

Education CPI has been in “deflation” four straight months! How can that be? With prices raging almost everywhere, have spending on education been really down?  

The Department of Education approved a 7% increase in tuition fees of private school last July. That’s no sign of deflation. And that’s just tuition fees. How about spending on uniforms, books, notebooks, and pens? For children schooled in private institutions, parents would see such negative numbers as incredibly unrealistic!

And how about the spending for construction, repair, improvements, logistics and others on educational institutions? (I know CPI is for households/consumers)

Demand or the lack of it is unlikely a factor for such CPI deflation; education GDP was one of the sectoral outperformers in the 3Q!  Besides, bank lending to the sector has been robust since Mr. Duterte assumed office. (figure 3, lower window)

So is excess supply, given the current state of education. 

The likely explanation is increased public subsidies to the households on education. Or government absorbed the price increases through its deficit spending. And the consequent effects from such subsidies on prices have been dispersed unevenly to many parts of the economy.

Since there are more students in public school (84.5%) than in the private sector (14.9%), the deflation in education CPI probably means free lunches drowned the spending costs by students in the private sector.

And if private sector education costs would reflect on the CPI, the headline number should be materially higher. Thus, the education CPI misleads.

The statistical economy is hardly reflective of actual conditions. They are supposed to be estimates and not facts for people and policymakers to fixate on.

Aggregation of prices barely resonates with reality from the individual’s perspective. And the whole cannot be the some of its distinctive and atomistic parts.

In lambasting his peers about the dogmatic embrace of inflation targeting, former US Federal Reserve Chairman Paul Volcker recently wrote,

“No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices. The variety of goods and services, the shifts in demand, the subtle changes in pricing and quality are too complex to calculate precisely from month to month or year to year. Moreover, as an economy grows or slows, there is a tendency for prices to change, a little more up in periods of economic expansion, maybe a little down as the economy slows or recedes, but not sideways year after year.

Another Anomaly: Despite TRAIN, Alcoholic Beverage and Tobacco CPI Below 2013

There’s another striking oddity in the CPI.

 

Figure 4

And that’s the “alcoholic beverages and tobacco” component.

Despite its recent surge partly due to the recently implemented excise taxes of TRAIN, its CPI remains lower fantastically compared to 2013. Aside from the Sin Tax Law, 2013’s alcoholic beverage and tobacco CPI surge reverberated with M3 growth of 30%+++. (figure 4 upper window)

With excise taxes from TRAIN 1.0 and the Sin Tax Reform Law of 2012 programmed for another round of increases in 2019, the segment's CPI should either see further upside moves or remain elevated in the face of an emergent slack in demand. 

Why Does the Government Panic Over 6.7% CPI? Will the BSP Raise Rates Anew?

It’s truly a complex and fascinating world.

A CPI of 6.7% remains significantly lower than the 60-year historical average of 8.4%, but why would the government succumb to popular demand and impose price controls (including prosecuting traders for alleged supply and price manipulations), andincreases in minimum wages?  

Of course, the CPI level then has been vastly different from today. Seen from the context of the USD php, sixty years back the USD php was 2, last Friday it was 52.97. But haven’t income been growing enough, as popularly held, to mitigate their impact?

And the government have been panicking over 6.7%?!

There have been more calls for the BSP to raise rates!! Will the BSP submit to such pressures in their coming meeting on the 15th?

It’s either this number has been severely understated or that the ballyhooed boom is a mirage masked by credit inflation.

Of course, the CPI is influenced by the supply of, and demand of money relative to goods and services.

While declining rate in bank lending and money supply may indicate a withdrawal in the means to finance spending, increases in the public’s time preference mean reduced demand to hold money relative to goods. Or when people expect a sustained pace of price increases, they chase prices.

October’s elevated CPI probably indicates the latter.

Also, it appears that on the demand side, the BSP’s record financing of the unparalleled deficit spending remains the more dominant force than the growing slack in private sector demand as expressed by declines in bank lending, and consequently, money supply growth. (figure 4, middle window)

However, yields of Philippine Treasuries may have been confirming my inflation expectations. With yields down in the mid- to the long-end, this may signal an easing of inflation. But the dilemma is on the yields of T-bills, which continue to ascend indicating deepening liquidity constraints! The result from this asymmetry is to flatten the curve. (figure 4 lower window)

Finally, because inflation is more than just about statistics, not only will its change affect business, economic and financial activities, but also impact the socio-political sphere as well.

A magnified political turmoil should accompany a bursting bubble.