Stagflation Ahoy! Defying the Consensus, Headline and Core CPI Hits Decade Highs! BSP QE 2.0 Variant as a Principal Driver!

 

We're victims of language. The very word ``inflation'' leads us to think of it as just high prices. Then, of course, we resent the person who puts on the price tags, forgetting that he or she is also a victim of inflation. Inflation is not just high prices; it's a reduction in the value of our money. When the money supply is increased but the goods and services available for buying are not, we have too much money chasing too few goods. Wars are usually accompanied by inflation. Everyone is working or fighting, but production is of weapons and munitions, not things we can buy and use—Ronald Reagan 

 

In this issue 

Stagflation Ahoy! Defying the Consensus, Headline and Core CPI Hits Decade Highs! BSP QE 2.0 Variant as a Principal Driver! 

I. January CPI Exposed the Flawed Quant-Based and Confirmation Bias Economics 

II. Missed Inflation Forecast? The BSP’s Strategy of Shifting Goalposts 

III. BSP’s CPI Forecasts Echo Policy Directions 

IV. Headline and Core CPI Hits Decade Highs! Chart Patterns and the 3-Wave Inflation Cycle Points to "Higher for Longer"  

V. Neither Falling Oil Prices nor the Decline of the USD Influenced the January CPI 

VI. Yep, BSP and Bank Liquidity Operations Played a Substantial Role in Boosting Aggregate Demand… 

VII. …and so Did the Bank Credit Expansion, Mainly Consumer Loans 

VIII. Deficit Spending: Another Primary Factor of Demand; the Aggregation of Demand Forces as Causes of Inflation 

IX. Relatively Higher Philippine CPI? Philippine Yields Drop Faster than US Treasuries; Imbalances in USD Peso Interbank Liquidity 

 

Stagflation Ahoy! Defying the Consensus, Headline and Core CPI Hits Decade Highs! BSP QE 2.0 as a Principal Driver! 

 

Defying the consensus, the headline and the core CPI etched a 14 and 22-year high last January!  Liquidity injections from the BSP QE 2.0 and from the banks were among the principal forces. 

 

This post will likely be the fifth and last series of the BSP's QE 2.0 variant, which appears to be uncovered by authorities and social media.   

 

I. January CPI Exposed the Flawed Quant-Based and Confirmation Bias Economics 

 

For starters, January’s startling CPI in the eyes of the media. 

 

Inquirer.net, February 8: Inflation, a measure of the rate of increase in the prices of basic goods and services, surged to a new 14-year high of 8.7 percent in January, breaching the forecast of the Bangko Sentral ng Pilipinas (BSP) of between 7.3 and 8.3 percent, as well as estimates of private economists of 7.6 percent. 

 

Businessworld, February 6: HEADLINE INFLATION likely cooled in January as weaker demand, the peso’s appreciation against the US dollar, and slower growth in food prices offset the rise in utility rates and pump prices. A BusinessWorld poll of 15 economists last week yielded a median estimate of 7.6%, closer to the lower end of the 7.5% to 8.3% forecast range given by the Bangko Sentral ng Pilipinas (BSP) for January. 

 

The two article excerpts exhibit the incredible disparity between the predictions of the mainstream and actual results.  

 

Stunningly, two highly paid ivory tower experts even predicted a 5% CPI!  Amazing.  Have their quant models been looking at a different place? Have they not been scanning the headlines? 

  

These forecasts exhibit the hilarity and the futility of the "pin the tail on the donkey" economics. 

  

The same crowd has long seen and religiously asserted inflation as "transitory." They seem to represent the echo bubble chambers of authorities. Or their role is to possibly confirm the biases of the uncritical public.  

  

Besides, the consensus has always defended the sustainability of the current debt-driven consumption economic paradigm anchored on the expectations of the eternity of a cheap money regime. 

  

From their perspective, it is noise than signals that matter. As such, it seems that crucial changes in the economic structure can hardly occur from their viewpoint.   

 

This space offers an alternative "out of the box" perspective: the unseen effects of the economics of human action. 

II. Missed Inflation Forecast? The BSP’s Strategy of Shifting Goalposts 

 

But the BSP has even been worst. 

 

Manila Bulletin, January 31: The Bangko Sentral ng Pilipinas (BSP) said on Tuesday, Jan. 31, that inflation for the month of January may be lower at 7.5 percent from December’s actual 8.1 percent, or higher at 8.3 percent because of costlier power rates during the period. 

 

Not only have their armies of economists and analysts failed to "pin the donkey's tail" within the assigned bandwidth, but the sharing of inside information with the Philippine Statistics Authority (PSA) may have even been inadequate.  

  

Unlike mainstream experts, the BSP projects the CPI within a range, theoretically increasing the odds of hitting their projections, which should boost their credibility.  

  

Ironically, while authorities make the CPI, stunningly, they can even miss predicting it!  

 

But that’s not all. 

  

Again, had the calculation of the CPI been based on the 2012 base, it may have generated a far higher rate (9.1-9.3%).  Further, direct and implicit price controls (via SRPs) may have subdued the reported price increases.  Other factors, including the quality of survey questions, could also affect the inputs. 

  

As it is, tweaking statistics has partly been responsible for a "lower" CPI. 

  

But look at the short-term predictive prowess of the BSP. 

 

Last November, the BSP forecasted that the CPI could peak in November or December.  

 

In December, the same institution also reiterated its forecast; the CPI could reach its turning point in the same month.  

 

Yet, the January CPI hit a carved new 14-year high!  But a broken clock can be right twice a day. 

 

So, the examples above demonstrate the authorities' communication strategy of moving their goalposts frequently as a smokescreen.   

 

Yet the public still believes them.  

 

A word of note (nota bene).  This author is not a believer in the quantitative aggregation of the individual utility functions, as in the case of measuring price changes of goods and services via the CPI. Instead, as earlier noted, we seem to be operating in the age of inflation 2.0. (Prudent Investor, 2023) 

 

III. BSP’s CPI Forecasts Echo Policy Directions 

 

But the BSP’s projections are indicative of their policy directions.  

 

In any case, before the release of the January CPI, the BSP signaled a supposed change in strategy.  The BSP Governor noted that "they will focus on inflationary expectations in (the Philippines), not the Fed’s 25-bp (basis point) rate increase." 

 

If we guess the BSP right, since they might have been expecting a decline in the CPI, they could have been banking on maintaining the current level of rates.  

 

But the PSA must have been a "party pooper!"   

 

That is to say, if they raise rates by a mere 25 bps, then this validates our conjecture.  If they should raise rates by 50 bps, which means that the unexpected CPI rates forced them, it shows how communication errors could backfire. 

 

Yet, if they opt to keep rates at present levels—or even make a partial cut—then it illustrates that neither inflation nor the FED was the reason.  One would worry that this may be about banks and their addiction to easy money. 

 

So, the announcement of January’s CPI threw the establishment off balance. 

 

After all, for them, inflation remains stubbornly a "supply-side issue," if not an "imported" one.   

 

And it is almost always a problem of "greed" by some scheming entrepreneurs but never the authorities.  

 

The solemnity of the actions of authorities represents a form of Statolatry—the worship of the state. 

 

IV. Headline and Core CPI Hits Decade Highs! Chart Patterns and the 3-Wave Inflation Cycle Points to "Higher for Longer"  

 

The sticky headline inflation was at a 14-year high last January!  And that's what the media focuses on.  

 

Figure 1 

But the price increases outside food and energy, or the CORE CPI, which was at 7.4%, hit a 22+ year high! (Figure 1, topmost chart)  

 

It jumped past the zeniths of February 2005 (7.11%) and October 2008 (7.25%) to reach close to the December 2000 level of 8.24%! 

 

For chart enthusiasts, the breakout of the Core CPI from the twin resistance levels brings it closer to the December 2000 peak, which seems to be reinforced by a massive rounding bottom.  

 

The Headline CPI, meanwhile, also depicts a breakthrough from a rounded bottom and a reverse Head and Shoulder pattern, marked lowest level (Head) and by the left shoulder (LS) and right shoulder (RS).  

 

The momentum tells us a different story from that of the mainstream: inflation will remain "higher for longer."  

  

And this seems further supported by the mechanisms of the inflation cycle. 

 

That is, our explanation of the age of inflation represents a composite of multi-cycles.  And a cycle constitutes three waves of inflation spikes.  

 

The current wave represents the second, which may find a peak soon.  But then, based on the inflation cycle, after slowing for a time, the third wave will likely attain a "higher low and higher high."    

 

And perhaps the completion of this first cycle will be in 2025-2026. 

 

That's if history should rhyme. 

 

V. Neither Falling Oil Prices nor the Decline of the USD Influenced the January CPI 

 

And why wouldn't it rhyme when the ingredients are all in place? 

 

Despite the repeated insistence that inflation represents exogenous factors, facts (and theory) show the contrary. 

 

From our last post:  

In the last series, we explain January's 14-year high CPI from another angle: the massive liquidity infusions by the BSP, banking, and other financial institutions. 

Figure 2 

First, the latest evidence reveals that internal rather than external forces have driven up the CPI. 

 

Oil prices, measured by the US WTI benchmark, climaxed in May 2022 and have given back a substantial portion of its gains.  Regardless, the CPI continues with its upside streak.  (Figure 2, topmost window) 

 

Further, the easing of domestic oil imports has manifested the diminishing impact or the reduced transmission of international oil prices on local demand. (Figure 2, middle chart) 

 

Next, the USD reached its pinnacle last October.  It then retraced some of its gains.  But the CPI continues to set fresh multi-year highs nonetheless. (Figure 2, lowest chart) 

 

Yes, there could be time lag factors involved.   

 

But the thing is, what if the recent waterfall in the prices of oil and the USD-Php reverses? 

 

Will these not exacerbate inflation? 

VI. Yep, BSP and Bank Liquidity Operations Played a Substantial Role in Boosting Aggregate Demand… 

 

Figure 3 

So, what domestic factors could have driven the CPI to its present level? 

 

It is no coincidence that the spike in the January CPI has responded to the accelerating activities of the net claims on the central government by the BSP and the Banking system. 

 

In short, liquidity operations of the central bank in collaboration with the banks have bolstered the sector’s demand.   

 

More, the liquidity operations fueled substantial rallies in the treasury market and the Philippine Stock Exchange (PSE), which exhibited a significant loosening of financial conditions.  

 

Signifying the Cantillon Effects, the spending windfall of the direct recipients of such activities percolated into the other sectors, which helped power the aggregate demand. 

 

VII. …and so Did the Bank Credit Expansion, Mainly Consumer Loans 

 

Figure 4 

Aside from mounting inflation, the easing financial conditions, also signified by the uneven implementation of monetary policies, prompted consumer borrowing to spike to historic levels.  (Figure 4, topmost chart) 

 

Many consumers also took advantage of the interest rate subsidies via an interest rate cap to augment the loss of purchasing power.  Salary loans exploded too!  But these factors represented the next interlocking feedback loop that energized street inflation. 

 

Last December, such massive injections by the BSP and banks also percolated into bank real estate loans.  As a result, the expansion of industry loans in the banking system also contributed to the gains in aggregate demand. 

 

VIII. Deficit Spending: Another Primary Factor of Demand; the Aggregation of Demand Forces as Causes of Inflation 

 

But this leads to the most hallowed factor of economic development according to the popular view.  Deficit spending hovered close to the ALL Time record. The yearend data has yet to be reported.   

 

Figure 5 

For the consensus, government spending, which outcompetes the private sector, has little influence in shaping prices. 

 

But not for us, especially when the BSP and the banking system finance it.  Money supply expansion to fund public or deficit spending IS inflationary.  

 

The acceleration of the M2/GDP has energized the CPI on a time-lag basis. (Figure 5, upmost window) 

 

The former US President, Ronald Reagan, explained in a speech how deficit spending is inflationary.  

We know now that inflation results from all that deficit spending. Government has only two ways of getting money other than raising taxes. It can go into the money market and borrow, competing with its own citizens and driving up interest rates, which it has done, or it can print money, and it's done that. Both methods are inflationary. (Reagan, 1981)  

In summary, aggressive BSP and bank liquidity injections, bank credit expansion via consumer and industry loans, and deficit spending financing (expressed via money supply growth) signify the principal causes of the elevated CPI than supply-side bottlenecks.  

  

And the current credit and liquidity boom will have carry-over effects, which implies inflation pressures via demand carried forward.  

 

But to maintain the political-economic privileges of the status quo, the political rhetoric dictates that inflation remains a supply-side concern to convince the public that this is a "transitory" issue.  

 

In reality, the supply-side predicament represents an aggravating factor, a secondary source of inflation.  

 

IX. Relatively Higher Philippine CPI? Philippine Yields Drop Faster than US Treasuries; Imbalances in USD Peso Interbank Liquidity 

 

In the finale, even as the Philippine CPI runs hotter than the US, the yield differentials between the 10-year Philippine and UST bonds have widened recently.   It is indicative that the 10-year Philippine treasury has dropped faster than its US counterpart.  The deviance possibly represents the effects of massive joint liquidity infusions by the banks and financial institutions. (Figure 5, middle chart) 

  

Returning to the BSP’s attribution of the US Federal Reserve's activities for their policy adjustments, Phiref rates have also diverged from the USD-Php. (Figure 5, lowest pane) 

 

Phiref rates used to have tagged along with the USD-Php.  Phiref rates rose ahead of the USD-Php in 2020, which could make it a leading indicator. 

  

The Phiref rate is a derivative.  According to the Bankers Association of the Philippines (BAP), the PHIREF or the Philippine Interbank Reference Rate is the implied Peso interest rate derived from done deals in the interbank foreign exchange swap market.  The PHIREF is used as the benchmark for the reset value for the peso floating leg of an Interest Rate Swap. 

 

Put this way: the Phiref rates represent a measure of interbank FX liquidity. 

  

The disparity suggests that despite the fall of the USD, constraints on FX liquidity in the financial system remain elevated.  

 

This disconnect possibly represents a distortion in one of the price signals. 

 

Something has got to give. 

 

Our guess is that the supposed quest to control or contain inflation should remain elusive.  That's because politics is concerned with addressing short-run effects. 

______ 

 

References 

 

Prudent Investor, The 56-Year Philippine Inflation Cycle, December Headline and Core CPI Reinforce the Return to the Age of Inflation, January 8, 2023: blogger, substack 

 

Reagan, Ronald, Address to the Nation on the Economy - February 1981, Oval Office February 5, 1981, RONALD REAGAN Presidential Library & Museum 

 

Prudent Investor, The BSP Unveils Stealth QE 2.0 (Variant)! January 15, 2023; substack, blogger 

 

Prudent Investor, BSP QE 2.0 Variant Spurs Huge PSEi 30 Rally; Falling US Dollar Reflates the Everything Bubble substack, blogger 

 

Prudent Investor, BSP QE Variant 2.0 Confirmed! Historic Monetization of Public Debt by Financial Institutions! The Greatest Monetary Policy Experiment! February 6, 2023 substack, blogger 

 

Prudent Investor, BSP Variant QE 2.0 Variant Bolsters Bank Cash, Deposits and Total Assets! Banks Income "Boom" in 2022! February 12, 2023 substack, blogger