What Surprise is in Store for the 2025 Year of the Wooden Snake?

 

Mundus vult decipi, ergo decipiatur (The world wants to be deceived, so let it be deceived) —Sebastian Brant (also Brandt) 

In this issue

What Surprise is in Store for the 2025 Year of the Wooden Snake?

I. 2025: The Year of the Wooden Snake, Zodiac Cycles and Sociology

II. Trump 2.0 and Current Geopolitical Developments

III. Geopolitical Milestones in the Year of the Snake

IV. The Influence of the Year of the Snake on the Global Economy and Financial Markets

V. The Impact of the Year of the Snake on Philippine Politics and Economy

VI. A Comparative Analysis of the Year of the Snake's Impact on the Philippines

VII. Conclusion

What Surprise is in Store for the 2025 Year of the Wooden Snake?

How will the 2025 Year of the Snake impact geopolitics, the global economy, and financial markets? Will it be a year of upheaval or opportunity for the Philippines?

I. 2025: The Year of the Wooden Snake, Zodiac Cycles and Sociology

2025 is the Year of the Wooden Snake. To gain insight into what this might signify, a quote from the article offers a succinct summary. 

Chinese new year 2025 is an especially fortuitous one as it is ruled over by the wood snake, a sign associated with wisdom, intuition, and renewal. It’s a combination of an animal (the snake) and an element (wood) that occurs once every 60 years. It promises to be a period full of unique energy with some distinct characteristics…The combination of snake and wood creates a special synergy in which the introspective and transformative energy of the snake is paired with wood’s expansive and balanced nature. (Mendoza, 2025)

Optimism consistently pervades the annual forecasts for the Chinese zodiac calendar. The zodiac embodies a 12-year cycle, each year symbolized by an animal and its associated attributes.

While we remain agnostic about this tradition (and its geomantic counterpart, feng shui), significant events occurring within the year might appear as circumstantial coincidences or could indeed signal potential cyclical patterns within the political economy. 

In other words, certain aspects of astrology might intersect with sociological phenomena. 

For instance, our analysis of geopolitical developments through the lens of the Chinese zodiac cycles fortuitously resulted in our accurate prediction of the outbreak of the Russia-Ukraine War in February 2022. 

Aside from the eroding concerns over the pandemic, potential geopolitical flashpoints for a hot war may occur.  

For instance, the US-Russian impasse over Ukraine (Russia’s vehement objection over the slippery slope of NATO’s expansion into her borders) (Prudent Investor, January 2022) 

Thus, an examination of global and local developments over 12-year cycles may provide valuable clues for 2025. 

II. Trump 2.0 and Current Geopolitical Developments

Donald Trump’s inauguration as the 47th President of the United States will be held on January 20th, just 9 days ahead of the Chinese New Year on January 29th. This timing suggests that at the start of his term, he will busily sign numerous Executive Orders (EOs) that could significantly influence the geopolitical landscape this year. 

Even before taking office, geopolitical developments have already moved in anticipation of his potential actions.

Israel and Hamas have agreed to a ceasefire, which takes effect on Sunday, January 19th—469 days after the conflict began on October 7, 2023. President-elect Trump reportedly had significant influence over this deal. 

Still, Israeli Prime Minister Netanyahu has publicly stated that the ceasefire with Hamas, as discussed with Trump, is intended to be "temporary." 

The incoming president is also reportedly considering easing sanctions on Russian oil exports in exchange for a peace deal with Ukraine, while simultaneously exerting pressure on Iran and Venezuela. 

While the incoming cabinet has reportedly been filled with pro-Israel lackeys and are hostile towards relations with China and Russia, Trump recently posted a video on his X account suggesting that the Syria and Iraq wars were orchestrated by Israel’s Netanyahu. 

Trump also had a phone call with China’s President Xi on January 17th, where both leaders declared on X.com they would “do everything possible to make the world more peaceful and safe.”

Following the sudden collapse of Assad-led Syria, Russian President Putin and Iranian President Raisi signed a “comprehensive partnership agreement” on January 17th, likely aimed at deterring any potential aggression from the U.S.-Israel alliance

Donald Trump has added complexity to geopolitics by exerting pressure on his allies. 

1. He has cited the need to pursue the acquisition of the Panama Canal.

2. Beyond securing access to critical mineral resources, Trump has proposed the acquisition of Greenland and the annexation of Canada, potentially to extend the U.S. sphere of influence in the Arctic Circle, competing with Russia. This strategy might also serve to divert attention from escalating war tensions with Russia and China.

As historian Eric Margolis suggested, "Trump has started a scramble of imperial rebranding"

3. Additionally, Trump has urged NATO members to increase their defense spending to 5% of GDP.

4. Could the alleged snubbing of the Philippine leadership at Trump’s inauguration signal a potential shift in US-Philippines foreign relations?

Trump's presidency promises to be a period of intense geopolitical activities, where traditional alliances might be tested, and new power dynamics could emerge, all under the ambitious and often unpredictable deal-making leadership of the 47th President of the United States.

III. Geopolitical Milestones in the Year of the Snake

Based on historical analysis and considering the cyclical nature of the Chinese zodiac, here are significant geopolitical milestones that occurred in various Years of the Snake: 

1917: The United States joined the Allies and entered World War I in April 1917. This was a pivotal moment that contributed to the eventual end of the war.

1941: The Bombing of Pearl Harbor on December 7, 1941, prompted the U.S. entry into World War II, significantly altering the course of the conflict.

Operation Barbarossa: Launched on June 22, 1941, this was Nazi Germany's invasion of the Soviet Union, marking the beginning of a massive Eastern Front campaign in World War II. This operation was one of the largest military operations in history and had profound effects on the war's outcome.

The Battle of Moscow, marking a turning point on the Eastern Front for the Russians against the invading Germans in World War II, also took place in (October 2) 1941-42. This battle was crucial for halting the German advance into the Soviet Union.

1953: The Korean War concluded with an armistice agreement on July 27, 1953, ending three years of conflict and setting the stage for the division of Korea that persists today.

1965: The U.S. significantly escalated its involvement in the Vietnam War in 1965, marking a major expansion of American military presence in Southeast Asia.

1989: The Tiananmen Square Massacre in China, from April 15 to June 4, 1989, involved the violent suppression of pro-democracy protests, impacting China's international image and domestic politics.

The Fall of the Berlin Wall on November 9, 1989, marked the end of the Cold War and was a precursor to the reunification of Germany, signaling the decline of the Soviet sphere of influence in Eastern Europe. 

2001: The 9/11 Terrorist Attacks on September 11, 2001, devastated the U.S., leading to the initiation of the War on Terror. This event reshaped global security dynamics.

The War in Afghanistan began 1-month later that year as the U.S. response to the 9/11 attacks, marking the start of a long-term military engagement in the region.

2013: The Syrian Civil War saw increased international involvement in 2013, with discussions around chemical weapon use and subsequent military actions, further complicating the conflict.

The Snake is often linked with transformation, introspection, and unpredictability, suggesting that geopolitical tensions might rise or escalate. The Wood element, associated with growth and expansion, could also signify potential for new power struggles. On the other hand, the introspective nature of the Snake might promote diplomatic efforts and peace negotiations, leading to the conclusion of ongoing conflicts.

In sum, the impact of the Year of the Wood Snake will depend on a complex array of interdependent factors, including global political dynamics, the influence of vested interest groups such as the military-industrial complex, hegemonists, and political elites, as well as leadership decisions and international diplomacy. This year tends to bring significant changes, with the potential for new conflicts to emerge, existing wars to escalate, and the possibility of resolving ongoing disputes, reflecting the intricate interplay of forces during this zodiac cycle.

IV. The Influence of the Year of the Snake on the Global Economy and Financial Markets

The influence of the Year of the Snake on the global economy and financial markets have been significant

1929: The U.S. stock market crash of 1929 precipitated the Great Depression, causing global economic devastation, massive unemployment, and profound financial instability. 

1941: U.S. economic mobilization for World War II marked a shift toward a war economy. This also resulted in increased U.S. wartime financing through the issuance of war bonds, a growing national debt and the Fed’s financial repression policies.

World War II also led to the U.S. Lend-Lease Act, which strengthened economic ties between the U.S. and Allied nations. 

1965: Often cited as part of the Golden Age of capitalism, 1965 marked a peak in the post-WWII economic boom in Western nations, particularly the U.S. and Europe.

Figure 1

The Bretton Woods System started showing signs of strain mounting due to inflationary pressures and vastly increased spending related to the Vietnam War. (Figure 1, upper graph)

1977: Following the Nixon Shock in 1971, the post-Bretton Woods era led to U.S. dollar weakness and inflationary pressures.

1989: The fall of the Berlin Wall paved the way for Germany's economic reunification. 

Global market liberalization advanced, emphasizing free trade and deregulation.

Despite the Bank of Japan's monetary tightening, the Nikkei 225 reached an all-time high of 38,957.44 on December 29, 1989, amidst a Tokyo land price crash. 

2001: The bursting of the Dot-Com Bubble led to a recession, with considerable stock market losses, particularly in tech stocks, and an eight-month U.S. economic contraction.

The 9/11 attacks further destabilized global markets.

China's accession to the WTO significantly expanded its global trade presence.

2013: The "Taper Tantrum" occurred when Federal Reserve Chairman Bernanke announced a potential reduction in bond purchases, causing U.S. bond yields to rise and leading to instability in emerging markets.

The U.S. Dollar Index (DXY), which tracks the value of the U.S. dollar against a basket of six major trading partners' currencies, began its nearly 12-year uptrend in 2013. (Figure 1, lower image) 

Meanwhile, the Eurozone crisis persisted, with Greece and other nations continuing to face financial instability.

The Year of the Snake has historically been associated with heightened volatility in both geopolitics and domestic politics, and its interconnectedness with economics reveals similar underlying dynamics.

Historically, periods marked by surging asset bubbles, financial system pressures, recessions, and rapid economic expansion have all been part of this recurring cycle.

Looking ahead to 2025, uncertainties abound. However, the growing deep-seated economic imbalances—characterized by unprecedented debt levels, record deficits, and central bank policies favoring easy money—along with rising protectionism, the weaponization of finance, and speculative asset bubbles, all point to an increased risk of significant downside volatility.

V. The Impact of the Year of the Snake on Philippine Politics and Economy

How has the year of the Snake affected the Philippines.

1929: The Great Depression severely impacted the Philippine economy, which was still a U.S. colony, due to its dependence on U.S. markets.

1941: Imperial Japan launched a surprise attack on Clark Field and Iba Field on the opening day of hostilities in the Philippines, a day after the attack on Pearl Harbor. This paved the way for the Japanese occupation, causing massive socio-economic devastation.

1953: Former Defense Secretary Ramon Magsaysay was elected as the seventh President of the Philippines. The post-World War II economic recovery was still underway, with the country grappling with the repercussions of the war, including ongoing rebuilding efforts.

1965: Ferdinand Marcos Sr. was elected the tenth President of the Philippines. His victory marked the beginning of a long tenure in power, eventually leading to the declaration of martial law in 1972.

1977: Since the establishment of Martial Law in 1972, the administration of Ferdinand Marcos Sr. had suppressed political dissent and controlled growing unrest, which resulted in widespread human rights violations.

During this period, the Philippine economy was characterized by massive government spending on infrastructure projects, largely funded through loans. This led to rising external debt, which became a significant issue in the later years of Marcos' rule. In 1977, Marcos issued Presidential Decree 1177, which mandated automatic appropriations for debt servicing. 

The imposition of Martial Law coincided with economic instability, partly exacerbated by the global oil crisis, high inflation, and escalating debt levels.

1989: The late 1980s were marked by political turmoil and growing opposition to the regime of Corazon Aquino, who had assumed power after the 1986 People Power Revolution (People Power I).

In 1989, the Reform Armed Forces of the Philippines (RAFP) launched the most serious coup attempt against the Aquino government, among many previous attempts, highlighting dissatisfaction with her leadership and resistance to her reforms.

Despite Aquino's efforts to stabilize the economy, the country continued to face persistent challenges, including high levels of foreign debt and inflation. However, Aquino’s administration made significant strides in implementing market-oriented reforms and privatizing state-run enterprises, though the country still struggled due to global economic conditions and internal political instability.

2001: In January 2001, President Joseph Estrada was ousted in a second People Power Revolution, also known as People Power II, after being accused of corruption. Estrada’s impeachment and subsequent removal from office, amid widespread public protests, marked a significant political transition. Vice President Gloria Macapagal Arroyo was sworn in as the new president, though the transition was accompanied by significant political unrest and instability.

At the time, the Philippines was grappling with substantial economic challenges, including the aftermath of the 1997 Asian Financial Crisis and declining investor confidence during Estrada's administration.

Figure 2

2013: The Philippine economy showed robust growth, reaching a significant milestone with an upgrade to an investment-grade credit rating by major rating agencies.  (Figure 2, topmost chart)

The economy grew at an impressive rate of 6.8% for the year.

Simultaneously, Philippine assets reached key milestones, reflecting strong investor confidence in the market during this period.

The Philippine Stock Exchange’s PSEi 30 had a record-breaking year, hitting new highs in May 2013. (Figure 2, middle diagram)

The Philippine peso rallied to a five-year high, or the US dollar-to-Philippine peso exchange rate fell to a five-year low. (Figure 2, middle chart)

In April 2013, Philippine 10-year bond yields hit all-time lows or Philippine bonds rallied to historic highs. (Figure 2, lowest graph)

In my humble opinion, 2013 signified the genuine bull market peak of the PSEi 30, which has been affirmed by both the USD-PHP exchange rate and the bond markets.

Once again, like its global counterparts, the Year of the Snake in the Philippines has historically coincided with moments of political upheaval, such as the rise and fall of leaders, coup attempts, and the People Power Revolution, as well as economic challenges and heightened volatility like inflation, debt, instability, and periods of market euphoria.

VI. A Comparative Analysis of the Year of the Snake's Impact on the Philippines

Finally, let us provide a concise analysis of the comparative performances during the Year of the Snake.

Nota Bene: The underlying dynamics behind each economic statistic differ from period to period.

Figure 3

The headline GDP experienced its best performance post-independence from the U.S. and post-bellum or post-war recovery in the Water Snake year of 1953, which saw an 8.9% GDP growth. (Figure 3, upper window)

With the exception of 2001, the headline GDP has been rising since then, with 2013 representing its highest level.

However, the Water Snake year of 1953 was followed by a sharp decline in the Wooden Snake year of 1965. If history follows its pattern, could we witness a sharp drop in GDP? Or will the uptrend since 1965 continue?

The average headline GDP during the Year of the Snake since 1953 stands at 5.4%.

Could the Year of the Snake also reflect trends in the Consumer Price Index (CPI) cycle?

The CPI surged from its trough in the Wooden Snake year of 1965 to its peak of 10.7% in 1989, before descending to 2.6% in the Water Snake year of 2013.

Does this suggest a cyclical pattern of three Snake years (or every 24 years)? Or could the CPI rise sharply in the upcoming Wooden Snake year? (Figure 3, lower chart)

The average CPI during the Year of the Snake since 1965 is 6%.

Figure 4

The USD-PHP exchange rate seems inclined to appreciate during the Year of the Snake. It gained in three of the last four Snake years, averaging 4.6%, particularly due to the 2001 return, which coincided with the weakest GDP performance among Snake years. (Figure 4, upper pane)

Moving to the PSE. Since its largest return of 31.24% in 1989, the Philippine’s major equity benchmark, the PSEi 30 has struggled. However, despite its mixed performance, the five Year of the Snake episodes since 1965 have yielded an average return of 4.1%, thanks in large part to the notable gains in 1989. (Figure 4, lower graph)

The Snake years reveal that the USD-PHP's largest returns, the weakest GDP, and the most significant decline in the PSEi 30 share a common denominator: the Metal Snake year of 2001.

Key global events—such as the bursting of the dot-com bubble, the dot-com recession in the U.S., the 9/11 attacks, and local political upheaval in the Philippines marked by People Power 2, alongside the country's post-Asian Crisis economic challenges in 2001—contributed to this outcome. 

VII. Conclusion

In examining the economic patterns associated with the Year of the Snake in the Philippines, we observe a tapestry of significant historical events and economic indicators. From the peak GDP growth in 1953 to the financial turbulence of 2001 and to the financial euphoria of 2013, these years have often been marked by notable shifts in political power, economic policy, market cycles and external shocks with each year adding a unique chapter to the country's economic and political story.

As we look towards 2025, while historical trends provide valuable insights, the future remains uncertain. Given the current global and domestic economic imbalances, the Year of the Snake may again usher in another period of heightened risk and potential volatility. As always, the interplay of external events, governmental actions, and market responses will determine whether the Snake’s legacy of upheaval or opportunity will prevail. 

____

References

Corina Mendoza Architectural Chinese new year 2025: Here's what to expect in the year of the Wood Snake January 1 2025 

Prudent Investor, What Surprise is in Store for the 2022 Year of the Water Tiger? January 23, 2022 

Other Zodiac series

What Surprise is in Store for the 2023 Year of the Water Rabbit? January 22, 2023

What Surprise is in Store for the 2024 Year of the Wooden Dragon? February 11, 2024

 

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

 

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse—Ludwig von Mises 

In this issue

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

I. A Closer Look at the Flawed Foundations of the CPI

II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?

III. A Brief Look at Inflation Era 1.0; Key Questions

IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty

V. Demand Side Inflation: Record 11-Month Public Spending 

VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System

VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields

VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

A sharp increase in liquidity conditions last November, driven by BSP measures and bank activities, has likely spilled over into prices. Could December’s CPI signal the start of a third wave in the current inflation cycle?

I. A Closer Look at the Flawed Foundations of the CPI

Before we proceed with our exegesis of the Philippine Consumer Price Index (CPI) from last December, it is essential to clarify our position, which diverges from the mainstream acceptance of the inflation benchmark.

We argue that the CPI is structurally flawed for the following reasons:

1. Subjective Nature of Personal Utilities

Because people engage in exchanges to improve their well-being, prices reflect the subjective evaluations of individual economic participants.

As such, comparing personal utilities is inherently impossible because they are subjectively determined, depending on the specific circumstances of an individual, including their operating environment, preferences, values, and hierarchy of needs.

As we explained in 2022 (bold original):

Yet, the thing is, the most substantial argument against the CPI comes from its essence: it is impossible to quantify or average the spending activities of individuals. Everyone has different 'inflation.' The consumption basket varies from one individual to another. And the composition of an individual's consumption basket is never static or constant because it is subjectively determined; it is dynamic or consistently changes. 

Therefore, because the assumption used to generate an estimated CPI is fallacious, the CPI is structurally flawed. (Prudent Investor 2022) 

2. CPI as a Political Statistic 

The CPI is not merely an economic measure; it is, arguably, the most significant political statistic.  

From the Philippine Statistics Authority (FAQ): CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases.

In this context, the political objectives of the administration may influence the calculation of economic indicators, rather than reflecting actual estimates. 

For example, the Consumer Price Index (CPI) plays a significant role in determining bond market rates and interest rates. By understating the CPI, the government can effectively engage in "financial repression," which entails the implicit and artificial lowering of interest rates to subsidize government debt.  

Moreover, beyond facilitating government borrowing, an artificially suppressed CPI also inflates GDP figures, creating a perception of stronger economic performance. 

The periodic (six-year) base year adjustments used for calculating the CPI—intended to reflect the most current composition of goods and services—are inherently biased toward reducing inflation rates. Consequently, CPI figures would likely be higher if calculated using the previous base year of 2006 compared to the current base year of 2018. 

3. The CPI Data and Official Narrative on Inflation 

CPI data and the official narrative often portray inflation as an inherently supply-side-driven phenomenon. 

The sectoral composition of the CPI baskets appears biased, fostering the perception that price increases (inflation) are predominantly caused by supply-side factors. This perspective is consistently reinforced by official explanations, which highlight supply disruptions as the primary drivers of inflation. 

Ironically, however, the Bangko Sentral ng Pilipinas (BSP)’s policy responses have been predominantly demand-side in nature. These responses include interest rate adjustments, reserve requirement ratio (RRR) changes, and regulatory relief measures such as the credit card interest rate cap, as well as quantitative easing or liquidity injections. On rare occasions, political interventions, like the Rice Tariffication Law, address supply-side issues directly. 

In reality, if prices were allowed to function freely, supply-side imbalances would typically resolve themselves in the short term. 

Moreover, with a fixed money supply, an increase in demand for specific goods or services, leading to higher prices, would naturally result in reduced demand for other goods or services, causing their prices to decline. This dynamic reflects changes in relative prices (increases and decreases), which do not equate to a general rise in overall price levels. For example, households operating within fixed budgets and without access to credit exemplify this principle. 

However, when prices for most goods and services rise simultaneously, it indicates a condition of "too much money chasing too few goods." In other words, a generalized price increase arises when the growth of money supply (via credit expansion) outpaces the growth in goods and services. 

In the immortal words of Nobel Laureate Milton Friedman in an interview: (bold mine) 

It [Inflation] is always and everywhere, a monetary phenomenon. It's always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output…

If you listen to people in Washington and talk, they will tell you that inflation is produced by greedy businessmen or it's produced by grasping unions or it's produced by spendthrift consumers, or maybe, it's those terrible Arab Sheikhs who are producing it. Now, of course, businessmen are greedy. Who of us isn't? Trade unions are grasping. Who of us isn't? And there's no doubt that the consumer is a spendthrift. At least every man knows that about his wife. 

But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money. (Friedman, Heritage Foundation)

This underscores the reality that inflation is driven by excessive monetary expansion rather than purely supply-side factors.

Figure 1

Aside from this author, has anyone pointed out the deepening reliance of GDP on money supply growth? (Figure 1, topmost graph)

4. The CPI as a Tool for Narrative Control

The BSP and the government’s approach to inflation management often involves shaping public perception through strategic "narrative control." A clear example of this is the establishment’s "pin-the-tail-on-the-donkey" CPI forecasting exercise:

-At the close of each month, the BSP releases a forecast range for the monthly inflation rate, usually spanning a margin of approximately 80 basis points.

-"Establishment experts" then publish their single-point predictions, which the media aggregates into a "median estimate."

-When the Philippine Statistics Authority (PSA) announces the official inflation rate, it almost always falls within the BSP’s forecast range—except during anomalous periods, such as the CPI spikes in 2022-2023.

This practice reinforces the establishment narrative and helps frame the public’s understanding of inflation within a constrained Overton Window, limiting alternative interpretations of its causes and dynamics.

As I elaborated in 2024 (bold and italics original): 

In essence, they blame the supply side for inflation, but use demand-side instruments to manage it. This disconnect is often lost on the lay public, who are unfamiliar with the technical details surrounding the mechanics of inflation. 

The general idea is that distortions from the supply side are seen as representing market failure, namely greed, and that the BSP is considered immaculate, foolproof, and practices Bentham's utilitarianism (for the greater good) when it comes to its demand-side policies. Therefore, it would be easier to sell more interventions when the authorities are perceived as saints.  

Ironically, the BSP has been advocating for the "trickle-down theory" in its policies: subsidize demand while controlling or restricting supply (Kling,2016) 

More importantly, the public is unaware of the entrenched "principal agent syndrome" in action: the BSP regulates these mainstream institutions. As such, the BSP indirectly controls the narratives or dissemination of information on inflation.   

Make no mistake: the structural flaws of the CPI arise not only from a critical economic perspective but, more significantly, from a political dimension designed to shift the blame for price instability onto the market economy.  

II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?

Our dialectic of the CPI’s critical flaws serves as the foundation for examining December’s CPI data. 

Let us explore the issue from the perspective of the mainstream viewpoint.

Reuters, January 7: Philippine annual inflation quickened for a third straight month in December due to the faster pace of increases in food and utility costs, the statistics agency said on Tuesday. The consumer price index (CPI) rose 2.9% in December, higher than the 2.6% forecast in a Reuters poll, and was above the previous month's 2.5% rate. December's inflation print brought average inflation in 2024 to 3.2%, well within the central bank's 2%-4% target for the year, marking the first time since 2021 that the Philippines has achieved its inflation goal. 

Though December marked the third consecutive monthly YoY increase, boosting the month-on-month (MoM) change, the upward momentum has not been strong enough to signal a decisive breakout from its year-on-year (YoY) downtrend. (Figure 1, middle image) 

Typically, a MoM rate exceeding 1% is required to achieve this. 

However, while food prices continue to play a significant role in driving up the headline CPI, their influence has been diminishing. This shift indicates broader sectoral contributions, primarily driven by housing, utilities, and transport in December. (Figure 1, lowest diagram)

Figure 2

The uptrend has been most pronounced in the transport sector, while momentum in housing and utilities has recently gained strength. (Figure 2, topmost chart)

The broadening increase in prices has also led to an expansion in the non-food and energy CORE CPI. Both the CORE and headline CPI appear to have made a turn reminiscent of patterns seen in 2015 and 2022. (Figure 2, middle pane) 

If this momentum persists, the headline CPI may be transitioning into the third wave of the current inflation cycle, which has now entered its tenth year.

III. A Brief Look at Inflation Era 1.0; Key Questions

Should the third wave, characterized by the current series of increases, be confirmed, the headline CPI is likely to surpass its 2022 high of 8.7%. 

This inflation cycle is not an anomaly; it mirrors historical precedent, specifically the secular inflation era (1.0), which spanned three inflation cycles from 1958 to 1986. (Figure 2, lowest graph) 

This brings us to several critical questions:

>How do supply-side (cost-push) factors contribute to driving an inflation cycle or even a prolonged era of inflation?

>Does the current inflation cycle mark the beginning of an "Inflation Era 2.0"?

>Which mainstream experts have anticipated and explained this phenomenon?

IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty

A striking contrast exists between the government's data on the bottom 30% of income earners and the Social Weather Stations (SWS) self-rated poverty survey.

Figure 3

The Consumer Price Index (CPI) for the bottom 30% income group presents one of the most fascinating – and somewhat contradictory – data points in CPI coverage. (Figure 3, topmost window) 

It indicates that the food CPI for this income group has decreased at a faster rate than the overall headline CPI, resulting in a negative spread for the first time since at least 2022. This suggests that the bottom 30% has benefited from easing food inflation, ostensibly leading to ‘reduced inequality.’ 

This assumption appears to be based on the notion that stores have provided price discounts to this income group or that conditions have improved due to assistance from food banks. 

Conversely, a private poll reported that instances of self-rated poverty surged to their highest level since 2003, reaching a 21-year high! 

SWS Report, January 8 2025: The December 2024 percentage of Self-Rated Poor families of 63% was 4 points up from 59% in September 2024, rising steadily for the third consecutive quarter since the significant 12-point rise from 46% in March 2024 to 58% in June 2024. This was the highest percentage of Self-Rated Poor families in 21 years, since 64% in November 2003. (Figure 3, middle visual) 

If this poll is accurate, it implies that a vast majority of households continue to suffer from the erosion of the peso’s purchasing power. 

The recent decline in the CPI rate, far from indicating relief, might instead signify a “boiling frog syndrome”—a slow, almost imperceptible build-up of economic hardship. This is evidenced by deteriorating consumption patterns and increasing pessimism, despite near-record employment rates. 

In November 2024, employment rates reached their third-highest level, continuing a trend of near-full employment since Q4 2023. (Figure 3, lowest chart) 

Still, despite this robust employment dynamic, inflation has continued to decline. 

Does this mismatch between self-rated poverty levels and employment gains highlight productivity improvements that are not reflected in wage and income growth?  

Alternatively, could this gap reflect potential manipulation or "padding" of labor data for political purposes ahead of upcoming elections? 

As I noted back in October 2024: (bold and italics original) 

All these factors point to the SWS Q3 data indicating an increase in self-rated poverty, which not only highlights the decline in living standards for a significant majority of families but also emphasizes the widening gap between the haves and the have-nots.  

As a caveat, survey-based statistics are vulnerable to errors and biases; the SWS is no exception. 

Though the proclivity to massage data for political goals is higher for the government, we can’t discount its influence on private sector pollsters either. 

In any case, we suspect that a phone call from the office of the political higher-ups may compel conflicting surveys to align as one. 

Apparently, that phone call to influence the self-rated poverty survey has yet to occur. 

Furthermore, the multi-year high in self-rated poverty could also be symptomatic of government policies involving "financial repression" or an "inflation tax," which redistributes finances and resources from the private sector to the government to subsidize its political spending.

This raises an important question: Whose sentiment truly reflects the public's conditions?  

On one hand, government data suggests a vague improvement for low-income households due to easing food prices.  On the other hand, SWS data indicates a historic rise in self-rated poverty.  

The divergence between these two perspectives underscores the complex economic realities faced by different segments of society as they confront inflation.

V. Demand Side Inflation: Record 11-Month Public Spending

Let us now shift our focus to the demand side of the inflation cycle.

Figure 4

The first and most significant demand-side driver of inflation cycles is public debt-fueled deficit spending. (Figure 4, topmost image)

Thanks to robust tax collections, the 11-month fiscal deficit has fallen to its lowest level since 2020, despite reaching a historic high in public spending over the same period. 

However, while current tax revenues have supported fiscal health, they are subject to the variability of economic conditions and the efficiency of tax administration, whereas government spending is determined by Congressional appropriations. 

Still, diminishing returns and the crowding-out effect could slow GDP growth—or even trigger a recession—leading to reduced tax revenues. This could drive deficits back to record-high levels. 

In any case, public spending at an all-time high inevitably fosters heightened competition with the private sector for resources and financing. This competition—the crowding out syndrome—serves political objectives but disrupts economic allocation, production, and pricing. 

The Philippine budget is set to grow by 9.7% to Php 6.326 trillion in 2025, reinforcing its long-term upward trend in public expenditures. 

Unsurprisingly, this accelerating trend in public spending has closely correlated with the first inflation cycle. 

Also, this is in seeming response to the Q3 2024 GDP slowdown and a deflationary spiral in real estate prices, 'Marcos-nomics' stimulus measures have only intensified. 

That’s in addition to the administration’s positioning for this year’s elections.

VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System 

Despite the CPI gradually rising, the BSP cut interest rates twice in Q4 2024, supported by a significant reduction in the bank’s reserve requirements. 

When similar measures were implemented during the pre-pandemic and pandemic phases (2018–2020), they fueled the first leg of the second wave of the inflation cycle. Is history repeating itself? (Figure 4, middle diagram)

After an 11-month plateau, the banking system’s net claims on the central government (NCoCG) surged to a record-high Php 5.31 trillion in November 2024! (Figure 4, lowest window) 

Banks may have responded to an implicit directive from the BSP, which has contributed to the growth of the money supply. 

Additionally, the BSP’s ‘easing cycle’ prompted a surge in bank lending, particularly to the struggling real estate sector and consumers.

Universal-commercial (UC) bank lending grew by 11.34% in November, driven largely by a 10.11% increase in lending to the real estate sector, which reached a record-high Php 2.57 trillion. 

Meanwhile, UC consumer bank lending (excluding real estate) jumped 23.3% to a historic Php 1.54 trillion.

Figure 5

Overall, systemic leverage—defined as UC bank loans plus public debt—expanded by 11.1%, reaching an all-time high of Php 28.44 trillion.  (Figure 5, topmost chart) 

This growth drove a sharp increase in M3 money supply, from 5.43% in October to 7.7% in November. 

Despite BSP claims of ‘restrictive’ financial conditions, growth rates of systemic leverage have been rising steadily since its trough in September 2023. 

The BSP’s easing measures in the second half of 2024 have undoubtedly contributed to this systemic expansion in leverage. 

The combination of liquidity injections through NCoCG and surging systemic leverage has also driven growth in M1 money supply, which again rose 7.7% in November—reaching levels seen in October 2023. 

If history offers any guidance, reminiscent of 2014 and 2019, the current surge in cash circulation—which accounted for 30.83% of November’s M1—has likely contributed to the broadening increase in non-food and non-energy core inflation, supporting the notion that the headline and core CPI have already bottomed out. (Figure 5, middle graph) 

Notably, M1’s influence on price pressures occurs with a time lag. This means that certain price increases, due to increased spending in sectors benefiting most from credit expansion—such as real estate and their principal lenders, the banks—eventually percolates into the broader economy. 

This clearly reflects the BSP’s implicit backstop for the real estate sector and its key counterparties—the banking system. 

VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields 

Another factor that appears to be providing a behind-the-scenes support to inflation is the BSP’s US dollar Philippine peso USDPHP exchange rate cap. 

As we previously noted,

Widening Trade Deficit: First, the cap widens the trade deficit by making imports appear cheaper and exports more expensive. An artificial ceiling exacerbates imbalances stemming from the historical credit-financed savings-investment gap. (Prudent Investor, 2024)

Although November’s trade deficit narrowed to USD 4.77 billion due to a 4.93% decline in imports and an 8.7% slump in exports, it remains within the record levels seen in 2022. (Figure 5 lowest window)

Figure 6

The risk of a sudden devaluation grows as the persistent trade deficits erode the BSP's ability to defend the USDPHP ceiling magnifying inflation risks. (Figure 6, topmost diagram) 

Additionally, the recent shift in the Philippine treasury yield curve—from a flattening, belly-inverted slope to a steepening curve driven by surging bond rates—has further underscored this vulnerability. (Figure 6, middle image) 

Besides, rising yields on US Treasury bonds could influence upward pressure on Philippine rates. (Figure 6, lowest chart) 

US inflation can indirectly impact the Philippines through global trade, commodity prices, and capital flows.  For example, rising US inflation may lead to higher prices for imported goods, thus contributing to increased inflation domestically in the Philippines. 

Additionally, US Treasury yields act as a global benchmark for interest rates. When US yields rise, typically due to higher inflation expectations or tightening monetary policy by the Federal Reserve, it can exert upward pressure on bond yields in other countries, including the Philippines. 

This dynamic occurs as foreign investors may seek higher returns, which in turn can push up domestic yields. The influence of rising US bond rates on Philippine yields underscores the interconnectedness of global financial markets and reflects the broader impact of US economic conditions on emerging market economies. 

Furthermore, if the BSP insists on continuing its ‘easing cycle’ under such conditions, it risks stoking the embers of inflation, which could further weaken the USD-Philippine peso exchange rate. 

Sure, while it’s true that the structural economic conditions of the Inflation Era 1.0 differ from today’s—marked by advances in technology, globalization, and other factors—the political landscape remains strikingly similar. Authorities are still using leverage both directly (through deficit spending) and indirectly (through asset bubbles) to extract resources from the private sector. As such, the outcome—an Inflation Era 2.0—seems increasingly likely to echo its predecessor. 

VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave 

To wrap things up, December’s CPI has shown signs of a potential bottom and has laid the groundwork for the third upside wave of this inflation cycle. 

Aside from the turnaround in the CORE CPI, which indicates a broadening of price increases across the economy, the record quantitative easing by banks in support of record public spending and all-time highs in public debt have injected substantial liquidity into the system. 

This, combined with the accelerating growth in bank lending, has intensified liquidity growth. As a result, this increased liquidity tends to diffuse into the economy with a time lag, eventually leading to higher prices.

___

References: 

Prudent Investor, The President and the Markets "Disagree" on the CPI; Global Financial Crisis Icebreaker: The Collapse of Sri Lanka July 11, 2022

Philippine Statistics Authority Consumer Price Index and the Inflation Rate, Frequently Asked Questions 

Milton Friedman, The Real Story Behind Inflation, The Heritage Foundation 

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10 2024  

Prudent Investor, Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages October 13, 2024  

Prudent Investor, How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate, January 2, 2025