Outside show is a poor substitute for inner worth—Aesop
In this issue
3Q CPI Fall to 42-Month Low as Divergences in Component CPIs Widen; Flawed CPI—the Shakey’s Pizza Evidence
-Clashing CPI CORE CPI Outlook: CPI Signals Downside Pressure, CORE Indicates Bottom
-Food and Transport Deflation! Have Consumers Stopped Eating and Moving About?
-Rice Under the Shadow of The Law of Supply; Weak Food Demand and Not a Supply Glut
-Restaurant CPI’s Record Divergence with Food CPI
-Flawed CPI: The Shakey’s Pizza Evidence, T-Bills Defy the CPI
3Q CPI Fall to 42-Month Low as Divergences in Component CPIs Widen; Flawed CPI—the Shakey’s Pizza Evidence
With the government’s statistical inflation, the CPI, falling to .83%, a 42-month low, the administration held its victory lap to claim that “sound and working policies” had been responsible for it. Meanwhile, the Bangko Sentral ng Pilipinas forecasted that “inflation has likely bottomed out” in October, which the consensus agreed.
Clashing CPI CORE CPI Outlook: CPI Signals Downside Pressure, CORE Indicates Bottom
Because the CPI is a politically sensitive statistic, promoting the National Government’s agenda maybe an unstated objective behind its construction.
Such an agenda includes embellishing the National Accounts or GDP statistics intended to promote the political capital of the incumbent administration engineered to influence the market prices for the NG to obtain cheap financing from the public for its boondoggles.
And because the CPI attempts to create one-size fits all or an aggregated number from a complex network of interdependent disparate individuals, operating on distinct and shifting perceptions, ever-dynamic preferences, and that drive their actions, it is nothing more than a meaningless statistic.
Primarily because of the deflation in rice prices, which in the statistical basket constitutes the largest component with a 9.57% share, the headline CPI has dropped to this level.
In response to the 2H 2018 rice crisis, true enough, the National Government overhauled barriers to rice imports by replacing quota with tariffs, which resulted in an avalanche of supply, and subsequently, the reported contraction in rice prices.
Figure 1
Yet the number is nothing more than statistical contraption barely representative of reality.
With its statistical construction disproportionately skewed towards food prices, the negative divergence between the headline and its CORE component has reached unprecedented levels, which occurred again in October. (figure 1)
Despite falling to 2.65% from 2.75% in September, the CORE CPI remains elevated adrift at 2018 levels and in the proximity of the 2014 pinnacle.
Though food prices, which drive the headline CPI, tend to run ahead of the CORE, especially during the upside, their gyrations tend to exhibit tight correlations. That is, the positive spread between the headline index and the CORE eventually narrows. And the scale is limited when it inverts.
Such interactions appear to have been disrupted by the sharp deflation in rice prices. Rice prices contracted by 9.7% in October.
As an aside, it’s a wonder how many people have experienced any such price decline [year to date -2.1% or month on month -.8%]?
Well, based on statistics, this time is different!
So while the general prices, as demonstrated by the headline CPI, have been suggested to have undergone substantial downside pressures, the CORE CPI asserts little of these.
But does it matter? For the consensus, it’s all about the headlines.
Predicting a “bottoming out” in the CPI, because of this gross distortion, is a piece of cake, ain’t it?
Food and Transport Deflation! Have Consumers Stopped Eating and Moving About?
Two of the CPI’s components dropped to the subzero zone.
Figure 2
Food prices contracted for the second straight month! It was -.86% in October from -.94% a month back. And accompanying food prices have been the deflation in transport CPI, which also registered -1.57 and -.93% over the same period. (figure 2, upper window)
And the deflation in food CPI has not been just about rice prices, but the downside pressures spread ironically even to meat prices! As if the African Swine Flu did not even exist! Meat CPI was just 2.7% YoY or .4% MoM! Vegetable prices were in deflation too at -.8% YoY! (figure 2, BSP table)
And there had been little signs of substitution, where people shifted from pork, to avoid AFS, to other food items. Instead, because suppressed demand, says the Food and Beverage CPI, people practically went on a diet!
Incredible!
Figure 3
Heck, with the record borrowing spree, what had consumers been spending on??? Buying cars and luxury goods at the expense of food? Starve to elevate one's social status through positional goods?
But how about the poor? Have they been practicing abstinence? And has this been the reason why statistics say that “fewer families experience involuntary hunger”?
Rice Under the Shadow of The Law of Supply; Weak Food Demand and Not a Supply Glut
How about the supply side? Has there been in a deluge in food supplies?
However, the National Government’s PSA says domestic food production has barely grown. In the 3Q, the sector grew by just 2.87%.
The PSA’s GDP shows that as well. Nominal agricultural output was even negative (-3.6%) in the 3Q, however because of the magic PCE deflator, real output turned into positive (+3.1%) lead was turned into gold! The alchemy of statistics! (figure 2, lower pane)
So reduced nominal revenues of farmers have transformed into growth according to statistics! Statisticians should tell farmers to eat and live by statistics!
Separately, domestic Palay production has contracted in the 3Q. Palay real GDP production decreased by 4.2%, while current priced GDP data showed an output slump of 29.4%!
And nor has slowing overall imports been about a shift towards a barrage of food imports. Nondurable consumer imports, which consisted of food and beverage, declined 4.8% in September. Food and live animal imports shrunk by 7.5% in part because rice imports contracted by 53%!
The thing is, the rice episode exhibits the law of supply in motion. The law of supply states that as the price of a good or service increases, the quantity supplied increases, and vice versa.
And in response to the rice crisis or the spike in rice prices, the administration opened the floodgates that ushered in an initial barrage of rice imports. The ensuing deflation in rice prices demonstrates the next stage of the law of supply: as the price of the good decreases, the quantity supplied decreases.
Hence, rice imports and production output has been down. Economics 101!
And although the NG’s statistics have been broadcasting deflation in prices, the contraction in imports and production output must have been accelerating the ongoing drawdown of rice oversupply.
The reported deflation in rice prices is, thus, about to end.
And overall, falling prices amidst stagnant agricultural or food production and imports point to a problem of demand.
Restaurant CPI’s Record Divergence with Food CPI
Another facetious aspect of the CPI is the incoherence of its components, the Food and Beverage CPI with the Restaurant CPI. While the Food CPI controls 38.34% of the basket, Restaurant and Miscellaneous services hold the third-largest share with 12.59%.
The restaurant CPI supposedly signifies the price rate of change in the consumer's spending on food outlets. Resto CPI was 2.88% in October, slightly lower than 2.97% in September. In contrast, deflation in food CPI occurred in the same period. (figure 4, upper pane)
Figure 4
Echoing the headline and the CORE CPI, the variance between food and resto CPI has dropped to the unseen levels. (figure 4, lower window)
But why the glaring dissonance in the spending pattern of consumers in the context of restaurant and non-restaurant food expenditures?
Are food prices in the resto industry price inelastic (or unaffected by changes in demand or supply)?
If the little scathed resto CPI translates to relatively more demand, wouldn’t this influence the market prices of food that should have been reflected on the consumers?
Or has the coordinative function of the pricing system between consumers and producers broken down?
And wouldn’t such glaring disparity be a boon to the profit margins of the food retailing industry?
Flawed CPI: The Shakey’s Pizza Evidence, T-Bills Defy the CPI
Figure 5
Shakey’s Pizza 3Q 17Q gives us a clue as to the relevance of the CPI. (Nota Bene: PIZZA is the first and the only food chain to report on the 3Q Financial Statement last week.)
Have PIZZA’s margins spiked because of this extraordinary CPI spread aberration?
On the other hand, PIZZA’s gross profit margins increased modestly by 69 bps to 26.5% from 25.81% in 3Q of 2018.
However, as the CPI jumped from 2% to 6.2% in the 3Qs of 2016 to 2018, PIZZA’s 3Q profit margins tumbled from 33.22% to 25.81% over the same period.
That said, the recent crash in the CPI has hardly magnified PIZZA’s margins.
Since 3Q 2019 CPI at 1.7% has been below the 3Q 2016 CPI of 2%, PIZZA should have at least regained its 2016’s 33% profit margins.
Here’s the thing, while lower prices in the early quarters have helped improve marginally PIZZA’s margins, the firm acknowledged the challenge of rising costs in the 3Q.
From the PIZZA’s press release: “We are pleased with the results of our initiatives to trim down unnecessary expenses and run a leaner, tighter ship. Year-to-date, raw materials have also moved in our favour adding extra upside to our margins. Nonetheless, we are bracing ourselves for a more challenging year-end with some of our main input costs on an upward trend,” said President and CEO Vicente Gregorio.” (bold and underline mine)
Disinflation or no inflation in the 3Q? Only in statistics!!!
And has the lower CPI bolstered demand for Pizza’s products as indicated in the GDP?
From the same press release: “Same-store sales growth (SSSG), however, remained flat with PIZZA withholding from raising prices during the latest nine-month period.”
Hence, PIZZA’s sales growth came from “new store openings in second-tier cities - in line with the Company’s push to expand in under penetrated areas of the country.”
9-month systemwide sales and revenues grew 9% and 7.4%, the lowest in three years, yet was bumped up by 3Q sales, which jumped 13.6% from its latest acquisition, the Peri-Peri Charcoal Chicken chain. The company’s domestic outlets expanded 18.4% to 263 and added one abroad, as of the end of September.
Expanded demand from consumers? Only in statistics!!!
Though as a chained pizza full-service restaurant with a 64.2% share of the market, according to the Euromonitor, I understand that PIZZA may not represent the whole industry.
However…
Not only have the fundamental premise and logic behind the statistics been flawed, but these numbers have been detached from the real world as proven by micro-evidence.
Hence, sorry guys, that CPI thing has been misstated.
With T-bills holding steady in the face of a crashing Headline CPI, not even the treasury markets (BVAL rates) believe these numbers! (figure 5, lower window)
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