One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its owntoxics.
Herbert Hoover 31st US president, The Memoirs of Herbert Hoover - The Great Depression 1929-1941 p.11
Here is another example of government statistics that reveal of brazen inconsistencies
The BSP reported November’s CPI: “Headline inflation in November increased to 2.5 percent year-on-year from 2.3 percent in the previous month, and was above the BSP’s forecast of 1.6-2.4 percent for the month. However, the resulting year-to-date average inflation rate of 1.7 percent was still below the Government’s inflation target range of 3.0 percent ± 1.0 percentage point for 2016. Likewise, core inflation, which excludes certain volatile food and energy items to measure underlying price pressures, also rose slightly to 2.4 percent in October. Meanwhile, month-on-month seasonally-adjusted headline inflation inched up to 0.4 percent in November from 0.3 percent in October.”
CPI’s increase attributed to: “The uptick in November inflation can be attributed to higher prices of selected non-food items, namely higher electricity rates in a number of provinces, and upward price adjustments in domestic petroleum products, particularly LPG and kerosene. Meanwhile, inflation of alcoholic beverages and tobacco also increased during the month. On the other hand, food inflation held steady as increases in the prices of rice, fish, and fruits were offset by the lower inflation rates of corn, meat, and vegetables.”
The Philippine Statistics Authority’s (PSA) version: The country’s annual headline inflation increased to 2.5 percent in November 2016. It was posted at 2.3 percent a month ago and 1.1 percent in November 2015. This was attributed to higher annual increments registered in the indices of alcoholic beverages and tobacco; housing, water, electricity, gas, and other fuels; and transport. Excluding selected food and energy items, core inflation picked up 2.4 percent in November 2016. Last month, it was recorded at 2.3 percent and in November 2015, 1.8 percent.
Last week, PSA also reported on what it calls as the General Retail Price Index (GRPI), a less cited but CPI related statistics: “The annual growth of the General Retail Price Index (GRPI) in the National Capital Region (NCR) further went up to 3.4 percent in October 2016. Last month, it picked up by 3.0 percent and in October 2015, 0.5 percent. This was mainly due to the 7.5 percent annual increase in the heavily-weighted food index. Contributing also to the uptrend were the higher annual gains registered in the indices of chemicals, including animal and vegetable oils and fats at 1.4 percent; machinery and transport equipment, 0.4 percent; manufactured goods classified chiefly by materials, 1.9 percent; and miscellaneous manufactured articles, 0.7 percent. On the other hand, the annual uptick of crude materials, inedible except fuels index slowed down to 0.5 percent. That for beverages and tobacco index remained at 3.1 percent while the index for mineral fuels, lubricants and related materials continued to post negative annual rate at -0.3 percent (Table 2).
Let me first clarify my position: Inflation statistics have no relevance to the real world for 3 reasons.
One. Totally different products and services cannot be aggregated.
Or, to aggregate prices of totally different products would be entirely inappropriate. Say for example, how can one take the average of prices of an apple, a car, an online subscription and a movie ticket? Yes, they are peso based. But no, they are different items that have different values for individuals or for the people.
Two, utility or preferences expressed through actions of buying are subjective and ordinal. Individuals, you and me, spend differently on different things due to different priorities. And priorities are NOT static or fixed but dynamic. They change. My food preference maybe adobo today, tomorrow it maysinigang, the next day could be inihaw na pusit. This applies not just in food but in other social activities.
Therefore, my inflation basket or my periodical spending distribution profile is, and will be, different from yours or from anyone else. The same applies to you; your spending preferences and actions are different from the rest.
Again not only are they different, they change.
Seen in general, the distribution can be as follows, some individuals spend larger amount for food, others for education, others for recreation leisure and more. Or some save more…
There can be no aggregate statistical number to accurately reflect on the spending activity of the Juan or Pedro or Maria.
Three, the skewness of statistics.
How would the inflation basket of the family of taipans Sy, Gokongwei, Ty, Ayala, Aboitiz, Razon and etc… affect the inflation basket of a below $1 person (poverty rate) to generate the average inflation of the man on the street?
As example, in a room (statistical sample universe) of 100 people, 99 of which earn only minimum wages while one is a billionaire, what would the per capita income or per capita inflation be? Wouldn’t this be inflated?
In psychology it’s called contrast effect—what you see depends on the reference or the point of contrast. It may be also called a “framing”—perspective as a matter of presentation.
So the inclusion and the exclusion of people’s activities as part of the government’s inflation basket becomes subject to statistician’s (methodological) whims.
Of course, since these statistical data are derived from surveys, they are also vulnerable to the critical flaws from the methodological execution of surveys. The Brexit and Trump surveys underscore the point that polls are not to be trusted.
Will surveys on economic fields be different???
So inflation numbers are, for me, utterly misleading. And since inflation numbers are inaccurate, so is the GDP.
But GDP is beside the point for this topic
Understand that these numbers are constructed for the purpose of justifying political agenda.(see the PSA’s explanation below)
And it’s why when governments suffer hyperinflationary episodes, as evidenced by a free fall of the national currency, official inflation numbers remain muted. Venezuela should be an example.
Now to revert to the CPI-GRPI discussion.
The official definition and use of the CPI according to the Philippine Statistics Authority: “The CPI is anindicator of the change in the average retail prices of a fixed basket of goods and services commonlypurchased by households relative to a base year. The CPI is most widely used in the calculation of the inflation rate and purchasing power of the peso. It is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures (PCE) in the calculation of the gross national product (GNP). Another major importance of the CPI is its use as basis to adjust wages in labor management contracts as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases.”
Now here is the official definition and use of the GRPI according to the same agency: “The GRPI is a statistical measure of the changes in the prices at which retailers dispose of their goods to consumers or end-users relative to a base year. The GRPI is an indicator used to monitor the economic situation of the retail trade sector. It is also used as a deflator of the National Accounts especially on the retail trade sector and serves as a basis of forecasting business in the retail trade.”
The difference can be summarized as this: The CPI represents consumer BUYING prices from retail outlets, or specifically the “change in the average retail prices… purchased by households”, while the GRPI signifies the SELLING prices of retail outlets to consumers, or “changes in the prices at which retailers dispose of their goods to consumers”.
To emphasize: CPI versus GRPI represents the BUY prices versus the SELL prices in the lens of household relative to retail, and on the flip side, the retail relative to the consumer.
Said differently, these numbers essentially establish the fundamental relationship of the transactions (buy and sell) by consumers as expressed in price changes recorded periodically.
In theory, since both numbers should reflect on the same set of actions by consumers, they are supposed to MATCH each other. Or, prices SOLD should account for prices BOUGHT for a transaction to be attained.
Got that?
It’s elementary logic.
Well, but such relationship has NOT been the picture presented by the government.
As one can see, while both GRPI and CPI have closely tracked the movements of one another (correlation at .8), the performance by the GRPI and the CPI has meaningfully diverged in terms of speed of price changes or the growth rate.
How divergent?
GRPI has now raced to 2014 highs while the CPI has only accounted for less than half of the 2014 pinnacle.
Remember that both GRPI and CPI attempts to capture consumer activities through price changes from prices SOLD (retail) and prices BOUGHT (consumer).
So the government has been telling us that prices BOUGHT by the consumer at retail outlets have been rising by significantly LESS than what the retail has declared through prices SOLD to the consumers.
A much better perspective can be seen via the RATIO of CPI over GRPI.
Remember the 10 months of 30%+++ of money supply growth? The apex of M3 coincided with the turning point of the CPI/GRPI. When M3 descended, so has the CPI/GRPI.
Now that the M3 has been rising but the CPI/GRPI continues to fall! So what gives????
Again the message: since 2014, consumers have BOUGHT at LOWER prices than what had been declared by the RETAIL outlets!
That’s government logic for you.
Neither has the growing variance between CPI and GRPI represented just a statistical anomaly nor a polemic on government statistics, instead these widening disparity in the government’s own INFLATION numbers have CRITICAL significance on real economic events!!!
Understand that CPI is a politically significant statistics.
Again the PSA on the importance of CPI… “it is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy”
Got that: major monitoring indicator of government economic policy???
So it is easy to see why CPI numbers may have, most likely, been presented with a political tilt. There would be less incentive to do so for GRPI.
This means that the growing divergence in the two series of numbers simply indicates that either the GRPI has been OVERstated or that CPI has been UNDERstated. Both could even be undervalued.
More important is to understand that an inflation premium is always tacked on interest rates.
In the assumption that CPI has been UNDERstated, this entails of a LOWER inflation premium built in on present interest rates. Or lower inflation premium means diminished interest rates.
And since interest rates affect the supply and demand of loanable funds, artificially lowered interest rates tend to INFLATE demand for credit (ceteris paribus—or given all things equal—particularly on conditions of balance sheets).
And this is why one can see, the second highest 10 month growth rates in bank credit expansion to the supply side since 2014’s record—the latter milestone has spanned nearly two decades.
And because of the funding function of commercial activities, the UNDERstatement of inflation, and consequently, reduced interest rates, likewise tend to INFLATE prices of ALL domestic assets, in particular, real estate (which at nominal prices are at record highs), stocks, bonds and the peso!
Yes, market manipulation is subsidiary to subsidies on credit that has financed the grotesque overvaluation of asset prices.
Proof?
Here is the BSP’s chief’s latest candid “free lunch” comment from a November 2016 speech in front of bankers* on how low interest rates impact financial assets…
We all know that making money on financial assets in a low/declining interest rate environment is a “no-brainer”. All fixed income assets you hold rise in value as interest rates fall.
*Amando M. Tetangco Jr Vision for resilience and growth November 21, 2016 BIS.org
Wow!
You see? The fun part here is that the BSP chief implicitly admitted that low interest rates signify a “no-brainer” subsidy to financial asset holders!!!!!
Yes, the BSP has been enriching the financial institutions through invisible redistribution from monetary policies that comes at the expense of the peso! More evidence how the peso has served as an unwitting victim for political agenda, which masquerades as economics. What more with the political drift to the left??
And YES a stunning admission!
So buy buy buy hands over fist!
And even more fun is that the BSP chief’s “Vision for resilience and growth” has been anchored on free lunches forever!!!! With possible interruptions from ONLY overseas events!
This only shows that if markets prices interest rates through the assimilation of government inflation numbers, then the suppressed inflation premium has played a critical role for the “no-brainer” subsidy on financial assets, and more importantly, the statistical GDP—channeled via artificially lowered interest rates!
But since subsidies are no free lunches, this translates to serious maladjustments in financial assets and chronic malinvestments in the real economy which the BSP has been blind to.
Even the former US president, Herbert Hoover, in the aftermath of the Great Depression admitted to the fatal consequences of inflationary credit (see opening quote)
To be clear, I am not saying that the GRPI has been more accurate than the CPI. I am saying that inflation statistics play a key role in influencing interest rates. And I am saying that government statistics have been embedded with political colors.
Now you see why the widening DIVERGENCE between inflation statistics matter? It’s all in the framing.
