Stagflation Part 16: The Peso's 24th Record Low — When the Pressure Valve Widens

 

 

Modern democracy and bureaucracy progressively separate decision-makers from the costs and feedback generated by their decisions. Democracy separates voters from decisive responsibility, bureaucracy separates administrators from profit and loss, inflation separates spending from visible taxation, transferism separates consumption from production, and media and intellectuals separate narratives from empirical accountability. All this tends toward and encourages living in unreality which might be called mental moral hazard—Joshua Mawhorter 

In this issue: 

Stagflation Part 16: The Peso's 24th Record Low — When the Pressure Valve Widens

I. The Peso is Not Falling, It is Clearing

II. The Peso’s Travails Didn't Start Last Week

III. It Isn't the Dollar: The Peso Is Losing Ground to Frontier-Market Currencies

IV. The Peso’s Gold Test

V. The Soft Peg BSP Denies

VI. What the GIR Data Actually Shows

VII. The Central Argument: This Is a Savings-Investment Gap, Not an Oil Shock

VIII. Eight Barometers of the Savings-Investment Gap

IX. The Strawman Defense

X. Conclusion: The Pressure Valve, Again 

Stagflation Part 16: The Peso's 24th Record Low — When the Pressure Valve Widens 

Even against Cambodia and Laos, the Philippine peso keeps falling—revealing an internal imbalance that dollar strength cannot explain 

I. The Peso is Not Falling, It is Clearing 

The USDPHP closed Friday at a record 62.68, its 24th record low of 2026, 21 of them since the Middle East war began. The pair was up a modest 0.14% week-on-week, pushing YTD depreciation to 6.62%. 

A single record is noise. Twenty-four in one year, overwhelmingly clustered inside a nine-month war window, is a pattern requiring a causal explanation. 

The question is not “why did the dollar rise Friday?” That question is designed to be unanswerable in a way that absolves policy. The question is why the peso, of all regional currencies facing the same war, the same oil shock, the same Fed, keeps landing at the bottom of the pile. 

II. The Peso’s Travails Didn't Start Last Week 

The 2:1 USDPHP peg was not a natural state of affairs. It was written into law by the 1946 Bell Trade Act, a condition the United States attached to $800 million in postwar rebuilding assistance. 

It survived, more or less intact, for over a decade, until the arithmetic of an overvalued peso—visible in a thriving dollar black market and chronic current-account strain—forced a retreat. 

Formal decontrol began in April 1960, when the Central Bank introduced a multi-tier exchange system under Circular 105. The official Php 2 rate held for some transactions while a Central-Bank-managed “free-market” rate, initially Php 3.20, applied to others. Further adjustments followed through 1961. 

In January 1962, President Diosdado Macapagal substantially lifted the remaining controls, and the peso lost roughly half its value, settling near Php 3.90. 

The formal unification came almost four years later. Executive Order No. 195, signed November 6, 1965, fixed the new par value at $0.2564103 per peso—approximately Php 3.90/$1. 

From that Php 2 starting parity to Friday's Php 62.68, the peso has lost more than 97% of its dollar value over six decades. 

That is the scale against which any single week's move should be read. 

Since that 1962-65 transition, and treating the currency the way Nassim Taleb's Lindy Effect heuristic treats any long-surviving process—its continuation is the base case, not the exception—the USDPHP has been in a secular bull market. 

The pattern of countercyclical peso rallies recur:

• January 1984–February 1985, after the 1983 debt crisis;
• December 1990–August 1992;
• September 1998–June 1999, after the Asian crisis;
• December 2004–February 2008, after the dot-com bust;
• August 2009–March 2013, after the Great Recession;
• October 2018–June 2021;
• October 2022–February 2023, during post-pandemic normalization. 

The mechanism connecting these episodes is not coincidence.

Figure 1 

The peso's sharpest depreciations coincide with technical stagflation—the 1983 debt crisis and 1997 Asian crisis combining recession, inflation, financial stress, and rising unemployment. (Figure 1, upper window) 

The milder depreciations track externally driven stagnation—the dot-com bust, Great Recession, and pandemic recession. 

In both cases, the currency functioned as a release valve, absorbing pressure the real economy could not otherwise clear immediately. 

What's different in 2026 is not the mechanism. It's how long and deep this leg runs. The current depreciation trend traces back to 2021 — five years and counting. History offers no fixed template for how these legs resolve: the 1983 debt-crisis depreciation ground on gradually for over a decade, into 1996; the 1997 Asian crisis spike took seven years to work through, into 2004. What decides the difference isn't the calendar. 

The crux of the matter is whether BSP has the resources left to keep smoothing the path in the face of the current degree of maladjustments. On that count, its position looks more strained now than at either prior turning point — which leaves two ways this can go: a sharp, disorderly snap once the smoothing capacity runs out, or a long, grinding decline like 1983-1996. Which one, we don't know yet. That it has to be one of the two is the point. 

III. It Isn't the Dollar: The Peso Is Losing Ground to Frontier-Market Currencies 

Officials and the financial press default to the same explanation for every leg down: dollar strength, Fed policy, a global phenomenon the Philippines merely inherits. 

That framing starts from the wrong end. It begins with a correlation—the dollar moved, so the peso moved—and searches backward for the most convenient cause rather than starting with the process generating the price. 

The right question isn't “why is the dollar strong.” It is what is generating persistent demand for dollars relative to pesos, specifically? 

The week of this record made the point cleanly. 

The US dollar index (DXY) was little changed week-on-week—another leg down against the yen even as oil and Treasury yields rose, but flat in aggregate as of September 11th. 

Asian FX was mixed: the dollar gained against six of ten regional currencies, itself little changed on net. USDPHP was the outlier at the other end—a record Friday close, its third straight Friday all-time high, achieved amid suppressed volatility. (Figure 1, lower image) 

If this were simply a dollar-strength or broad-EM story, the peso would be moving with the pack. 

Instead, on a week the dollar itself was directionless, USDPHP alone kept printing records. 

That makes the record a distinctly USDPHP story, not something adequately explained by Asian FX or dollar strength alone.

Figure 2

The same divergence holds over a longer window: the Singapore dollar, Malaysian ringgit, and Thai baht have all outperformed the peso; the Vietnamese dong has been strengthening against the peso since May 2026. (Figure 2)

Figure 3 

Even the Indonesian rupiah—conventionally the region's “weak” currency—has been rising against the peso since August 2026. 

More strikingly, the Philippine peso has been weakening against the Cambodian riel since 2021 and the Lao kip since 2024. (Figure 3) 

The peso is therefore not simply underperforming developed Asian currencies. It is losing ground even against ASEAN frontier-market currencies! Incredible! 

BusinessWorld/Bloomberg's September 7 reporting makes the same point: the peso has been left behind in Asia even as the region absorbs the same oil shock and dollar-reserve pressures.

The common external shock is real. 

It is simply not sufficient to explain the Philippine outcome. 

IV. The Peso’s Gold Test 

The same divergence appears against gold. 

The peso price of gold has risen from under Php 10,000 in 1993 to roughly over Php 270,000 today. (Figure 3) 

Gold is not a fixed-price numeraire, but its supply is not determined by Philippine monetary policy. A currency losing this much ground against a monetary asset over three decades cannot have that loss explained by short-term DXY movements. 

It is that the long-run loss of purchasing power is a different phenomenon from a temporary bout of dollar strength. 

The dollar may explain a move. 

It does not explain the trend. 

V. The Soft Peg BSP Denies 

BSP's official line is that it smooths volatility and does not defend specific levels. 

The historical ceiling data suggests something more complicated.

Figure 4 

USDPHP held a cap around 56.3 in 2004–05, around 59 from 2022 to 2025, and around 61.75 from May to July 2026. Three distinct ceilings, each eventually breached, each followed by a fresh, higher ceiling. (Figure 4, upper diagram) 

That is not the behavior of a completely hands-off float. 

It is the signature of a managed, adjustable peg that BSP declines to call by that name. The latest record streak reinforces the point: it has come on suppressed volume and suppressed volatility — the hallmark of intervention smoothing the path of depreciation, not an absence of intervention. (Figure 4, lower window) 

If pegs—even informal ones—contributed to the external-debt buildup that culminated in the 1997 Asian crisis, a managed exchange rate can reproduce part of that mechanism while buying more time before the adjustment. 

A peg (formal or de facto) subsidizes the peso side of the ledger: it lowers the effective cost of holding peso liabilities and raises the relative appeal of dollar borrowing, because it dampens the FX-risk premium borrowers would otherwise have to price in. 

That mispricing does two things simultaneously— it channels domestic policy toward being overused (rate hikes held back, liquidity kept loose, because the peg is doing part of the stabilizing work) or weakens its transmission signals and it builds up external leverage that isn't compensated by a correspondingly higher return on peso assets. 

The result is a widening stock of dollar-denominated exposure sitting on balance sheets that were never priced for the FX risk they actually carry — the same imbalance that later shows up as a "wall of maturities" and external debt (Section VII, below).         

Governor Eli Remolona Jr. made the constraint explicit when he said the central bank could not simply force the peso back below Php 60 without risking depletion of foreign-exchange reserves. 

That is not a statement about smoothing volatility. It is a statement about defending a level — phrased as a resource constraint ("we don't have the reserves to do it") rather than a policy choice, but a level-defense admission all the same. 

Read alongside the suppressed volume and volatility accompanying the current record streak, the honest description of where policy stands is a transition: from an explicit, defended soft-peg ceiling to a managed — but still intervention-smoothed — slide. 

BSP is no longer holding a line; it is choreographing the pace of its retreat. 

That sustained intervention is not incidental to the price-suppression architecture this series has documented elsewhere (EO 110, the CPI-suppression basket, the BSP regulatory-relief cascade) — it is another leg of the same scheme, aimed at averting a disorderly, stagflationary FX shock. 

But an intervention that prevents the immediate shock does not remove the underlying mismatch; it re-times it, and each re-timing layers on more of the external-leverage buildup and mispriced FX risk described above — a cost that must eventually clear through some balance sheet. 

This is the same seen/unseen distinction Bastiat used to unmask public spending: what's seen is the stable, orderly exchange rate — the thing officials point to as evidence policy is working. 

What's unseen is where the cost of holding that rate stable actually goes: depleted reserves, a growing stock of dollar liabilities on corporate and sovereign balance sheets, savers earning less on peso assets than the currency risk warrants. The peg's defenders only ever have to account for the seen half. 

VI. What the GIR Data Actually Shows 

BSP's Gross International Reserves history provides a second line of evidence for how the peso has been managed. 

Three developments stand out.

Figure 5

One. BSP sold gold reserves in 2020 and became the world's largest sovereign gold seller in the first half of 2024. The latter episode coincided with the period in which the peso was again weakening into new lows. (Figure 5, upper pane) 

Two. BSP also began leaning more heavily on Other Reserve Assets—repos and derivatives—from 2018 onward, coinciding with the October 2018–May 2021 peso rally. (Figure 5, lower chart)         

And three, the National Government’s foreign-currency deposits from fresh sovereign borrowing—the $2.5 billion eurobond, the $1 billion World Bank loan, and similar inflows—have repeatedly supported the headline GIR figure, including in the latest August release. 

These are not necessarily separate stories. 

They describe point to a crucial transition: as organic FX inflows — goods and services exports, FDI, tourism, remittances, portfolio flows — have weakened, BSP has complimented them with leverage (ORA positions and NG borrowing) and asset sales (gold). 

The distinction that matters here is between a stock and a flow. 

GIR is a stock — a balance-sheet snapshot that can be topped up through borrowing, derivatives positioning, or selling down an existing asset. 

Organic FX generation is a flow — the ongoing, self-renewing output of a productive economy. 

A rising stock built on borrowed or sold-down components says nothing about whether the underlying flow has improved; it can just as easily mean the flow has weakened badly enough that the stock had to be propped up to disguise it. 

The headline GIR number holds up. What holds it up has changed. 

The USDPHP has been rising on the back of an increasingly ‘short’ BSP dollar position dressed up as reserve strength — which is a materially different reserve-adequacy story than the one implied by simply citing months-of-import coverage. 

The latest GIR report, which rose from $103.3B in July to $104.8B in August, should be an example. The surge in gold prices delivered all of the gains plus some ($1.6B), offsetting decreases in its foreign holdings. 

The USDPHP is telling us which side of that balance sheet is doing the adjusting. 

It is revealing a deeper mismatch between the country's demand for foreign exchange and its capacity to generate it. 

VII. The Central Argument: This Is a Savings-Investment Gap, Not an Oil Shock 

Strip away the fuel‑subsidy and price‑suppression noise and the underlying mechanism is the one this series has tracked since Part 1: a deepening reliance on a Keynesian savings‑investment gap development model — spending‑led growth financed by debt rather than by real domestic savings — which politicizes and centralizes capital allocation, entrenches malinvestments, degrades productivity, discourages savings in favor of consumption, raises leverage across every balance sheet it touches, and relies on financial repression as part of capital consumption. 

EO 110's price-suppression architecture, BSP's cascade of regulatory and capital reliefs, the FX policies via NDF warnings, the 61.75 soft-peg ceiling, and a run of timid rate hikes are not independent policy choices. They are the same mechanism applied to five different transmission points at once — each one deferring an adjustment rather than making it. 

The distinction that makes this more than a Keynesian-labeling exercise is between statistical savings and real savings. 

The national-accounts savings rate is a residual of GDP accounting — spending minus consumption, whatever that arithmetic yields. It says nothing about whether the economy has actually set aside real resources — goods, capital, productive capacity — for future production. 

Production is what generates the purchasing power to sustain demand in the first place; debt‑financed spending can inflate the accounting residual — through money illusion — without creating a single additional unit of real resource behind it. 

When spending outruns what the economy has genuinely saved, the gap between the two doesn't disappear. 

It has to surface somewhere — and currently it is surfacing across fiscal deficits, trade deficits, leverage, liquidity, weak investment, and currency depreciation simultaneously, because these aren't eight separate problems. They are eight readings of the same shortfall. 

VIII. Eight Barometers of the Savings-Investment Gap 

The evidence, current as of the most recent data:

Figure 6

One. Fiscal and trade deficits. Seven-month/YTD fiscal deficit (Php 893.1 billion) and trade deficit ($37.338 billion) both at records; public debt at an all-time high Php 19.389 trillion and at the second-highest YTD accumulation since 2022, against the DBCC's full-year targets (deficit Php 1.658 trillion, debt Php 19.765 trillion) (Figure 6, top and middle panes) 

Two. BOP structurally deteriorating. The Balance of Payments peaked in Q4 2020 — itself a pandemic-era anomaly — and has trended toward deficit since 2011. The long trend line, not the 2020 spike, is the relevant baseline. (Figure 6, bottom chart)

Figure 7

Three. August CPI’s marginal decline to 6.1% conceals more than it reveals. Beyond the balance-sheet transfers, price suppression, and the FX peg already discussed, headline CPI is further distorted by money illusion and by sneakflation, skimpflation, and shrinkflation — quantity and quality as well as benefit reductions and stealth fees dressed up as stable prices. 

The bottom-30% income group absorbs a disproportionate share of the real adjustment CPI barely captures. For instance, the food CPI spread between the bottom 30% and the headline index surged to its highest level since at least 2022 — suggesting a lower standard of living, particularly for the lower class and the poor, while also exerting pressure on the middle class. (Figure 7, topmost graph) 

Four. Rising global food prices. The Bloomberg Agriculture Spot Index recently posted its largest monthly jump since the Arab Spring food-crisis era, and the FAO Food Price Index is at its highest since 2022, amid mounting supply risk. (Figure 7, middle image) 

Because the Philippines imports a large share of its food requirements, this is a direct transmission channel into both the trade deficit and domestic food inflation — not a coincidental overlay. July's agricultural trade deficit of $1.192 billion, the second-highest on record, is the balance-of-payments face of the same pressure. (Figure 7, lowest visual)

Figure 8

Five. Liquidity growth outrunning nominal GDP. Money supply M-series liquidity growth had eased slightly by July but remains in double digits — still outpacing nominal GDP growth, even before the Iran oil shock is layered on top. Excess liquidity is the primary driver of rising general prices; supply bottlenecks compound rather than originate the pressure, and the peso absorbs the resulting imbalance through the same feedback loop described above. (Figure 8, topmost window) 

This is where the exchange rate stops being a passive readout: loose liquidity feeds import demand and price pressure, which weakens the peso, which raises import costs, which policy then responds to with more intervention — and that intervention itself becomes a new input into the fundamentals it was meant to merely observe. The political regime isn't managing an external process from outside it; it is the process — the essence of the imbalance, not an observer of it. 

Six. Labor market deterioration. July’s unemployed population rose to a post‑pandemic‑era high (February 2022/December 2021) as participation rates slow — a labor‑market crack surfacing despite a price‑suppression regime that delivered 2.3% Q2 GDP and 2.6% first‑half GDP. Growth this administered should not be producing rising joblessness. That it is tells you the suppression is masking weakness, not curing it. (Figure 8, second to the highest image) 

The NCR hike is only the most recent installment in a running series of national minimum-wage increases, and the mechanism here isn't limited to weakening savings. A wage floor set above what productivity in the affected sectors can support functions as a regulatory tax on capital — it raises the cost of employing labor without a matching gain in output, and employers absorb that through slower hiring, automation, or informalization instead. That compounds the savings-investment gap from a second direction: capital gets penalized directly, and the standard of living falls for the workers the policy was meant to protect, not just for savers holding depreciating peso assets. 

Seven. Wall of Maturities (Corporate FX Debt). BSP’s own 2025 Financial Stability Report flags “sizable foreign‑currency exposures, with US dollar‑denominated debt averaging 37.6% of conglomerate debt” over the coming five years. That is precisely the external‑leverage buildup the soft‑peg mechanism in Section III predicts. Vista Land’s proposed sale of two non‑core malls is an early, visible symptom of the liquidity and solvency strain this exposure is starting to produce — not an isolated corporate decision. 

Eight. External Debt Pressures (Macro Leverage). The external debt stock rose to $154.9 billion as of June 2026, the highest on record, up from $147.4 billion a year earlier— and now roughly 48% larger than the $104.7 billion GIR that's supposed to be the country's reserve cushion against exactly this kind of external exposure. (Figure 8, second to the lowest pane) 

Yet, the composition matters more than the headline: medium‑ and long‑term borrowings dominate ($134.3B), and the public sector alone accounts for $92.8B — showing that the national government has become the primary driver of external leverage. Private corporates and banks are crowded into the same FX pool, but it is sovereign borrowing that now sets the tone. (Figure 8, lowest graph) 

Bondholders and multilaterals are the largest creditors — $49.2B owed to bond markets, $43.2B to multilaterals — underscoring dependence on volatile capital markets and crisis‑era financing that has quietly become structural. 

What looks like financing is in fact capital consumption: debt service ratios rise, GIR adequacy is flattered by borrowed inflows, and the peso’s weakness is the balance‑sheet readout of a system living on external leverage. 

The corporate wall of maturities (#7) and the sovereign external-debt buildup (#8) aren't separate problems — one is the micro expression of the same mechanism the other expresses at the macro level. Organic savings and FX generation have slowed, so the system substitutes debt. Leveraging doesn't create new resources. It only layers fragility across every balance sheet it touches. 

Every one of these data points is downstream of the same root cause: organic revenue generation has been slowing while the system crowds out savings, tightens the competition for what capital remains, and accumulates malinvestment and balance-sheet mismatches that a suppressed exchange rate and a suppressed CPI print cannot make disappear — only relocate. 

Notice the pattern that recurs across three separate statistics in this piece: CPI, GDP, and GIR. In each case, the headline number can improve — or hold steady — while the underlying capacity it's supposed to represent does not. 

• CPI doesn't capture sneakflation, shrinkflation and skimpflation; 
• GDP doesn't distinguish debt-financed spending from genuine productive capacity; 
• GIR doesn't distinguish organic FX flow from borrowed or sold-down stock. 

The representation starts standing in for the reality it's supposed to describe, and policy gets evaluated against the representation instead. That substitution is not an accident of measurement. It is what makes price suppression look like it's working, right up until the exchange rate — the one price left that's hardest to fully administer — starts printing the difference. 

None of this is likely to unwind on its own. Interventions introduced as temporary crisis responses have a well-documented tendency to become permanent features of the policy landscape once the crisis passes: price controls become policy, regulatory relief becomes precedent, liquidity support becomes an expectation, and FX intervention becomes simply how the market is understood to operate. Each of the mechanisms catalogued above — EO 110, the BSP relief cascade, the soft-peg ceilings, the ORA-and-borrowing-propped reserves — was introduced to manage a specific, bounded stress. 

None of them shows signs of being unwound now that the stress has evolved into something more chronic. That is how a set of emergency measures quietly becomes the baseline the economy is now structurally dependent on. 

IX. The Strawman Defense 

When asked directly, the administration doesn't deny the peso's weakness is connected to spending. It reframes the causality. Malacañang's response to the peso's earlier close at Php 62.56 was that the government remains focused on "fiscal discipline and more efficient use of public funds" — a line issued the day after that record close — conceding the timing, not the mechanism, and substituting an efficiency claim for the deficit and debt figures documented above. 

Other coverage leans on imported inflation and self-attribution bias — as if the oil shock explains the weakness on its own, rather than exposing a structural vulnerability that was already there. Trickle-down and imported-inflation framings both mislead in the same direction: they treat symptoms of the savings-investment gap as if they were independent, external causes. The oil shock didn't create the vulnerability. It exposed the belly that was already soft.

X. Conclusion: The Pressure Valve, Again 

None of this is new in kind — only in scale and duration. 

The peso has always functioned as the pressure-release valve absorbing the strains the rest of the system won't adjust to directly. What officials present as monitoring, smoothing, and prudent reserve management is, read against the reserve composition, the ceiling history, and the twin-deficit trajectory, a policy of financing today's imbalances with tomorrow's leverage. 

The 24th record of the year won't be the last. 

The relevant question for readers isn't when the next one comes. It's what balance sheet — household, corporate, or sovereign — absorbs the difference when the leverage funding this "stability" runs out of room. 

The peso isn't creating the imbalance. It is clearing it. 

The record USDPHP is not merely a currency story. It is the stagflation story — priced in pesos.

___ 

Last three stagflation series: 

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation, August 30, 2026 

Stagflation Part 14: Q2 GDP at 2.3% and Falling — A GDP Built on Suppression and Debt, August 9, 2026 

Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment, August 2, 2026

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation

  

What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless—Ludwig von Mises 

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation

I. Preamble: Interconnectedness of All Economic Phenomena 

II. Following the Money: The Balance-Sheet Origins of Inflation

IIA. Why This Matters: From External Discipline to Domestic Bailout

IIB. Following the Credit: Electricity and the New Transmission of Liquidity

IIC. When Balance Sheets Become Policy: From Liquidity to Prices

III. Oil Relief, Monetary Inflation, and the Return of Deferred Prices

IIIA. Administrative Suppression Is Not Price Stability

IIIB. The Poor Continue Paying the Highest Inflation Tax

IIIC. Benchmarkism and the Illusion of Labor Absorption

IIID. Wage Mandates and the Intervention Spiral

IV. Conclusion: Inflation Before Prices 

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation 

Why Consumer Prices Reveal the Consequences, Not the Beginning, of the Process 

I. Preamble: Interconnectedness of All Economic Phenomena 

Economic commentary often treats macroeconomic releases as though they describe separate realities. Bank lending is analyzed independently of inflation. Labor market statistics are discussed apart from monetary policy. Wage adjustments are framed as social policy, while electricity is relegated to industry news. Each release receives its own headline, its own narrative, and then quickly disappears into the next news cycle. 

Yet the economy functions as an interconnected process rather than a collection of isolated indicators. 

As Ludwig von Mises observed, economics "does not allow of any breaking up into special branches." It is concerned with "the interconnectedness of all phenomena of acting and economizing." Economic facts condition one another, and each problem can only be properly understood within a broader system that assigns its due place to every aspect of human action and economic choice. 

Money created through the banking system finances specific borrowers. Credit helps determine which investment projects become financially viable, influencing the allocation of resources, production costs, employment, asset prices, and eventually consumer prices. Monetary developments therefore propagate through the economy sequentially rather than simultaneously. 

The political environment further shapes this process by influencing the prevailing model of economic development. Governments frequently respond to the unintended consequences of earlier interventions with additional interventions. Each successive policy alters incentives, redirects capital toward politically favored sectors, and generates new distortions that invite further intervention, progressively reducing the economy's capacity to adjust through market processes. 

These developments are not isolated events. They represent successive stages of the same underlying process. 

The Philippine economy today provides an instructive example. 

• The BSP's May 2026 universal-commercial banking statistics showed another acceleration in money and credit growth. 
• The June CPI inflation report simultaneously revealed softer headline inflation but broader underlying price pressures. 
• The May labor report appeared to indicate slightly ‘improving’ employment conditions even as business investment remained subdued. 
• Meanwhile, Metro Manila received its ‘historic’ mandated wage increase in years, justified as protection against the rising cost of living. 

Conventional narratives frame these developments as isolated economic events. In reality, they form an interconnected process that reflects the deepening consequences of balance-sheet expansion, politically driven credit allocation, and successive policy interventions. 

The sequence matters because inflation does not begin at supermarket shelves, gasoline stations, or electricity bills. Nor does it begin with the consumer price index. By the time consumer prices visibly accelerate, the underlying monetary and financial adjustments have often been unfolding for a period. Markets respond to underlying conditions. What is seen as inflation is, therefore, a symptom. 

The process begins elsewhere. 

It begins with the expansion of balance sheets. 

II. Following the Money: The Balance-Sheet Origins of Inflation 

One of the recurring shortcomings of contemporary macroeconomic analysis is its tendency to treat inflation primarily as a phenomenon of price changes. 

Policymakers, talking heads, and financial markets closely monitor consumer price indices because they are readily observable, politically salient, and easily communicated. Rising food prices, higher electricity bills, and more expensive transportation become the visible face of inflation. 

Because consumer prices are both politically sensitive and immediately observable, inflation is also commonly framed as a problem originating in markets rather than in monetary or policy decisions. The mechanical focus is on the supply side. Thus, the resulting narrative emphasizes shortages, speculation, supply-chain disruptions, hoarding or price gouging, encouraging corrective political interventions, while the monetary and administrative policies that altered purchasing power and resource allocation receive comparatively little or no scrutiny at all. 

Yet the price changes captured by official statistics describe only one observable manifestation of a much broader monetary and financial process. 

Consumer price indices summarize exchange ratios over a given period; they do not reveal how the purchasing power underlying those transactions was created, allocated, and transmitted throughout the economy. 

Before consumer price indices register sustained inflation, balance sheets have often been expanding for months. Before households pay more at the grocery, someone must first acquire additional purchasing power. Before firms bid more aggressively for labor, raw materials, or imported inputs, someone must first obtain financing that enables such spending. 

Within the financial system, the interaction of savings, credit creation, monetary policy, and bank intermediation determines how purchasing power is created, allocated, and transmitted throughout the economy. 

These financial adjustments reshape resource allocation, investment decisions, production structures, and distribution, eventually influencing employment, incomes, spending patterns, and consumer prices. 

Periods of monetary accommodation magnify the imbalances (excess leverage, credit concentration, politically directed finance, sectoral distortions) that developed in the process. 

Monetary conditions have evolved through successive phases rather than discrete episodes. The BSP's earlier pandemic-era monetary expansion was followed by a period of policy tightening to contain rising inflation. Beginning in the second half of 2024, however, the BSP gradually shifted toward monetary accommodation through successive reductions in policy rates and reserve requirements. Rather than immediately accelerating consumer prices, these measures first affected the financial system by lowering funding costs, intensifying the expansion of banks' capacity to extend credit, increasing system-wide liquidity, and encouraging further balance-sheet expansion. 

These changes in monetary and credit conditions propagated or diffused gradually through the economy. As new purchasing power entered through bank lending and other financial channels, it influenced financing decisions, resource allocation, investment activity, and "aggregate demand" before becoming fully reflected in consumer price measures. 

The BSP's May 2026 Depository Corporations Survey (DCS) illustrates this transmission process. 

Broad money continued to accelerate for a fourth consecutive month.

Figure 1

M3 expanded by 12.8 % year-on-year, following growth of 10.3 % in February, 12.1 %in March, and 12.2 %in April. (Figure 1, topmost pane) 

While the various monetary aggregates have not followed identical trajectories over recent years, the May data point to increasingly broad-based liquidity conditions. 

• Cash in circulation, which had recently trailed the other aggregates in growth, rebounded.
• M1’s growth trend remained robust, sustaining the momentum from its earlier expansion in 2023.
• M2 and M3 growth accelerated in Q2 2025, showing that monetary expansion had become more widely distributed across the financial system rather than concentrated in a single aggregate. 

The significance of these figures lies not merely in their magnitude but in what they reveal about the sources of liquidity. 

The current acceleration in liquidity growth echoes the BSP’s pandemic‑era response. And while the DCS shows that domestic credit remained the principal driver of monetary expansion, the transmission channel has shifted. 

Banks net claims on central government (NCoCG) rose 16.2% to Php 6.4 trillion. (Figure 1, middle image) 

Claims on the public non‑financial sector accelerated even more rapidly, surging 41.2%, coinciding with the DOF’s proposed record remittances of GOCCs to the national government. Are banks financing the GOCC remittances? 

Lending to the private sector also strengthened to 13.2%, though at a more moderate pace. 

The banks’ net claims share of domestic claims stood at 27.1% in May 2026, slightly down from the record 27.6% in May 2024, while claims on the private sector reached 64.23%, sharply lower despite recovering from its interim trough in Q4 2023. Since the pre‑pandemic year 2019, bank net claims on the central government have taken an increasingly larger share of domestic claims—a clear sign that liquidity creation now stems primarily from bank financing of the government. (Figure 1, lowest diagram)

Figure 2

In the meantime, BSP’s net claim on central government (NCoCG) growth doubled in May to Php 662.6 billion, though it remains below pandemic levels. (Figure 2, topmost window) 

In sum, these developments suggest that the recent acceleration in monetary growth has been driven primarily by continued domestic balance-sheet expansion by banks and the government-BSP complex rather than by external sources of liquidity. 

Although the current expansion differs from the pandemic response in both scale and transmission mechanism, its underlying balance-sheet logic is strikingly similar. Liquidity is once again being created through coordinated expansion of public and banking-sector balance sheets—not primarily to finance new productive activity, but to sustain an increasingly leveraged economic structure. 

Unlike 2020, the current process operates largely through the routine mechanisms of government finance, central-bank operations, and bank credit rather than emergency facilities. 

Nevertheless, the recurring liquidity injections exhibit the characteristics of a quasi-bailout whose monetary consequences gradually diffuse through the economy before becoming visible in consumer prices. 

IIA. Why This Matters: From External Discipline to Domestic Bailout 

For many years, discussions of Philippine liquidity focused primarily on external sources of monetary expansion—remittances, export earnings, business process outsourcing receipts, tourism revenues, foreign portfolio flows, foreign direct investment, and movements in the country's international reserves. 

These external inflows undoubtedly influence domestic liquidity conditions. Historically, the accumulation of foreign exchange reserves also imposed an important discipline on domestic monetary expansion, as the BSP's balance sheet remained closely linked to developments in the external sector. 

Over time, however, the growing financing requirements of the domestic economy increasingly shifted the source of monetary accommodation inward. 

Ever since the 1997 Asian crisis, the BSP built up foreign reserves, which held nearly fixed at ~86–87% of assets from 2012 to 2018, culminating in 2019. Pandemic injections of $2.3 trillion cut that share to ~72%, as historic liquidity infusions raised domestic securities to nearly 20% — exposing peso fragility. (Figure 2, middle graph) 

While BSP has since reduced its domestic securities share and rebuilt reserves, banks now carry the burden of financing sovereign liabilities. 

As an aside, strangely, the BSP has yet to publish its monthly updates for 2026 

Consequently, this reinforced the larger role of domestic credit creation in expanding liquidity — a greater reliance on internally generated purchasing power rather than external inflows. 

Equally revealing are developments on the liability side of the banking system. 

Deposit substitutes—including money-market borrowings, promissory notes, and commercial paper—accelerated sharply. After expanding by just over 10 % year-on-year in February, their growth surged to nearly 74 % in April before approaching 95 % in May. Wholesale funding has therefore become an increasingly important source of financing for continued balance-sheet expansion. (Figure 2, lowest chart) 

The changing composition of bank liabilities provides important clues about conditions within the financial system. Rather than merely reflecting a preference for alternative funding structures, the growing reliance on wholesale liabilities suggests that banks theoretically are adapting to funding, regulatory, and balance-sheet constraints while sustaining asset growth. It also reflects the increasingly important role of market-based financing in supporting credit creation when traditional deposit growth alone becomes insufficient. 

That evolution carries important implications. 

Conventional narratives often portray banks as simple intermediaries that collect household savings before lending those funds to borrowers. Modern banking systems operate differently. Through credit expansion, bank lending simultaneously creates deposits, expanding both assets and liabilities on bank balance sheets. 

The composition of those balance sheets, however, is equally important. As a growing share of bank assets becomes concentrated in public-sector claims and other policy-influenced lending, while portions of private-sector credit remain constrained by weaker credit quality and elevated non-performing loans, the organic growth of deposits becomes less sufficient to sustain continued balance-sheet expansion. The sharp increase in wholesale liabilities therefore appears less a voluntary shift in funding strategy than an institutional response to mounting balance-sheet pressures, with banks increasingly relying on market-based funding to support continued liquidity creation. 

Understanding this mechanism fundamentally changes how monetary statistics should be interpreted. 

Liquidity is not merely a passive consequence of economic activity. It is created through identifiable balance-sheet transactions that determine who first receives newly created purchasing power, under what conditions, and for what purposes. 

This is where aggregate monetary statistics become insufficient. 

Headline M3 describes the resulting expansion of liquidity. It does not reveal how that liquidity was created, through whose balance sheet it entered the economy, or which borrowers received the newly created purchasing power. 

Money does not enter the economy uniformly. New purchasing power enters through specific borrowers, particular industries, and identifiable financial channels before gradually spreading throughout the broader economy. Those early recipients acquire the ability to bid for labor, raw materials, imported inputs, financial assets, and productive resources before the nominal incomes of later recipients adjust. Relative prices therefore begin changing well before those adjustments become visible in aggregate price indices. 

Price changes themselves reflect the interaction of supply and demand. Without additional money or credit to finance higher spending, stronger demand in one part of the economy generally requires weaker demand elsewhere. Generalized inflation therefore requires an expansion of purchasing power beyond the mere redistribution of existing income and savings. Even supply shocks initially alter relative prices; they become broader and more persistent only when accommodated by monetary expansion. 

As the late Nobel Laureate economist Milton Friedman reminded us: inflation is always and everywhere a monetary phenomenon — produced only by a more rapid increase in the quantity of money than in output. 

This is why some industries expand more rapidly than others. Certain asset prices appreciate long before consumer prices accelerate. Input costs often rise months before those increases appear in finished goods. The process is neither instantaneous nor evenly distributed. It unfolds according to the channels through which money and credit enter the economy. 

The balance sheet therefore provides the first map of inflation's transmission. 

If the Depository Corporations Survey explains how liquidity is created, the BSP's lending statistics reveal where that newly created purchasing power is increasingly being directed.

That question is particularly revealing in the current Philippine context. 

Aggregate lending growth accelerated during May. Yet the headline figure conceals a more important structural development. The composition of credit—not merely its quantity—provides the more meaningful signal. 

Among all sectors of the economy, one has emerged as the largest destination for new bank financing. 

The electricity sector. 

IIB. Following the Credit: Electricity and the New Transmission of Liquidity 

If the Depository Corporations Survey (DCS) reveals the expansion of monetary and banking-system balance sheets, the BSP's Universal and Commercial (U/C) Bank Lending data reveals how newly created purchasing power is allocated across sectors of the economy. Together, the two datasets provide complementary views of the same process: one identifies the expansion of liquidity within the financial system, while the other shows where credit creation is concentrated. 

The May lending report continued to show a rapid pace of credit expansion. Total outstanding loans of universal and commercial banks accelerated from 11.84 %year-on-year growth in April to 12.62 %in May, extending the recovery in bank lending that followed the BSP's shift toward monetary easing. 

On the surface, these figures suggested improving financial conditions and stronger economic activity. 

Aggregate lending growth, however, reveals only the quantity of credit creation. The more important question is where that credit is being allocated.

Figure 3

Consumer lending, which had been one of the principal drivers of post-pandemic credit expansion, continued to decelerate gradually while remaining elevated. Consumer loans slowed from 19.58 %to 19.03 percent, while credit-card lending eased slightly from 26.57 %to 26.30 percent. (Figure 3, topmost visual) 

Household borrowing therefore remained strong, but it was no longer the dominant source of credit expansion.

Production lending moved in the opposite direction. 

Loans to production activities accelerated from 10.70 %to 11.67 percent, suggesting that banks were directing a larger share of new lending toward business-related activities rather than household consumption. Under normal conditions, such a shift would generally be interpreted as favorable, as productive investment should expand capacity, increase output, and support long-term economic growth. 

The sectoral composition of production lending, however, reveals a more complex picture. 

Among major industries, electricity, gas, steam, and air-conditioning supply recorded the strongest expansion by a wide margin. Outstanding loans to the sector increased by 31.65 % year-on-year, accelerating from 25.83 %in April. (Figure 3, middle image)

More significantly, electricity accounted for the largest absolute increase in bank lending among all industries, adding approximately Php133.3 billion in a single month and roughly Php539.2 billion over the preceding twelve months. 

As a result, the sector's share of total universal and commercial bank loans increased from 12.2 %in May 2025 to 14.5 %by May 2026, reaching its highest level since the BSP began publishing the current series! 

This is not simply another industry experiencing rapid credit growth. 

It represents a significant reallocation of the banking system's balance sheet. 

Balance sheets often reveal structural changes before those changes become visible in national income statistics. Financing patterns, investment decisions, and credit allocation frequently adjust before their consequences appear in GDP, employment, or consumer-price data. Following the money therefore requires examining not only how much credit is created, but also which sectors receive that credit. 

This pattern also reflects broader developments within the Philippine electricity sector. 

Our previous analysis examined how mounting financial pressures within the industry were increasingly addressed through institutional restructuring, financing arrangements, and regulatory adjustments rather than through explicit fiscal appropriations. A series of developments pointed in the same direction: the SMC–Aboitiz Equity Ventures–Meralco (Chromite) Batangas LNG deal, Prime Infrastructure's acquisition of First Gen, the suspension of real-property taxes (RPTs) on power assets, and the introduction of the Government Energy Auction Allowance (GEA-ALL) on top of the existing FIT-ALL mechanism. Although different in form, these measures reflected a broader effort to maintain the financial viability of a strategically important sector while limiting reliance on direct fiscal support. 

The important observation is that the banking system has become an increasingly important channel through which financing reaches the electricity sector. Given that electricity-sector output has remained weak despite rapid credit expansion, the increase in lending raises questions beyond simple investment financing. Electricity GDP has stagnated since Q2 2025 (Figure 3, lowest graph) 

This reflects a quasi‑bailout scheme channeled through refinancing requirements, balance‑sheet restructuring, and regulatory incentives. 

Government‑affiliated private sector balance sheets absorb pressures that would otherwise appear on public accounts. Rather than showing up as fiscal expenditure, burdens are transferred via corporate restructuring and commercial banks, facilitated by regulatory adjustments. The cost does not disappear; it migrates across balance sheets, masking fragility under the guise of restraint. 

In this environment, the boundary between monetary policy, industrial policy, and financial-sector policy becomes increasingly difficult to separate. 

Credit allocation does not require formal central planning to influence economic outcomes. Once liquidity expands within the banking system, institutions respond to incentives, regulations, collateral conditions, risk assessments, and political priorities. The resulting allocation of credit reflects not only private lending decisions but also the broader institutional environment in which those decisions occur. 

This is why following the money requires following the balance sheet rather than the budget alone. 

The modern transmission of policy increasingly operates through credit markets. 

IIC. When Balance Sheets Become Policy: From Liquidity to Prices 

The significance of electricity lending extends beyond a single industry. It illustrates a broader feature of modern monetary transmission: the effects of monetary accommodation depend not only on the quantity of liquidity created, but also on where newly created purchasing power is allocated. 

The May DCS and lending reports reveal two dimensions of the same process. The DCS shows the continued expansion of liquidity through domestic credit creation, while lending data reveal how that purchasing power is distributed across sectors. Credit directed toward different uses—financial assets, real estate, consumption, infrastructure, utilities, or government financing—produces different effects on investment decisions, resource allocation, and relative prices. 

The transmission from monetary expansion to consumer prices is therefore neither immediate nor uniform. Newly created purchasing power enters the economy through specific financial channels, affecting particular borrowers and sectors before broader price effects emerge. 

The May balance-sheet and lending data indicate that these earlier stages of the process remain active. Liquidity continues expanding, domestic credit remains the principal source of monetary growth, and bank lending increasingly reflects sectoral concentrations, including electricity. 

June's inflation report should therefore not be interpreted as an isolated movement in consumer prices. It represents a later stage of a monetary and credit process already visible within the financial system. 

The balance sheet reveals where the process begins. Consumer prices reveal where it eventually appears. 

The significance of electricity lending extends beyond a single industry. It illustrates a broader feature of modern monetary transmission: the effects of monetary accommodation depend not only on the quantity of liquidity created, but also on where newly created purchasing power is allocated. 

III. Oil Relief, Monetary Inflation, and the Return of Deferred Prices 

Having followed the creation of liquidity through the banking system and traced its allocation across the economy's balance sheets, the analysis now moves to where these monetary processes become most visible: consumer prices. 

June's inflation report was widely interpreted as evidence that inflationary pressures were easing. Headline consumer price inflation declined from 6.8 %in May to 6.4 percent in June, reinforcing the view that price pressures were gradually moderating and that recent policy measures were beginning to stabilize conditions. 

The underlying picture, however, was more complex.

Figure 4

The decline in headline inflation was driven primarily by a factor external to domestic monetary conditions: the sharp reduction in global oil prices. West Texas Intermediate crude declined by more than 23 % during June, easing one of the most significant cost pressures affecting households and businesses. (Figure 4, topmost window) 

Transport inflation correspondingly slowed from 16.2 %to 12.8 percent, contributing substantially to the moderation in the overall index. (Figure 4, middle image) 

Had inflation been primarily a fuel-price phenomenon, the decline in headline inflation would have represented a broader improvement. 

The underlying data suggest otherwise. 

Core inflation accelerated from 4.1% to 4.4%, indicating that price pressures were becoming more broadly distributed beyond volatile food and energy components. The breadth of monthly price movements also remained significant: only three of the thirteen major CPI divisions recorded declines, while eight increased and two remained unchanged. 

The decline in headline inflation therefore reflected the offsetting effect of a major temporary component rather than a broad reversal of inflationary pressures. Lower oil prices reduced one important source of cost pressure, but they did not eliminate the monetary and credit conditions that had already influenced other parts of the economy. 

As established in Part I, monetary expansion does not affect all prices simultaneously. Newly created purchasing power enters through specific financial channels, influencing particular borrowers, industries, and production decisions before broader consumer-price effects emerge. 

June's CPI data should therefore not be interpreted as contradicting the monetary process. They illustrate its continuing transmission. 

The BSP's monetary data reinforce this interpretation. Broad money expanded by 12.8% in May, marking the fourth consecutive month of double-digit M3 growth. (Figure 4, lowest chart) 

Such expansion does not mechanically determine a precise monthly inflation outcome; monetary transmission operates through time and through changing economic structures. However, sustained liquidity growth provides the financial conditions through which localized price pressures can become more broadly embedded. 

This distinction is essential because supply conditions and monetary conditions operate differently. 

Supply disruptions can alter relative prices. Higher oil prices increase transportation costs. Poor harvests reduce agricultural supply. Geopolitical conflicts and supply-chain disruptions affect specific markets. 

But relative-price changes alone do not create sustained economy-wide inflation. Without additional purchasing power, higher spending in one category must generally reduce spending elsewhere. A rise in one set of prices is offset by weaker demand in another. 

Generalized inflation requires a mechanism that allows nominal spending to expand across multiple sectors simultaneously. 

That mechanism is provided by monetary and credit expansion. 

The balance sheets examined in Part II explain how that purchasing power entered the economy. 

The CPI data reveal where those monetary effects are becoming visible. 

IIIA. Administrative Suppression Is Not Price Stability 

June's inflation data also illustrate a recurring feature of price management: suppressing visible price increases does not necessarily resolve the conditions producing them. 

When politically sensitive prices rise, policymakers often respond by attempting to manage the observed price outcome directly through administrative measures, subsidies, regulatory interventions, or temporary restrictions. Such measures may provide short-term relief, but they do not eliminate the underlying economic pressures affecting supply, costs, and incentives. 

Rice provides one example.

 

Figure 5 

Despite the continued implementation of the Maximum Suggested Retail Price (MSRP), import liberalization measures, 20 pesos rice rollouts and further policy interventions affecting rice markets, rice inflation remained elevated at close to 15 %in June, only marginally lower than May's 15.6 percent. (Figure 5, upper diagram) 

The persistence of high rice inflation demonstrates the limits of administrative measures as a substitute for resolving underlying supply and cost pressures. A controlled price may temporarily alter the reported price path, but it cannot by itself change the economic conditions determining production, distribution, and availability. 

The irony is, despite this, authorities still propose to extend price caps! 

Electricity provides another important illustration. 

During June, Wholesale Electricity Spot Market (WESM) prices increased by approximately 23 percent, with particularly sharp movements in the Visayas. The development attracted limited public attention despite its potential implications for future consumer prices. 

Earlier in the year, authorities temporarily suspended aspects of WESM pricing under Executive Order No. 110 before subsequently restoring market-based pricing mechanisms. The objective was understandable: electricity prices had become politically sensitive, and temporary intervention offered immediate relief. 

However, prices perform a crucial and indispensable economic function. They transmit information about scarcity, and costs necessary for economic calculation. Administrative intervention can delay that information from appearing in observed prices, but it cannot eliminate the underlying pressures that generated it. 

When market pricing resumes, adjustments may reflect not only current conditions but also costs that accumulated during the period of suppression. What appears to be a sudden price increase may therefore represent deferred price discovery rather than a newly emerging problem. 

The same principle applies beyond electricity. Temporary relief measures introduced during the earlier oil-price shock have since been reversed, restoring excise-tax collections while households continue facing elevated living costs. The sequence demonstrates a recurring policy tension: measures that to supposedly protect consumer gives way to other political priorities. 

Administrative intervention can influence the timing of price adjustments. 

It cannot permanently remove the economic forces requiring those adjustments. 

When underlying pressures are postponed rather than resolved, inflation does not disappear. Its transmission is merely delayed, redistributed, or redirected through other channels. 

IIIB. The Poor Continue Paying the Highest Inflation Tax 

Headline inflation also conceals an important distributional reality. 

Aggregate price indices describe an average household. No household is actually average. 

The BSP and the Philippine Statistics Authority recognize this distinction by publishing separate inflation measures for the Bottom 30 %of income households. These statistics often provide a clearer picture of inflation's social consequences because lower-income households devote a larger share of their budgets to essential goods. 

June's data offered little relief. 

Although the gap between Bottom-30 food inflation and headline food inflation narrowed slightly—from 8.5 percentage points in May to 7.9 percentage points in June—it remained historically elevated or significantly above the inflation spike of 2023. (Figure 4, lower graph) 

This difference matters because persistent inflation does not affect all households equally. 

Higher‑income households generally possess greater ability to adjust through changes in consumption patterns, sustained reductions in savings, or by using accumulated assets to defend against erosion of purchasing power — for example, buying USD or other inflation‑hedging instruments. 

Lower-income households have far fewer margins of adjustment. 

They continue purchasing the same essential goods—rice, food, electricity, and transportation—but those costs represent a much larger share of their available income. Inflation therefore reduces not only purchasing power but also household flexibility and resilience. 

This perspective exposes inflation’s role as inequality’s engine: a regressive tax that punishes the poor while averages mask fragility. 

This distinction is also important when interpreting broader economic classifications and averages. Improvements in aggregate indicators may reflect selective progress, but they do not necessarily capture how households experience changing prices in their daily lives. 

Statistical averages summarize outcomes. 

Ironically, the data defies the conditions that brought upon the upper middle-income country (UMIC) status upgrade. 

That asymmetry becomes even clearer when moving beyond prices and examining the labor market, where businesses must decide whether rising costs can still be absorbed or whether they must adjust employment, investment, and production decisions. 

That said, selective liquidity injections and quasi-bailout dynamics operate as an inflation tax. The redistribution occurs through the unequal transmission of newly created purchasing power: early recipients benefit before prices fully adjust, while households with the least ability to hedge against inflation absorb the greatest loss of purchasing power. Monetary accommodation therefore functions as a regressive transfer mechanism, amplifying inequality and social pressures. 

IIIC. Benchmarkism and the Illusion of Labor Absorption 

The June inflation report reveals where the transmission of monetary expansion becomes visible. The May labor report, by contrast, reveals where its longer-term consequences begin to emerge. 

Official commentary described the May labor statistics as evidence of improving "labor absorption." The phrase itself is revealing. It suggests that employment expands mechanically once workers become available, as though the economy simply absorbs labor whenever conditions permit. 

The reality is different. 

Employment is not an autonomous variable. In a market economy, labor demand is derived demand. Firms do not hire merely because workers are seeking employment. They hire because entrepreneurs, operating under uncertainty, expect that committing resources to expand the enterprise will generate future returns. 

Employment therefore represents the outcome of prior investment decisions. 

Structural capital includes not only physical assets and financial resources, but also the organizational, technological, managerial, and human capital that allow labor to become productive. Workers become more valuable when combined with the complementary capital, processes, and institutions that enable production to occur efficiently. 

A labor market can therefore improve through two very different mechanisms. 

The first involves firms utilizing existing deployed capital: filling vacancies, extending working hours, increasing production within current facilities, or replacing workers who have exited. 

The second involves entrepreneurs committing new capital to expand the productive structure itself: entering new markets, building additional facilities, acquiring new capabilities, and creating new organizational capacity. 

It is the second process that represents the creation of additional productive capacity and therefore determines the economy's longer-term ability to generate sustainable employment growth. 

Labor statistics, however, cannot fully distinguish between these outcomes. A reduction in unemployment or underemployment may indicate improved labor utilization, but it does not necessarily reveal whether firms are undertaking the deeper capital commitments required for sustained economic expansion. 

The broader investment environment provides a more cautious picture.

Figure 6

Foreign direct investment (FDI) has weakened substantially reaching a decade-low level in April. (Figure 6, topmost pane)

While the recent Iran war oil shock may have contributed to this, the broader decline in foreign exposure since 2022 suggests increasing caution among investors considering long-term commitments. 

This pattern is notable given the investment pledges announced during official engagements with geopolitical partners. Announced intentions do not automatically translate into deployed capital. Actual investment decisions ultimately depend on expected returns and hurdle rates, underwritten by institutional conditions, policy stability, and the perceived risks facing capital commitments. 

The divergence between household and business sentiment reflects a similar tension. 

BSP surveys indicate that consumers remain concerned about rising food prices, declining purchasing power, and persistent inflation pressures. Large formal enterprises, by contrast, maintain comparatively stronger expectations regarding sales and operating conditions. (Figure 6, middle left and right images) 

This divergence partly reflects differences in economic position. Large firms generally have greater access to credit, capital markets, export revenues, diversified income streams, and pricing power. Their outlook may therefore reflect stronger balance-sheet capacity or even narrative management aimed at securing financial interests, rather than broad-based improvements in the economy.

Even within business surveys, the signals are mixed. Firms may express confidence regarding near-term operations while remaining cautious about major expansion decisions. Ultimately, investment outcomes—not surveys—determine whether optimism translates into productive capacity. 

The labor statistics themselves also present a more complex picture than headline indicators suggest. 

Compared with April, labor-force participation and unemployment marginally increased 

Compared with May of the previous year, however, employment and labor-force participation remained weaker. 

More importantly, under present high inflation conditions, labor‑market softness reflects entrenched financing costs, balance‑sheet strain, policy uncertainty, volatile prices, and compressed margins. (Figure 6, lowest chart) 

Unlike the post‑pandemic reopening inflation spike, when BSP’s unprecedented injections and fiscal support temporarily fueled pent‑up demand, today’s environment discourages irreversible capital commitments. Employment gains in agriculture, construction, and accommodation may be seasonal or policy‑driven, not evidence of durable expansion. 

These conditions do not naturally encourage the irreversible commitments associated with expanding structural capital. 

The sectoral composition of employment gains reinforces this caution. 

Agriculture recorded the largest employment increase despite recurring weather disruptions and elevated input costs. Construction also expanded, although some of its momentum may reflect continued government infrastructure activity rather than broad-based private investment. Accommodation and food services improved despite tourism in recession in 2025, as well as earlier reported contractions in Baguio, Boracay, Hundred Islands and East Visayas. 

Such movements may represent temporary adjustments, seasonal effects, or sector-specific developments. 

They do not, by themselves, demonstrate a generalized expansion of productive capacity. 

The labor data is another manifestation of benchmarkism. 

Employment, unemployment, and underemployment are valuable indicators. They measure observable outcomes, but they reveal little about the entrepreneurial processes that generate those outcomes. 

They tell us how many people currently have jobs. 

They tell us far less about whether entrepreneurs are committing scarce capital to create the productive capacity required for future employment. 

That unseen process ultimately determines whether current labor conditions represent a durable expansion or merely a temporary improvement within a constrained economic structure.

IIID. Wage Mandates and the Intervention Spiral 

Against this backdrop, the Metro Manila wage board approved a historic Php85 per day increase in mandated wages, the largest adjustment in years. The measure was presented as a response to rising living costs and as protection against inflation. 

The political appeal is understandable. 

The economic challenge is that higher mandated wages do not restore lost purchasing power. They redistribute the burden of reduced real income among employers, consumers, investors, taxpayers, and workers themselves. 

The cost does not disappear because it is mandated. 

Businesses facing higher labor costs must adjust through some combination of lower margins, higher prices, reduced hiring, delayed investment, automation, or restructuring. The ability to absorb these costs differs significantly across firms. 

Large corporations with stronger balance sheets, broader revenue sources, easier access to financing, and greater pricing power may adapt more easily. 

Many MSMEs face a different reality. Operating with thinner margins, limited access to financing, and fewer opportunities to pass costs forward, smaller firms are generally less capable of absorbing mandated increases in labor costs. 

The effects of such policies are therefore not distributed evenly across the economy. Larger enterprises with stronger balance sheets, greater access to capital markets, established supply chains, and greater pricing power are better positioned to adjust. For smaller competitors and potential new entrants, however, higher compliance costs can become additional barriers to expansion. 

This creates an unintended asymmetry. Policies introduced in the name of protecting workers strengthens the position of established firms by increasing the cost of competition, while reducing opportunities for smaller enterprises to grow, train new workers, and create new employment capacity. This creates an implicit protective moat for conglomerates, raising barriers to entry and reinforcing concentration under the guise of worker protection. 

The consequences extend beyond immediate hiring decisions. Firms may respond by reducing entry-level opportunities, favoring experienced workers over new graduates, limiting employee benefits, postponing expansion, increasing automation where feasible, or remaining informal. These adjustments reduce the economy's capacity to develop skills, accumulate enterprise capital, and expand productive output. 

When such interventions occur within an environment of monetary accommodation and expanding liquidity, the adjustment process becomes even more complex. Higher business costs can contribute to higher prices, while weaker investment incentives constrain future supply growth. The result is not simply a labor-market adjustment, but a mechanism through which inflationary pressures and weaker productive capacity can reinforce one another—stagflation. 

Over time, successive interventions can generate a cumulative process in which attempts to offset earlier distortions create new distortions requiring further intervention. 

Mandated wage hikes redistribute costs but do not restore purchasing power. Larger firms adapt; MSMEs struggle. The result is an implicit moat for conglomerates, raising barriers to competition. Within monetary accommodation, higher costs feed inflation while weaker investment erodes capacity — stagflation in motion. Successive interventions spiral into quasi‑bailouts, entrenching centralization, weakening feedback, and deepening rent‑seeking fragility. 

IV. Conclusion: Inflation Before Prices 

As Ludwig von Mises observed, what is commonly called inflation today is more accurately the consequence of inflation rather than inflation itself. The persistent tendency to equate inflation with rising consumer prices shifts attention away from the monetary and financial processes that precede those price movements. 

The Philippine experience illustrates why that distinction matters. 

Balance sheets reveal where purchasing power is created. Bank lending reveals where newly created purchasing power is initially directed. Credit allocation influences investment decisions, resource allocation, relative prices, and production structures long before those adjustments become visible in consumer price statistics. 

By the time inflation appears in the Consumer Price Index, the underlying monetary process has often been unfolding for months. 

Yet the process does not end with liquidity creation. The destination of that liquidity matters. When monetary expansion increasingly operates through the financing of existing financial pressures, politically significant sectors, or heavily leveraged structures, liquidity creation can function as a form of quasi-bailout—shifting adjustment costs across balance sheets rather than allowing those pressures to be fully resolved through market processes. 

The consequence is not merely higher prices. 

It is a gradual weakening of the economy's capacity to adjust. Resources are redirected toward sustaining existing structures rather than expanding productive capacity. Price signals are delayed through administrative interventions. Labor statistics improve without necessarily reflecting stronger capital formation. Businesses face rising costs while investment incentives weaken. 

These developments represent different stages of the same underlying process. 

The BSP's balance-sheet and lending data therefore provide more than a snapshot of current financial conditions. They reveal the evolving structure through which liquidity is created, transmitted, allocated, and ultimately reflected in economic outcomes. June's inflation report, the widening divergence between headline and core inflation, the burden borne by lower-income households, the changing character of employment, and the growing reliance on successive interventions are not isolated developments. They are manifestations of a broader balance-sheet process. 

Understanding inflation therefore requires looking beyond benchmark statistics. Consumer prices summarize observable outcomes. They do not explain how those outcomes came into being. 

Following inflation means following the money. 

It means following balance sheets before price indices, credit allocation before consumer spending, and institutional incentives before policy outcomes. 

Only by understanding that sequence can we understand not only why prices rise, but also why repeated attempts to suppress adjustment can transform monetary accommodation into a self-reinforcing process of weaker investment, distorted allocation, and ultimately stagflation. 

_____

References: (last 3)

Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings 

Stagflation Part 10: The Politics of Contradiction—Rate Hikes, Liquidity Addiction, and External Constraint Under Balance-Sheet Stress 

Stagflation Part 9: The Good News Mirage — Statistical Stability Amid Structural Fragility