How to Chop the CPI? Change the Baseline Rates! T-Bill Yields Plunge to All-Time Lows as Credit Spreads Tighten!

 

Every man prefers belief to the exercise of judgment—Lucius Annaeus Seneca 

 

In this issue 

 

How to Chop the CPI? Change the Baseline Rates! T-Bill Yields Plunge to All-Time Lows as Credit Spreads Tighten! 

I. Changing the Baseline Rates: The Falling CPI Charade 

II. Huh? CPI Down, But General Retail Prices Up; Wholesale Prices Soar! 

III. Manufacturing: IHS Markit’s Stagflation Versus PSA’s Productivity Boom 

IV. Mounting Liquidity Strains: T-Bills Plunge to Historic Lows! Mid-to-Long Term Treasury Spreads Plummets! 

V. BSP: Liquidity is the Cornerstone of the Market 

VI. BSP’s Semantic Trick of Redefining Purchasing Power 

 

How to Chop the CPI? Change the Baseline Rates! T-Bill Yields Plunge to All-Time Lows as Credit Spreads Tighten! 

 

I. Changing the Baseline Rates: The Falling CPI Charade 

 

​From the BSP, February 4 (bold added): Headline inflation slowed down to 3.0 percent in January 2022 from 3.2 percent in December 2021 using the 2018-based Consumer Price Index (CPI) series. The January 2022 inflation settled at the midpoint of the Government’s inflation target range of 2.0-4.0 percent for the year. Meanwhile, on a month-on-month seasonally adjusted basis, inflation was higher at 0.4 percent in January 2022 from 0.2 percent in December 2021. The lower headline inflation can be traced to slower price increases of selected non-food items along with easing inflation for alcoholic beverages and tobacco. Inflation for housing, water, electricity, gas, and other fuels slowed down in January as electricity rates declined owing to lower generation charges, while prices of liquefied petroleum gas (LPG) also fell. At the same time, restaurants and accommodation services inflation also moderated during the month. Meanwhile, year-on-year food and non-alcoholic beverages inflation held steady at 1.6 percent in January from the previous month's rate. The inflation for 2021 using the 2018-based CPI was notably lower compared to the older series. The annual headline inflation for 2021 using the 2018-based series settled at 3.9 percent, which is lower than the 4.5 percent average using the 2012-based CPI. 

 

The CPI data represents another example of how the mainstream reduces the economy into a hydraulic machine subject to on-and-off levers by politicians and bureaucrats. 

 

So, in this case, how exactly do authorities slow its statistical inflation? Answer: By rebasing levels of the CPI! 

 

For a start, here are some facts.  

  

First, authorities construct and maintain this data, which is not subject to any audit or competition. 

  

Then, the same authorities make a projection based on it. Or, they issue forecasts on the data which they create.  

  

Next, given that surveys are the primary source of inputs, data from these are subject to biases. And biases emanate not only from the surveyed population/samples but also from those conducting the surveys. 

  

Importantly, since the CPI represents "a major statistical series used for economic analysis and as a monitoring indicator of government economic policy," why wouldn’t implicit political agenda be a principal factor in its publication? 

 

Also, the data subtly incorporate factors that may be affected by politics as SRPs (price controls), transport mobility restrictions, and more. 

 

What’s more, here is the magic from statistical rebasing. 

Nota bene 1: This author does not believe in the accuracy of the CPI simply because averaging different goods as potatoes, cars, laptops, and Netflix subscription fees represent a ridiculous and impractical exercise, and thus, do not reflect a realistic demonstration of price changes experienced by individuals writ large (community).  

Nota bene 2: Given the behavior of the treasury markets, the idea of slowing inflation is not something to oppose today. (see below) 

 

Using the base year of 2018, the BSP effectively shaved the CPI by some .4-.5% (average differential of .47%).  

 

The revised CPI seems to have omitted the CORE CPI in its report. 

 

The BSP admitted that the new base level lowered the headline 2021 average to 3.9% from 4.5% (2012 prices), signifying an estimated 13% drop. 

 

But as expected, the BSP kept its CPI targets despite the adjustments.  And so, with the 3% of January, the CPI 'settled at midpoint' of their target.  

 

In this manner, the CPI figure floats even while the targets of the BSP are fixed.  

 

The uncritical public buys it. Mission accomplished. 

 

But here is the thing.  

 

With a new base rate, the data sanitizes the erosion of the purchasing power from the previous base levels.   

 

For clarity purposes, let us expound.  

 

Figure 1 

 

Using the 2012 price series data provided by the BSP, the value of one peso in 2012 fell to 85 cents in 2018. Differently put, from 2012 to 2018, the peso suffered a loss of some 15% of its purchasing power. (Figure 1, topmost pane) 

 

So when the PSA rebased the CPI data, the new base essentially obliterates this purchasing power loss. The 85 cents of 2018 now becomes Php 1 or the base rate. 

 

Importantly, the differentials between the 2012 and 2018 base rates represent the missing purchasing power. (Figure 1, middle window) 

 

With this, the CPI data under the 2018 baseline will be lower. 

 

Nice huh? 

 

From a statistical perspective, that’s how the government conceals inflation. 

 

A similar dynamic was applied when the BSP also changed the base rates from 2006 to 2012 in 2018. 

 

The 2012 rates reduced the value of the 2006 peso by about an average of 17%.  (Figure 1, lowest pane) 

 

And so, if we apply 2006 base rates, the January 2021 CPI will still be near or at 4%, which signifies the top of the BSP's target range. 

 

The outcome changes significantly. Mission Failed. 

 

This would be a great example of a quote attributed to British economist Ronald Coase: "if you torture the data long enough, it will confess to anything." 

 

Again, the data distortion comes from the base effect only. Again, only. 

 

II. Huh? CPI Down, But General Retail Prices Up; Wholesale Prices Soar! 

 

And that’s not all. 

 

There seems to be a dissonance in the data reported by the statistical authorities.  

 

 

Figure 2 

While the PSA states that the CPI is on a downswing, ironically, they seem to also say that the rate of change in General Retail Prices has been rising! (Figure 2, upmost pane) 

 

The General Retail Price index (GRPI), according to the PSA, is a statistical measure of the changes in the prices at which retailers dispose of their goods to consumers or end-users relative to a base year. 

 

Or, the GRPI appears intended as a countercheck—the rate of change of prices of sold goods and services by retailers to consumers! 

 

In essence, the CPI should not deviate substantially from the GRPI and vice versa.  

 

The diametric directions tell us that consumers and retailers have different opinions on the rate of change of transacted prices. 

 

So which of the survey data is true, the prices of goods and services declared by the retailers or the consumers? 

 

Such patent deviance represents incongruity and credibility issues for these statistical metrics. 

 

Interestingly, the General Wholesale Price Index (GWPI) has been raging.  

 

As a side note, GRPI and GWPI data as of November.  

 

Unless the consumer prices become the receiving end of this surge in wholesale prices, the retail industry is bound to suffer from an awful squeeze in the profit margins! (Figure 2, lower window) That is in the condition that the data is accurate. 

 

Assuming all these are accurate, how are these supposed to contribute to the growth in earnings and the economy? 

 

III. Manufacturing: IHS Markit’s Stagflation Versus PSA’s Productivity Boom 

 

It does not stop here. 

 

Let us move on to the supply side. 

 

In contrast to the government data as the CPI and the GDP, the Markit PMI repeatedly evinces a stagflationary climate for the manufacturing sector, represented by several factors: subdued output, which manifests continuing slack in demand, elevated input prices, high unemployment rates, and increasing output prices, which persistently pressures profit margins. 

 

From IHS Markit, January 24: Central to the overall moderation was a solid fall in output. Production volumes decreased at the quickest rate for five months with panel comments linking the decline to pandemic restrictions, adverse weather conditions and a lack of raw materials. Tighter restrictions paired with higher prices for goods resulted in a weak demand environment. With the exception of the marked contractions seen in mid-2020, the latest decline was among the strongest in the survey’s six-year history, despite being only modest overall. Meanwhile, international demand declined at the fifth quickest rate in the series with the pandemic and the typhoon reportedly weighing on sales to foreign markets. With new orders and output falling in January, firms continued to scale back on headcounts. Job shedding has now been seen in each of the last 23 months, though the latest fall was the joint-softest in the current period of decline and only marginal. Faced with a subdued demand environment, incomplete work at manufacturing firms in the Philippines fell. The rate of reduction was, however, the joint-softest since May 2020, as weak input availability and the typhoon threatened production capabilities at some firms. Goods producers saw another severe decline in supplier performance at the start of the year with respondents noting that virus-related restrictions and port congestions had markedly increased lead times and consequently limited raw material availability. Consequently, firms faced additional surcharges and higher freight costs. Despite a renewed fall in output and new orders, companies raised their stocks of pre-production inventories, amid efforts to secure inputs ahead of further shortages. Post-production inventories fell sharply, however. Input scarcity and higher raw material costs were widely reported in the latest survey period. Input prices rose sharply, despite easing to the softest rate for four-months. Meanwhile, firms passed on higher expenses through greater selling prices, which rose at the quickest rate for seven-months. Firms reportedly sought to protect profit margins. 

 

To repeat. Weak demand environment. Solid fall in output. Job shedding…in the last 23 months. Input prices rose sharply. Output prices rose at the quickest rate for seven-months.  

 

Stagflation. The IHS Markit has consistently been driving this point. 

 

Figure 3 

But the PSA’s numerical observations drastically diverge from the IHS Markit. 

  

Though the official manufacturing data applies to November 2021, percentage improvements in manufacturing have stemmed principally from the low base effects.  

 

In peso terms, 2021 value and volume have grown substantially from the lows of 2020 but remain slightly off the pre-pandemic levels of 2019. (Figure 3, topmost pane) 

  

And so, while Markit emphasizes the rising input and output prices as consequences of supply issues, particularly material shortages and logistic and transit bottlenecks, the PSA showcases a demand surge supported by the recent outgrowth in bank credit. (Figure 3, middle window) 

 

Yet, input price inflation, represented by the PPI (as of December), remains strangely muted!  

  

In short, in the eyes of authorities, demand rather than supply drives manufacturing performance, which runs in contrast to Markit.  

  

And ironically, the rate of change in input prices of the government data seems hardly affected by the credit-fueled inflationary boom. 

 

Spectacular. 

 

Yet, the official manufacturing outlook serves as the foundation of the GDP.  

 

As one would observe, to crosscheck or counterbalance the claim of the others, even in economic data, competition is a necessity. 

 

IV. Mounting Liquidity Strains: T-Bills Plunge to Historic Lows! Mid-to-Long Term Treasury Spreads Plummets! 

 

From the PNA, February 4: The further deceleration of the domestic inflation rate as of January provides authorities the leeway to keep the central bank’s monetary policy stance steady, the Bangko Sentral ng Pilipinas (BSP) said. 

 

Keeping rates down is the entire point in the imperative to suppress the CPI. 

 

The low CPI permits authorities to do the following: 

  

1 Extend the bailout of the banking system primarily through the repressed deposit rates  

2 Keeps financing costs low to encourage credit rollovers and boost credit uptake while deterring an escalation of insolvencies.  

3 Extend the policy of financial repression through negative (real) rates, transferring resources to the public sectors, the banking system, and elite-owned non-financial firms. 

4 By subduing PCE in which CPI components serve as deflators, a low rate regime boosts the GDP. 

5 Keep the USD-Php down. 

 

My write-up last December dealt with some of these. 

 

See Lower November CPI to Justify the BSP’s Record Low Rates Regime: Paraphrasing J. Carville, It is the Elections, Stupid! December 12 

 

Instead of productivity, the Philippine GDP has become increasingly financialized, becoming more dependent on credit. M3-to-GDP hit a record 79.4% in Q1 2021 and was 79% in Q4 2021. The inflated GDP means higher figures for this ratio. (Figure 3, lowest pane) 

 

The more financialized the economy, the greater is its sensitivity to changes in interest rates. 

 

In the classic gold standard regime, the economic environment was dominated by slightly declining prices or deflation, reflecting productivity gains or increased purchasing power.  

 

In the present fiat currency standard, a declining CPI reflects on liquidity or credit transactions, popularly construed as 'aggregate demand.'  

 

Figure 4 

 

Even when bank credit uptake has shown signs of improvement, money supply growth appears to have stalled in December. While bank credit has improved by 4.8% in December, money supply growth appears to have stalled, up by 7.7% from 8.3% a month ago. (Figure 4 topmost window) 

 

Liquidity conditions have barely manifested the improvements in bank credit nor the increased liquidity injections by the BSP directly and indirectly through the banking system.  

 

What forces have been offsetting these liquidity-infusing dynamics? 

 

In contrast, liquidity strains seem to be mounting. 

 

A faster decline in the CPI relative to the 1-year BVAL yield translates to falling negative 'real' rates. (Figure 4 middle pane) 

 

Or, the implicit credit subsidies from the inflation tax have declined, despite the record liquidity creation by the BSP and banks, which seem to affirm the liquidity dilemma hounding the financial system. (Figure 4, lowest window) 

 

Figure 5 

But it gets worst.  

 

The most striking symptom of the escalation of liquidity pressures is that T-Bill yields have plummeted to historic lows! (Figure 5, upper window) 

 

And this occurred while treasury spreads of the belly and the long-bonds have dived! 

  

In this respect, stalling money supply growth, collapsing yield spreads, diminishing negative real yields, cascading CPI, and crashing T-Bill rates are symptomatic of the likely escalation of liquidity woes. 

 

As noted above, these are signs that street inflation may be slowing.  

Aside from demand concerns, crashing T-Bill Rates may be about collateral issues. Or, banks and the financial industry securing short-term securities in haste to swap for loans with each other or with the BSP. 

 

Interestingly, the PSEi 30 hit a 2-year high from select pumps, mainly on financials, on the back of thin volumes, and weak breadth.  (Figure 5, lowest pane) 

 

As previously noted, the rotation to financials represents part of the grand scheme of orchestrating the push of the index higher.  

 

See PSEi 30 7,200: The Financial Bubble Triggered, The Race Between the PSEi and Bond Yields October 18, 2021 

 

Are the share pumps designed to paper over the increasing liquidity stress or spiff up the banking industry to ensure sustained access to liquidity through confidence in the marketplace? 

 

The twist of events has gotten interesting.  

 

V. BSP: Liquidity is the Cornerstone of the Market 

 

The importance of liquidity, according to the BSP. 

 

From the BSP-FSCC Financial Stability Report 2H Semester 2021 (bold added): Since market liquidity is the cornerstone of a functioning financial market, it is “too important to fail” in this regard. The upshot of this is that the unconventional can quickly become the norm. While there were concerns over “monetizing the debt” when the authorities acted early on, this crisis quickly took a “whatever it takes” mantra, at least until we find a way out. 

 

FINANCIAL STABILITY COORDINATION COUNCIL, 2nd SEMESTER 2021 FINANCIAL STABILITY REPORT, Page 5, December 2021 BSP.gov.ph  

 

Nope. Liquidity policies do not extinguish risks. Instead, it disguises risks while allowing its distortions and imbalances to accrue. 

 

And they have acknowledged some of it.  

 

Again from the FSR*: More liquidity though can create its own challenges. The injection of liquidity is an adrenaline to the system to counter the slowdown brought about by the crisis. But there is always that concern that too much liquidity will fuel inflation, and that high inflation can be persistent rather than transitory. 

 

*Ibid 

 

Until a cleansing of the balance sheets of the public sector, the financial institutions, and the market price clearing of malinvestments transpires, one can expect the unconventional to become the entrenched norm until something breaks.  

 

Further, since 'whatever it takes' represents a free lunch, vested interest groups benefiting from it will lobby, at the very least, to hold on to such privilege, and they could even demand more, signifying the moral hazard at work. 

 

Give them an inch, they’ll take a mile. 

 

VI. BSP’s Semantic Trick of Redefining Purchasing Power 

 

Finally, monetary authorities seem either confused or have a warped definition of purchasing power. 

 

From their perspective, a loss in purchasing power mirrors the loss of money. 

 

From the Financial Stability Report 2H Semester 2021**: As presented in our previous FSR, there has been a redistribution in purchasing power that has made the socio-economically vulnerable even more vulnerable. This is relative to the cohorts who were already financially established and have been much less affected, if at all, by the suspension of livelihood activities. This redistribution will then affect the network of goods and services, arguably increasing the concentration towards those with disposable liquidity and purchasing power. Those who may have these will likely look towards the national government for further (and needed) support. 

 

**Ibid p. 25 

 

Nope. 

 

The purchasing power of money represents the number of goods and services a given amount of currency can acquire. 

 

Or, from the great Rothbard: "the purchasing power of the monetary unit consists of an array of all the particular goods-prices in the society in terms of the unit." 

 

Murray N Rothbard, MAN, ECONOMY, AND STATE p.237-238 Mises.org 

 

A thesis built on false premises leads to misguided conclusions. 

  

The BSP seemingly intends to wash its hands from the effects of its policies. And so, they redefined its meaning to shift the blame on external factors. 

 

As the great Austrian economist, Ludwig von Mises presciently warned, 

 

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase. 

 

Ludwig von Mises, Section 19. Inflation, Chapter II. Interventionism; Economic Freedom and Interventionism, Mises.org 

 

There is no free lunch forever.  

 

Policies anchored on paint by the numbers, designed to bail out the elites and the political system in the name of boosting the economy, will suffer from unintended consequences. 

 

Yours in liberty, 

 

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