October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

Prosperity, built on debt, inflation, and false government promises, is illusionary and can disappear quickly. It will be necessary that the people learn, or relearn, that debt is not wealth, paper is not money, free stuff is not justice, war is not peace, and government coercion is not liberty. Signs of social chaos are readily apparent and are a predictable consequence of the economic distortions created by the excesses of the QE bubble—Ron Paul

In this issue

October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

-Food CPI Stalls as Core Inflation Ramps Headline CPI to 6.7%

-As Prices Rage Elsewhere, Education CPI in Four Straight Months of Deflation! Why Price Indices Mislead

-Another Anomaly: Despite TRAIN, Alcoholic Beverage and Tobacco CPI Below 2013

-Why Does the Government Panic Over 6.7% CPI? Will the BSP Raise Rates Anew?

October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

Food CPI Stalls as Core Inflation Ramps Headline CPI to 6.7%

Last week, the National Government’s PSA and the Bangko Sentral ng Pilipinas reported on October’s CPI as unchanged at 6.7% from a month ago.

The draconian measures undertaken by the National Government to suppress prices, particularly food prices, had done little contain the statistical inflation.

Food CPI did back off slightly to 9.43% in October from 9.72% a month ago. But its loss had been neutralized by increases in non-food and non-energy CPI. (figure 1 upper window)

Figure 1

International oil prices can't justify the stubborn October CPI. Measured from the US West Texas Intermediate benchmark, WTI prices have dropped to $65 per bbl level. It fell below $60 last Friday. (figure 1 lower window)

Core inflation jumped to 4.9% in October from 4.7% a month ago, a multi-year high.

Food accounts for 35.46% or the second largest share of the CPI basket while non-food which includes clothing, household utilities, health, transport, recreation, education, and restaurant, has the largest with a 60.08% share. And the residual 1.58% share consists of alcoholic beverages and tobacco

 

Figure 2

Two of the three significant components of the CPI continued to streak higher.

Housing, water, electricity, gas and other fuels, which carried a 22.04% share weight, advanced to 4.76% but was down from its peak of 5.6% in June.

The second and third most significant component of the non-food CPI, the restaurant and miscellaneous goods and the transport, with a weighting share of 12.59% and 8.06% respectively, did most of the marginal lifting of the headline CPI. 

Both segments reached its highest level since at least 2013.  Restaurant CPI jumped 4.19% in October from 4.0% in September while Transport CPI vaulted 8.75% from 7.96% a month ago.

While restaurant CPI may lag the food and beverage CPI, transport CPI may reflect on the distortions from excise taxes and other mandated increases rather than from international oil prices.

The most recent mandated fare hikes on public transportation are likely to add these pressures. Power rates have also been slated rise.

As Prices Rage Elsewhere, Education CPI in Four Straight Months of Deflation! Why Price Indices Mislead

Of course, the statistical economy is different from the real economy.

Proof? 

 

Figure 3

Take a look at the education CPI. (figure 3 upper window)

Education CPI has been in “deflation” four straight months! How can that be? With prices raging almost everywhere, have spending on education been really down?  

The Department of Education approved a 7% increase in tuition fees of private school last July. That’s no sign of deflation. And that’s just tuition fees. How about spending on uniforms, books, notebooks, and pens? For children schooled in private institutions, parents would see such negative numbers as incredibly unrealistic!

And how about the spending for construction, repair, improvements, logistics and others on educational institutions? (I know CPI is for households/consumers)

Demand or the lack of it is unlikely a factor for such CPI deflation; education GDP was one of the sectoral outperformers in the 3Q!  Besides, bank lending to the sector has been robust since Mr. Duterte assumed office. (figure 3, lower window)

So is excess supply, given the current state of education. 

The likely explanation is increased public subsidies to the households on education. Or government absorbed the price increases through its deficit spending. And the consequent effects from such subsidies on prices have been dispersed unevenly to many parts of the economy.

Since there are more students in public school (84.5%) than in the private sector (14.9%), the deflation in education CPI probably means free lunches drowned the spending costs by students in the private sector.

And if private sector education costs would reflect on the CPI, the headline number should be materially higher. Thus, the education CPI misleads.

The statistical economy is hardly reflective of actual conditions. They are supposed to be estimates and not facts for people and policymakers to fixate on.

Aggregation of prices barely resonates with reality from the individual’s perspective. And the whole cannot be the some of its distinctive and atomistic parts.

In lambasting his peers about the dogmatic embrace of inflation targeting, former US Federal Reserve Chairman Paul Volcker recently wrote,

“No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices. The variety of goods and services, the shifts in demand, the subtle changes in pricing and quality are too complex to calculate precisely from month to month or year to year. Moreover, as an economy grows or slows, there is a tendency for prices to change, a little more up in periods of economic expansion, maybe a little down as the economy slows or recedes, but not sideways year after year.

Another Anomaly: Despite TRAIN, Alcoholic Beverage and Tobacco CPI Below 2013

There’s another striking oddity in the CPI.

 

Figure 4

And that’s the “alcoholic beverages and tobacco” component.

Despite its recent surge partly due to the recently implemented excise taxes of TRAIN, its CPI remains lower fantastically compared to 2013. Aside from the Sin Tax Law, 2013’s alcoholic beverage and tobacco CPI surge reverberated with M3 growth of 30%+++. (figure 4 upper window)

With excise taxes from TRAIN 1.0 and the Sin Tax Reform Law of 2012 programmed for another round of increases in 2019, the segment's CPI should either see further upside moves or remain elevated in the face of an emergent slack in demand. 

Why Does the Government Panic Over 6.7% CPI? Will the BSP Raise Rates Anew?

It’s truly a complex and fascinating world.

A CPI of 6.7% remains significantly lower than the 60-year historical average of 8.4%, but why would the government succumb to popular demand and impose price controls (including prosecuting traders for alleged supply and price manipulations), andincreases in minimum wages?  

Of course, the CPI level then has been vastly different from today. Seen from the context of the USD php, sixty years back the USD php was 2, last Friday it was 52.97. But haven’t income been growing enough, as popularly held, to mitigate their impact?

And the government have been panicking over 6.7%?!

There have been more calls for the BSP to raise rates!! Will the BSP submit to such pressures in their coming meeting on the 15th?

It’s either this number has been severely understated or that the ballyhooed boom is a mirage masked by credit inflation.

Of course, the CPI is influenced by the supply of, and demand of money relative to goods and services.

While declining rate in bank lending and money supply may indicate a withdrawal in the means to finance spending, increases in the public’s time preference mean reduced demand to hold money relative to goods. Or when people expect a sustained pace of price increases, they chase prices.

October’s elevated CPI probably indicates the latter.

Also, it appears that on the demand side, the BSP’s record financing of the unparalleled deficit spending remains the more dominant force than the growing slack in private sector demand as expressed by declines in bank lending, and consequently, money supply growth. (figure 4, middle window)

However, yields of Philippine Treasuries may have been confirming my inflation expectations. With yields down in the mid- to the long-end, this may signal an easing of inflation. But the dilemma is on the yields of T-bills, which continue to ascend indicating deepening liquidity constraints! The result from this asymmetry is to flatten the curve. (figure 4 lower window)

Finally, because inflation is more than just about statistics, not only will its change affect business, economic and financial activities, but also impact the socio-political sphere as well.

A magnified political turmoil should accompany a bursting bubble.

Footprints of a Neo-Socialist State: 1Q 6.8% GDP Dominated by the Government; The Relationship of Quo Warranto, War on Drugs, Boracay and the GDP

We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission; which is the stage of the darkest periods of human history, the stage of rule by brute force.—Ayn Rand

In this issue

Footprints of a Neo-Socialist State: 1Q 6.8% GDP Dominated by the Government; The Relationship of Quo Warranto, War on Drugs, Boracay and the GDP

-PESTLE Analysis and The War on Due Process

-Footprints of Neo-Socialist State: 1Q GDP Was Almost ALL About Government Spending!

-Industry GDP: Spend, Spend and Spend Construction and Utilities Boost 1Q GDP

-Services GDP: Spend, Spend and Spend Pushes Out the Private Sector!

-Neo-Socialism: Linking War on Drugs, Boracay, Quo Warranto  and the GDP

PESTLE Analysis and The War on Due Process

PESTLE is an analytical tool commonly used for business planning and strategy.

It takes into consideration six external factors that may affect an organization’s conditions namely, Political, Economic, Sociological, Technological, Legal and Environmental. Factors are under these nomenclatures are identified and consequently are rated by their likely impact on the organization’s health.

Having weighed on the likely influences, recommendations for actions to either enhance the benefit provided by specific factors or reduce exposure or take necessary contingencies to shield from potential risks. 

The lack of appreciation of the interrelationships of factors is one of the fundamental shortcomings of a typical PESTLE analysis.

Applied to contemporaneous politics, there appears to be sparse recognition that the unfolding series of events have signified planned or premeditated actions pillared on the goal of centralized direction

For instance, the war on drugs is entwined with the Boracay closure. Bereft of due process, such unilateral political activities signify as a systematic violation of property rights. Political action in one account reflects on another.

Do you know that a Bill of Rights has been enshrined in the 1987 Philippine Constitution?

From Article 3 Section 1: “No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.”

There is a link between the recent ouster of the Supreme Court chief justice with the war on drugs and the Boracay closure: these events mark the sustained upending of the due process.

Through a vote on a technicality, justices of the Supreme Court have opted for political expediency than to uphold fundamental rights.

In response, because 14 members of the Senate perceived that only Congress has the right to impeach the Supreme Court chief justice, theyfiled a resolution urging the Supreme Court to review its decision.

A former SC chief justice lamented on the Supreme Court decision to note that “Because the supposed to be the guardian of the constitution, the protector of the rights of the people, the sentinel of the rule of law, the steward of democracy […] violated the constitutional mandate that the chief justice can be removed only by impeachment”. He also added that because the Supreme Court vote was a “culpable violation of the Constitution” it should serve as “a basis to charge them of an impeachable offense”.

In the meantime, opposition lawmakers have taken former SC justice’s remarks as a call to action. Various groups including the Catholic Churchhave expressed opposition to the Supreme Court’s decision.

All these have been predictable. The thrust to centralize political power extrapolates to the purging of undesirable elements. Political purges were common in communist/ radical left regimes.

Since the incumbent leadership aims to establish outright control over all political institutions, its tactical approach would be to ensure a path free of any legal barrier.  So the leadership aims to install his vassals in the Supreme Court.

Otherwise, if the ruckus over the expulsion of the SC chief justice gains headway, this could lead to a constitutional crisis. Wouldn’t the internecine strife within the Supreme Court serve as propitious justification to impose martial law?

The leadership wins in both outcomes!

Footprints of Neo-Socialist State: 1Q GDP Was Almost ALL About Government Spending!

What has this got to do with the GDP?

Everything.

The path towards institutionalizing a neo-socialist state has been gaining momentum. It’s becoming evident even in the National Government’s GDP

 

Because the establishment perceives GDP as a vital thermometer of prosperity, it becomes part of our analysis even when I understand the GDP to be incurably inaccurate.

The Philippine GDP data comes with the expenditure and the industry side which, like a coin, represents the obverse sides of demand and supply.

The expenditure side indicates the people’s spending patterns while the industry side implies where such expenditures occurred.

From the demand or expenditure side, 1Q 6.8% real GDP was almost ALL about the GOVERNMENT.

Only Government Final Expenditure and Capital Formation increased in the 1Q. The rest of the pack including the ballyhooed Filipino consumers had been on the sidelines.

Growth in Government Final Consumption Expenditures (GFCE), which comprised of government personnel, wage increases, maintenance and operating activities, surged 13.6% in the 1Q from 12.2% in 4Q 2017. Excluding Q1 2017, GFCE’s growth rate has been accelerating since Q3 2016. (red bar chart)

Let us hear it straight from the Philippine Statistics Authority: “Government Final Consumption Expenditure (GFCE) grew by 13.6 percent in the first quarter of 2018. Creation and filling up of government positions as well as the increase in the base pay of civilian and military and uniformed personnel contributed to the growth of the sector. Increase in the maintenance and other operating expenses of various agencies also contributed to the expansion.”

See? Spend, spend and spend! And what’s the raison d'être for such bureaucratic expansion? Has it not been to institute bigger and deeper interventions in the economy?

Ever since peaking in Q2 2016 at 7.5%, growth in Household Final Consumption Expenditures (HFCE) has been decelerating. HFCE grew by 5.6% in Q1 2018 down from 6.2% in Q4 2017. Along with Q3 2017’s 5.4%, real household consumption growth has been at the lowest level since Q4 2014.

Why should household spending boom when consumer spending has been the target of taxes?

Capital formation was the other aspect which improved sizably in the 1Q. Capital formation jumped 12.5% in Q1 2018 from 8.3% in Q4 and 10.3% in 2017. But the improvement from this sector came mainly from the construction sector which almost doubled to 10.1% in Q1 2018 from 5.7% in 2018. Construction had a 27.8% share of capital formation.

 

From the PSA: “Investments in Construction grew by 10.1 percent in the first quarter of 2018, albeit slower compared with the 11.3 percent growth in the previous year. Public Construction, which accounted for 20.8 percent of total construction investments, expanded by 25.1 percent. Moreover, Private Construction, which accounted for 79.2 percent, grew by 6.8 percent. This was slower compared with the 13.6 percent growth in 2017.”

See? Spend, spend and spend!

The other major segment of the Capital Formation is Durable Goods which grew 8.4% in 1Q 2018 and was lower than 11.2% in the 4Q and 9.7% in 3Q 2017.

Meanwhile, exports and imports were down substantially in 1Q. Exports and imports grew by 6.2% and 9.3% from 4Q’s 20.6% and 18.1% respectively.

See? From the expenditures side, the government grew at the expense of the private sector. That would be the crowding out effect in motion!

To put it more precisely, that fantastic 6.8% headline growth accrued to the government. Yes, the national government has taken over the economy!

Industry GDP: Spend, Spend and Spend Construction and Utilities Boost 1Q GDP

Now let us move on to where people spent their money on - the supply side.

Since the obverse side of demand is supply, 1Q GDP tells the same tale: the National Government’s takeover of the economy! 

Of the three major sectors, only the industry grew and that’s largely due to construction!

Industry growth jumped to 7.9% from 7.0% in 4Q 2017 and was the principal driver of 1Q GDP.  Agriculture real GDP dropped to 1.5% in Q1 2018 from 2.4% in Q4 2017. The service sector real GDP inched up to 7.0% from 6.9% over the same period

It is interesting to see manufacturing slightly higher 8% from 7.9% even when exports and imports were down significantly. Except for the government and the construction sector, who would be buying their products when private sector activities have been weakening? Has the sector been immune from higher excise taxes? PSE data of listed manufacturing firms show otherwise.

Such is an example of the folly from the logic of statistics equals economics.

Mining real GDP was down to 4.5% from 5.4%. Industry’s other boost came from Utilities (electricity gas and water) which real GDP boomed to 6% from 5.5%.

Aside from public works, the imposition of excise taxes in the 1Q must have contributed significantly to the utility GDP, which may have only been partly captured by the implicit price index.

Increases in prices of utilities would lead to lesser disposable incomes of consumers unless income grew in proportion to such increases

Services GDP: Spend, Spend and Spend Pushes Out the Private Sector!

From the services side, the consumer-related GDPs of trade (6.1% in 1Q 2018 and 8.7% in 4Q 2017) and real estate (4.7%, 6.6%) were substantially lower. (see trend lines upper window). Again, PSE data on listed company performance contradicts this claim. The Train Law provided an ephemeral boost to non-durable retail but burdened the food retail business.

On the other hand, Real GDP’s of public administration and the transport sector rocketed 13.2% and 6.4% from 8.5% and 4.9% in 4Q 2017, respectively. (see bar charts upper)

The National Government implemented the Public Utility Modernization program in the second semester of 2017 which must have been a factor in the outperformance of the transportation sector’s 1Q GDP

Meanwhile, GDP of financial intermediation also boomed from 5.2% to 7.6%. The enormous issuance of public sector securities to finance its spending may have helped boost the sector's activities through the distribution of such securities. 

Other services real GDP spiked to 8.8% from 6.3% principally for the same reasons.

Expenditures on education nearly doubled to 13.3% in 1Q 2018 from 7.4% in the 4Q. (mid window) The most likely driver for this is public spending. The leadership’s Free College program must have been a principal factor behind such spending spree. At zero price, demand will overwhelm supply!

Health real GDP spiraled higher to 6.1% from 4.8% over the same period. Also, real GDP on infrastructure spending on sewage and refuse disposal facilities grew to 5.3% from 3.6%

See? Spend, spend and spend!

Other private sector services were down.

Except for recreational GDP which climbed to 4.6% in 1Q 2018 from 3.1% in 4Q 2017, real GDP of Other ‘other services’ slowed to 6.2% from 7.0% while hotel and restaurant GDP plunged to 6.1% from 8.9% over the same period.

Other services include beauty treatment, beauty parlors, personal treatment and grooming, spas, funeral services, washing and dry cleaning and others.

For the hotel sector, diving real GDPs came even BEFORE Boracay’s close and the war on tourism!

Neo-Socialism: Linking War on Drugs, Boracay, Quo Warranto  and the GDP

The crowding out theory simply means the displacement of the private sector activities by the government. And this crowding out mechanism has been all over 1Q GDP.  And this dynamic signifies a process which has been in acceleration.

Logic tells us that a successful transformation towards a fully centrally planned and organized political economy would require absolute control of all political institutions.

More pointedly, the serial suspensions of the due process, which spans from the war on drugs, the war on tourism, the war on informal labor, quo warranto and other contrived socio-economic wars, have been centered on this goal. 

The transformation of the Philippine economy would mean the institutionalization of an ideology into an operating political model.

This ain’t about personality-based politics.

 

But this doesn’t mean that the metamorphosis towards a socialist state is inevitable.

Socialism is always pillared on free money and that’s their Achilles heels.

Rising debt levels and greater use of debt monetization have only translated to a weaker peso, higher inflation and higher interest rates. Economics ensures that free lunch will be squeezed out

At one point soon, the BSP’s credit bubble pops and the proverbial emperor will be exposed as having no clothes.