The Philippine August CPI "Shock;" Stagflation Ahoy: Rising Oil Prices, Firming USD, Structural Deficits, and Asymmetric BSP Policies

 

Those into whose pockets the additional money goes first profit from the situation, whereas others are compelled to restrict their expenditures. The government does not acknowledge this; it does not say, "We have increased the quantity of money and, therefore, prices are going up." The government starts by saying, "Prices are going up. Why? Because people are bad. It is the duty of the government to prevent bad people from bringing about this upward movement of prices, this inflation. Who can do this? The government!" Then the government says, "We will prevent profiteering, and all these things. These people, the profiteers, are the ones who are making inflation; they are asking higher prices." And the government elaborates "guidelines" for those who do not wish to be in the wrong with the government. Then, it adds that this is due to "inflationary pressures." They have invented many other terms also which I cannot remember, such silly terms, to describe this situation — "cost-push inflation," "inflationary pressures," and the like. Nobody knows what an "inflationary pressure" is; it has never been defined. What is clear is what inflation is—Bettina Bien Greaves 

 

In this issue 

 

The Philippine August CPI "Shock;" Stagflation Ahoy: Rising Oil Prices, Firming USD, Structural Deficits, and Asymmetric BSP Policies 

I. The August CPI "Shock:" The Remarkable Deviation of Consensus Estimates 

II. Inflation is Not a Statistic, It Signifies the Destruction of Property Rights 

III. Move Aside Rice, Rising Oil Prices Should Compound "Imported Inflation"   

IV. More "Imported Inflation:" Firming US Dollar Should Expose the Fragility of the Philippine Peso 

V. Troublesome Structural Deficits and its Inflationary Financing; Credit Card Subsidies Fuel Pivotal Shift in Bank Lending Operations 

VI. What Tightening? Consumer Debt at All-Time High as Unemployment Jumped in July: Amplifies Bank and Stagflation Woes 

VII. The Lesson: Path-Dependent Policy Responses Extrapolate to "Stagflation Ahoy!" 

 

The Philippine August CPI "Shock;" Stagflation Ahoy: Rising Oil Prices, Firming USD, Structural Deficits, and Asymmetric BSP Policies 

For the consensus, the August CPI signified another data shocker. However, the third wave of this inflation cycle appears to be gaining momentum from various international and local fronts.

I. The August CPI "Shock:" The Remarkable Deviation of Consensus Estimates 

 

Reuters, September 5: Philippine inflation proved stubborn after it unexpectedly quickened for the first time in seven months in August, due largely to an uptick in food and transport costs, keeping the pressure on the central bank to maintain its hawkish stance. The consumer price index (CPI) (PHCPI=ECI) rose 5.3% year-on-year in August, above the 4.7% forecast of economists in a Reuters poll, which matched the previous month's pace, but within the central bank's 4.8% to 5.6% projection for the month. 

 

The "pin the tail on the donkey" or the "inflation is transitory" crowd of experts was caught flat-footed again!  

 

After the Q2 GDP, this time, the August inflation "shock." 

Figure 1 

 

As the Bloomberg survey exhibited, the highest inflation "guess on a guess" MoM estimate was .5%, but the actual result was more than double! (Figure 1, upper chart) 

 

In the meantime, the 5.3% CPI fell within the BSP's "guess," which covered an 80-bps range of 4.8% to 5.6%.  The private sector makes a one-number guess, but the BSP a—9-number—range. 

 

This hit makes the BSP look good and seem in control of the situation.  After all, they coordinate their forecasts with other agencies, including the Philippine Statistics Authority (PSA).  So, one political agency distills and calculates the surveyed inputs and publishes its result, while another agency offers a "guess."  Then, the private sector offers theirs.  

 

At any rate, according to the government’s statistics, rice was a critical factor in boosting the month's CPI. 

 

The irony: Despite mounting pressures on rice supplies, which social media news have been reporting, private sector estimates just piled or "herded" on the interim CPI downtrend.  

 

We have raised that the increasing imbalances in the rice economy would contribute to "inflation" as far back in January.  

 

Nevertheless, after this "surprise," the private sector experts have begun to upgrade their inflation crystal balls (like the GDP).  

 

The thing is, the overall goal of this "guessing" exercise, as we noted: 

 

In gist, the “pin the tail on the donkey” discourse gives “legitimacy” to the GDP (or the CPI). (Prudent Investor, 2023) 

 

II. Inflation is Not a Statistic, It Signifies the Destruction of Property Rights 

 

The mainstream projects to the public that inflation is just a statistic.  

 

For this reason, price controls look remarkably alluring.    

 

But inflation represents the destruction of our money's purchasing power.  Even when its rate of growth declines, it still corrodes on our property, expressed as our money.  The boiling frog syndrome analogizes the gradual disintegration (boiling alive) of its purchasing power from implicit political larceny.     

 

Nevertheless, price ceilings are also meant to suppress the CPI.  A higher base in the face of a price cap compresses the rice CPI, ceteris paribus (all things equal), that lowers the national CPI even when transactions move to the black markets.   

 

So, the CPI, theoretically, should go down.  But as the 1995 episode showed—not all things are equal—rice shortages led to rationing and spilled over to other food products that sent the CPI spiraling higher.   

 

As we have previously explained, base rates matter.  The CPI would likely be substantially higher when computed with the old base (2012 or 2006). The constant shifting of base rates, attributed to adapting modernity, is a euphemism for the enrichment of the CPI picture, a politically sensitive statistic. 

 

The other angle of the August CPI, or the "inflation surprise," was the spike in its month-on-month (M-o-M) growth rate.  Figure 1 (lower graph) 

 

And each time the M-o-M growth rate soared above 1%, it accompanied an inflection point, whether a top or bottom in the headline CPI.  That said, this threshold augurs excess CPI volatility. 

 

So, what could August CPI presage: a coming upside spike or a downside spiral? 

 

To this point, politics divert the public's attention with statistics but erode our claims of wealth (money) with the entrenchment of redistribution via the inflation tax. 

III. Move Aside Rice, Rising Oil Prices Should Compound "Imported Inflation" 

 

But it may not just be rice.  Other factors are brewing to augur inflation's third wave. 

 

First, is the surging price of oil. 

 

Last week, two of the largest oil producers, Russia and Saudi Arabia, jointly declared production cuts as US Strategic Petroleum Reserves plunged to their lowest level since 1983.   

 

In the meantime, despite a slowing economy, China continues to build on its reserves by acquiring cheaper oil from Iran and Russia.   

 

Despite expectations of a moderation in oil demand (IEA), tight supply has spurred a runup in international oil prices. 

 

The US WTI and Europe's Brent have been up by 4.6% and 4.4% in September (as of September 8).  

 

Figure 2 

 

Aside from the various impacts, rising energy prices could boost fertilizer prices and consequently food prices. Urea prices have started to climb along with oil. (Figure 2, topmost chart) 

 

Rising oil prices have led to a rebound in the share of Philippine fuel imports last July. (Figure 2, middle chart) 

 

Moreover, the increasing share of fuel imports—from higher prices—may contribute to a higher trade deficit, increasing pressure on the USD-Php, which has a precedent: the 2020-22 episode. (Figure 2, lowest window) 

Figure 3 

 

As such, the national CPI will likely reflect the influence of "imported inflation."  The headline and the CORE CPI have also fluctuated with the WTI. (Figure 3, topmost graph) 

 

IV. More "Imported Inflation:" Firming US Dollar Should Expose the Fragility of the Philippine Peso 

 

Next is the firming US dollar. 

 

The rising trend of the USD Php has accompanied the CPI. (Figure 3 middle pane) 

 

The US dollar has been strengthening against most currencies, which has been rising alongside yields of the US Treasury markets (and oil prices too). (Figure 3, lowest chart) 

 

External pressures should expose inherent fragilities of domestic political-economic activities not limited to public spending, bank loan conditions, BSP-bank liquidity operations, and other relevant policies. 

 

Despite recent BSP activities to prop it up, a weak peso transmits into amplified price pressures expressed via the CPI.  

 

For instance, authorities have recently been using their purse to allay unsatisfactory economic conditions from their inflationary policies. 

 

It recently approved the "release of P3 billion for a fuel subsidy program for public utility drivers and transport operators."  It also promised a subsidy to those affected by the price ceiling: "At least P2 billion would be allocated by the government to rice retailers who would be affected by the rice price cap." 

Figure 4 

 

And it should be unsurprising that public debt continues to swell to all-time highs—which, of course, the banks have played a crucial role in its financing.    

 

V. Troublesome Structural Deficits and its Inflationary Financing; Credit Card Subsidies Fuel Pivotal Shift in Bank Lending Operations 

 

The impact of all these should be to increase deficit spending financed by the record banking system's NCoCG (net claims on central government) even as the BSP has recently been pulling back. (Figure 4, top and middle charts) 

 

Both public debt (Php 14.244 trillion in July) and bank NCoCG (Php 6.33 trillion in June) were at all-time highs. (Figure 4, lowest graph) 

 

These inflationary liquidity backstops are here to stay. 

 

As we have been pointing out here, rate hikes by the BSP are for headline consumption.   

 

In reality, the BSP practices asymmetric policies, where the economy still benefits from easy money via credit card subsidies and bank NCoCG operations (and possibly residual relief measures). 

 

When you subsidize something, you get more of it. 

 

The consequences are obvious: While consumer credit growth appears to have peaked in % YoY, it continues with its record-breaking streak in pesos.   

 

Figure 5 

 

Such inflationary pressures are being revealed by the structural shift in banking activities, now focusing on consumer credit rather than production loans. (Figure 5, topmost diagram) 

 

And so, with reduced financing for operations and investments, which has led to moderating factory/manufacturing output and increasing unemployment, the markets and public spending increasingly depend on imports.  (Figure 5, middle window) 

 

It is a different story from the S&P Markit perspective; factory output has started to contract. 

 

Naturally, with the buildup of trade and fiscal deficits, a higher CPI and a weaker peso should represent its natural outcome.  

 

VI. What Tightening? Consumer Debt at All-Time High as Unemployment Jumped in July: Amplifies Bank and Stagflation Woes 

 

And so, while the media focused on July's unemployment data, which jumped from 4.5% to 4.8%, the plunge of labor participation rates from 66.1% to 60.1% and the surge in underemployment from 12% to 15.9% should be the more worrying developments. (Figure 5, lowest chart) Why have a lot of people stopped looking for jobs?

 

In any case, though the labor data itself is questionable, it likely reflected the delayed impact of the Q2 4.3% GDP shock.  

 

Figure 6 

 

That being the case, rising rates have incited the persistence of the record hot streak of bank salary loans. Yes, % YoY performance has materially slowed, but similar to credit cards, peso levels are at an all-time high! (Figure 6, top, second to the highest and second to the lowest charts) 

 

And salary loan growth has echoed the CPI. 

 

We can only deduce that with rising unemployment, the backdrop of massive increases in leverage by employees—to increase purchasing capacity in response to higher prices—should lead to snowballing non-performing loans (NPL). 

 

That should be aside from rising cases of delinquencies from loans on the industry side.   

 

In all, rising NPLs would compel banks to become defensive—raise loan loss reserves, increase Held-to-Maturity (HTM) holdings to camouflage mark-to-market investment losses, liquidate bad loans (and assets) to increase liquidity, amplify fund-raising via the capital markets, tap liquidity from the BSP and reduce lending operations. 

 

And because this should hit the economy, authorities could use the 2020 playbook of record deficit spending and myriad monetary and financial interventions (liquidity, relief measures, rate cuts, politically mandated loans, etc.)  

 

So why would these forces not lead to stagflation? 

 

VII. The Lesson: Path-Dependent Policy Responses Extrapolate to "Stagflation Ahoy!" 

 

Again, looking at the evidence, many of these forces are already present and entrenched in the system. 

 

The record growth of consumer loans tells us that monetary policies remain partially loose. 

 

This penchant for short-term political fixes (populism) raises the risks for expanded price controls to cover many other areas. The longer the price ceiling remains, the greater the risks of shortages and rationing. (Prudent Investor, September 2023) 

 

As an aside, Malaysia has started to ration (limit sales of) rice. 

 

Path-dependent policies of throwing money or the expanded use of fiscal space to address political plight have signified the automatic or mechanical response of policymakers. 

 

Banks continue with their record acquisition of NCoCG.  Public debt has taken over bank credit growth. 

That's apart from the political exercise to enforce an Overton Window by controlling media narratives and shutting down any opposition to it. 

 

Lastly, treasury markets have been ambivalent.   

 

The recent steepening of the treasury yield spreads appears to be reversing or has started to flatten anew, suggesting the economic vulnerability that could offset part of these inflationary forces. (Figure 6, lowest graph) 

 

Nonetheless, the trend of the yield spread should become evident soon. 

 

In all this, the policy responses to unfolding developments ultimately determine inflationary conditions, regardless of whether we could see a turnabout or one/more declines in the CPI in a month or so.    

 

The third phase of the present inflation cycle will come sooner than later, which means (like it or not) "stagflation ahoy!" 

 

____ 

references 

 

Bettina Bien Greaves, "Deficit Financing" and Inflation, October 25, 2021, Mises.org  

 

Prudent Investor Newsletter, "Shocking" Philippine Q2 GDP 4.3%: Don’t Fight the Trend! Public Spending Soared in Pesos! Consumers Slowdown as Big Government Becomes "Bigger," August 13: Substack, Blogger 

 

Prudent Investor Newsletter, Philippine Rice Crisis 2.0: Why the Price Ceiling Policy Will Fail! The Role of Protectionism and the Real Estate Bubble, September 3: Substack, Blogger