The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Doom-loops don't occur in isolation: they interact with each other, reinforcing each other. Attempts to suppress one doom-loop by papering over the unwelcome reality accelerate other doom-loops—Charles Hugh Smith 

In this short issue 

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

I. July’s CPI Momentum Accelerates

II. July Headline and Core CPI’s Diametric Paths 

III. Philippine Treasury Market Defied the July CPI Data

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Not only inflation, but stagflation remains a principal risk to the Philippine political, financial, and economic landscape

Inquirer.net, August 6, 2024: Headline inflation in July reached its highest rate in nine months, driven by higher price increases in housing, water, electricity, gas and other fuels, transport items, and food and non-alcoholic beverages, the Philippine Statistics Authority (PSA) reported on Tuesday. Preliminary data from the agency showed the consumer price index grew by 4.4 percent year on year in July, accelerating from the 3.7 percent in June, but slower than 4.7 percent in the same period last year…Inflation print in July marked the fastest growth in nine months or since the 4.9 percent logged in October 2023.  

Some observations from the July CPI Data:  

I. July’s CPI Momentum Accelerates

Figure 1

First, a greater than 0.5%—but less than 1%—spike in the Month-on-Month (MoM) growth rates has typically been a harbinger of a sustained uptick in the Headline CPI Year-over-Year (YoY). July’s MoM rate jumped by 0.72%. (Figure 1 upper image) 

Does this imply a higher CPI in August and the strengthening of the third wave of this first CPI cycle?

II. July Headline and Core CPI’s Diametric Paths 

Second, while the Philippine headline CPI surged from 3.7% in June to 4.4% in July, core CPI dropped from 3.1% to 2.9%. The gap between the headline and core reached its widest level since 2022. (Figure 1, lower graph) 

In the past, this chasm was a result of the headline rising faster than the core or vice versa. Or, while both were headed in the same direction, the divergent pace or speed resulted in the disparity. The recent gap signified a product of path divergence. 

Energy was the primary source of July’s "inflation." According to the BSP, although food inflation also accelerated due to faster price increases of meat and fruits, "the uptick in July inflation was traced mainly to non-food inflation, particularly higher electricity rates and upward adjustments in domestic prices of petroleum products."

Figure 2

Interestingly, the transport CPI spiked from 3.1% to 3.6% despite the moderation in global oil prices as measured by the US WTI. (Figure 2, upper window)

According to the BSP’s inflation basket, food, transport, electricity, and gas constitute 53.5% of the CPI basket. 

However, the antipodal directions indicate generally weak demand for non-food and transportation items. 

Could this signify an escalation of stagflation? 

Moreover, the weakening MoM change in the core CPI has barely supported the rise in general prices in the economy. (Figure 2, lower diagram) 

III. Philippine Treasury Market Defied the July CPI Data

Figure 3 

Next, despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Figure 3, upper chart) 

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation 

Needless to say, the escalating tensions between the deflationary and inflationary forces in the economy should lead to more volatility, and this directional impasse will likely be resolved by (path-dependent) government policies. 

Or, while we are not fans of government statistics, should the government maintain the pace or speed of the latent "Marcos-nomics stimulus," forces of inflation are likely to prevail in this phase of the CPI cycle. 

Marcos-nomics, as Q2 GDP has validated, will continue to anchor on boosting GDP (infrastructure and welfare), funding pre-election, and defense spending. 

That is to say, such stimulus would increase demand by intensifying systemic leverage. 

Figure 4 

The combination of record Universal Commercial Bank lending levels—or rebounding growth rate—and the upsurge in the government’s deficit spending has prompted the most liquid of the money supply measures (M1) to accelerate upward. (Figure 3, lower chart, Figure 4, top and bottom graphs) 

If sustained, this should send the CPI higher over time. 

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

Lastly, using official data, the CPI reveals shades of broadening inequality.

The Bottom 30% (B30) income households buy at the same prices as others.

Figure 5

In July, the headline CPI rose faster than the B30, which pulled their spread marginally lower after reaching 2018 highs last June. (Figure 5, topmost graph) 

However, the spread in the Food CPI between the headline and the B30 remains wide and at 2022 levels. (Figure 5, middle image) 

The widening gap in the PSA’s B30-headline inflation data partially confirms a private sector poll’s finding that hunger rates have been rising—not limited to the B30 class, but also on self-poverty ratings. (Figure 5, lowest chart) 

Stagflation is already present among the average citizens. 

Until the government and the BSP discipline themselves from their free-money "trickle-down" policies, stagflation will remain a primary political-economic-financial risk.