Philippine July CPI Reinforces Interim Downtrend; "Sticky" Core and the CPI in Search of a Bottom

 

If I gain ten pounds one year and four the next, my inflation rate will fall, but I am not slimming. And prices continue to bite, hurting the economy and consumers—Daniel Lacalle 

 

In this short issue 

Philippine July CPI Reinforces Interim Downtrend; "Sticky" Core and the CPI in Search of a Bottom 

I. July 2023 Headline and Core CPI Dived, Explaining the CPI Basket 

II. "Sticky" Core CPI and the Incredible Deflation in Transport CPI 

III. Widening Food and Food Services CPI Spread: Booming Profit Margins? Boosting the GDP Requires a Sharp Fall in the CPI 

IV. Though Downside Momentum Could Continue, the CPI in Search of a Bottom 

 

Philippine July CPI Reinforces Interim Downtrend; "Sticky" Core and the CPI in Search of a Bottom 

The Philippine CPI sustained its downside momentum last July.  But the Core CPI remained "sticky," as several signs possibly point to an upcoming bottom.  

I. July 2023 Headline and Core CPI Dived, Explaining the CPI Basket 

 

GMA News, August 4: The Philippines’ inflation rate continued to decline for the sixth straight month in July amid slower movements in utility, food, and transport prices, the Philippine Statistics Authority (PSA) reported on Friday.At a press briefing, National Statistician and PSA chief Claire Dennis Mapa said that inflation —or the rate of increase in the prices of consumer goods and services — decelerated further to 4.7% last month from 5.4% in June and 6.4% in July 2022. July’s rate is the lowest in 16 months or since March 2022’s 4.0% print, according to Mapa. This brought the year-to-date print to 6.8%, still above the government’s ceiling of 2% to 4%. This is the sixth time that inflation declined from a peak of 8.7% in January. 

 

The mainstream describes the CPI in the prism of monthly changes, typically comparing it with the latest level.   

 

 

Figure 1 

 

But let us point out what the consensus omits.  The CPI remains above the 2014 levels.  More importantly, the CPI has been on an uptrend—marked by higher lows and higher highs—since 2015. (Figure 1, topmost window) 

 

From the perspective of the inflation cycle, the recent two highs constitute the 1st and 2nd waves. 

 

But there's more.  It has been more than the Headline CPI; despite the recent decline, the Core CPI remains at 15-year levels! 

 

And in contrast to the information provided by the establishment, the largest component of the nation's CPI basket is the Non-Food segment, which represents 60.09% share.  

 

On this account, the Core CPI—even with the exclusion of the energy component—has the biggest share of the CPI pie. (Figure/Table 1) 

 

II. "Sticky" Core CPI and the Incredible Deflation in Transport CPI 

Figure 2 

 

Government statistics incorporate bizarre quantifications.  

 

Strikingly, the deflationary collapse (23.2%) of the "operation of personal and transport equipment" has the most influence on the plunge of the headline (and core) CPI, which carried a .7% contribution to the YoY change.    

 

In contrast, "Passenger Transport and Services," which posted a 7.2% GDP, contributed .3% on the YoY change, barely offsetting this plunge that resulted in a stunning 4.7% deflation of the Transport CPI! (Figure 2, upper chart) 

 

So, while everything has been rising but at a slower rate, the Transport sector has endured a deflationary storm?! How valid is this? 

 

Incredible.  

 

Importantly, the spread between the headline and the core CPI has been negative since March 2023—and the widest since 2019.  (Figure 2, lower graph) 

 

In 2019, while headline CPI plunged, the core CPI drifted steadily, which created this record margin. Today, the headline CPI has dropped faster than the core.  

 

The gist of the "sticky" core CPI is that inflation represents a monetary or a demand-side phenomenon. 

 

Further, contradictory to the consensus, which sells the notion that the falling CPI represents "good news," inflation is cumulative, which means though consumers have been punished less—based on statistics—they are still being robbed of their purchasing power, which extrapolates to a lower standard of living, regardless of the GDP numbers.   

 

As an aside, 2Q GDP is to be announced this week. 

 

III. Widening Food and Food Services CPI Spread: Booming Profit Margins? Boosting the GDP Requires a Sharp Fall in the CPI 

Figure 3 

 

The other odd aspect is the astonishing difference between the Food CPI and Food and Beverage Services CPI.  

 

The Food and Beverage Services CPI has signified the most significant contributor to the Core CPI. That's primarily because of its "stickiness," or the Food CPI has plunged faster than the Core's Food and Beverage services CPI.   

 

The inference is that the public continues to binge on outdoor meals. And because of this, the relatively faster decline of the food CPI translates to lower input costs that should boost the gross profit margins of the food services industry! (Figure 3 topmost graph) 

 

We shall see if this is valid in the 2Q reports of listed food chains. 

 

But why the quirks in the CPI? 

 

The GDP depends on several components of the CPI to represent the deflator or its implicit price index.  (Nota Bene: The PSA refurbished its website, so the previous links are currently unavailable.) 

 

With private sector and public revenues or the top line—the Nominal GDP—receding due to reduced demand from the moderation of public spending and declining bank credit growth, the CPI has to fall substantially to generate a headline-striking "GDP."  

 

This bias to inflate the GDP could also be one of the reasons behind the remarkable chasm between the "headline" and the "core" CPI. 

 

IV. Though Downside Momentum Could Continue, the CPI in Search of a Bottom 

 

The BSP has yet to release the publication of June's bank lending conditions.  That said, our limited analysis and exposition on the July CPI.  

 

Though we predicted the interim turnaround of the CPI last March, there are signs that this downtrend could bottom out sooner.  (Prudent Investor March 2023) 

 

To be clear, yes, momentum suggests more downside, the CPI may fall to the BSP’s target levels, but once it hits a "floor," it could pivot rapidly to the upside.  

 

Why? 

 

First, aside from banks, the BSP continues to inject liquidity into the system via its stealth QE. (Figure 3 middle chart) 

 

Figure 4 

 

Next, a sustained rise in energy (WTI oil) prices and a likely rebound USD-Php could signify pressures from "external" sources or "imported inflation." (Figure 3 lowest window and Figure 4, topmost chart) 

 

Lastly, the Philippine yield curve morphed into a "bearish steepening"—indicating that Treasury traders foresee an inflation comeback. (Figure 4 middle window) 

 

In conclusion, as previously discussed, as long as the domestic drivers of inflation remain in place, the inflation cycle should persist. (Prudent Investor, July 2023) 

 

Many have been predicting (exactly—wistful or longing for) rate cuts.  (Figure 4, lowest chart) 

 

Be careful of what you wish for. 

 

_____ 

References 

 

Prudent Investor, Philippine Core CPI Forged a New 22-year High!  Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections, March 12,2023 (Substack, Blogger) 

 

Prudent Investor, A Review of June and 1H 2023 Philippine Budget Deficit, The Eleven Ramifications of Deficit Spending, July 31, 2023 (Substack, Blogger)