The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy

National product statistics have been used widely in recent years as a reflection of the total product of society and even to indicate the state of “economic welfare.” These statistics cannot be used to frame or test economic theory, for one thing because they are an inchoate mixture of grossness and netness and because no objectively measurable “price level” exists that can be used as an accurate “deflator” to obtain statistics of some form of aggregate physical output. National product statistics, however, may be useful to the economic historian in describing or analyzing an historical period. Even so, they are highly misleading as currently used—Murray N. Rothbard 

 

In this issue: A brief but blistering breakdown of the 5.5% GDP mirage. 

The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy

I. Q2 GDP: A Mirage of Momentum

II. The Secondary Trendline: Pandemic’s Lingering Scar; GDP: A Flawed Lens, Still Worshipped

III. Economic Wet Dreams, Statistical Kabuki and Confirmation Bias

IV. The GDP Illusion, Poverty Amid Growth: Cui Bono?

V. Policy Theater, the Real Economy and The Credit–Consumption Black Hole

VI. Jobs Boom, GDP Drag

VII. Policy Vaudeville: July .9% Inflation, MSRP and the Php 20 Rice Rollout

VIII. Core vs Headline CPI: A Divergence Worth Watching

IX. Deflator Manipulation, GDP Inflation

X. Inflation-GDP Forecasting as Folklore

XI. The Official Narrative: A Celebration of Minor Gains

XII. The Real Driver: Government Spending, Not Households

XIII. The Consumer Illusion: Retail as a Misleading Proxy

XIV. Expenditure Breakdown: Only Government Spending Beat the Headline

XV. Inconvenient Truth: The Rise of Big Government—Crowding Out in Action, The Establishment’s Blind Spots and Tunnel Vision

XVI. More Inconvenient Truths: Debt-Fueled GDP—A Statistical Shell Game

XVII. The Debt-Deficit Trap: No Way Out Without Pain—Sugarcoating Future Pain

XVIII. Tail-End Sectors Surge: Agriculture and Real Estate Rebound

XIX. The Policy Sweet Spot—and Its Expiry Date: Diminishing Returns of Stimulus

XX. Conclusion: Narrative Engineering and the Keynesian Free Lunch Trap

XXI. Post Script: The Market’s Quiet Rebuttal: Flattening Curve Exposes GDP Mirage 

The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy 

Beneath the headline print lies a fragile economy propped up by CPI suppression, statistical distortion, and unsustainable public outlays.

I. Q2 GDP: A Mirage of Momentum 

The Philippines clocked in a Q2 GDP of 5.5% — higher than Q1 2025’s 5.4% but lower than Q2 2024’s 6.5%. 

For the first half, GDP posted a 5.4% expansion, above the 5.2% of the second half of 2024 but still below the 6.2% seen in the first half of 2024.

Figure 1

While this was largely in line with consensus expectations, what is rarely mentioned is that both nominal and real GDP remain locked to a weaker post-2020 secondary trendline — a legacy of the pandemic recession. (Figure 1, topmost graph) 

II. The Secondary Trendline: Pandemic’s Lingering Scar; GDP: A Flawed Lens, Still Worshipped 

Contra the establishment narrative, this lower secondary trend illustrates a slowing pace of increases—a theme we’ve repeatedly flagged. 

GDP now appears to be testing its own support level, underscoring the fragility of this fledgling trendline and the risk of a downside break. 

Though we’re not fans of GDP as a concept, we analyze it within the dominant lens—because everyone else treats it as gospel. 

But let’s be clear: GDP is a base effect—a percentage change from comparative output or expenditure figures from the same period a year ago. 

III. Economic Wet Dreams, Statistical Kabuki and Confirmation Bias 

When pundits claim GDP will breach 6% or that the Philippines is nearing “upper middle class” status, they’re implying that aside from seasonal Q4 strength, the rest of the year will recapture the original trendline and stay there. What a wet dream! 

These forecasts come from either practitioners afflicted by the Dunning-Kruger syndrome or sheer propagandists. 

The PSA’s national accounts data offer contradictory insights. But this isn’t just about statistics—it’s about confirmation bias. The public is told what it wants to hear. 

IV. The GDP Illusion, Poverty Amid Growth: Cui Bono? 

GDP is a quantitative estimate—built on assumptions, inputs, and econometric calculations. It hopes to objectively capture facts on the ground, but in aggregate, it overlooks individual preferences, distributional effects, financing mechanisms, and policy responses. 

Worse, its components (from rice to cars to Netflix) are averaged in ways that can distort reality. Aside, input or computational errors, or even manipulation, are always possible. 

Yes, GDP may be 5.5%, but SWS’s June self-rated poverty survey still shows 49% of Filipino families identifying as poor, with 10% on the borderline. While this is sharply down from December 2024’s 63%, the numbers remain considerable. (Figure 1, middle image) 

So, who benefits from the recent inflation decline that distilled into a 5.5% GDP? 

At a glance, the 41%—but even within this group, gains are uneven. Or, even within the 41% who are “non-poor,” gains are concentrated among larger winners while most see only modest improvements (see conclusion) 

V. Policy Theater, the Real Economy and The Credit–Consumption Black Hole 

The real economy doesn’t operate in a vacuum. It is a product of interactions shaped by both incumbent and anticipated socio-political and economic policies. 

The BSP began its easing cycle in 2H 2024, delivering four rate cuts (the fifth in June), two reserve requirement ratio cuts, doubled deposit insurance, a soft peg defense of the peso, and a new property benchmark that eviscerated real estate deflation. 

Theoretically, the economy ought to be functioning within a policy ‘sweet spot’. 

Despite blistering nominal growth and record-high universal-commercial bank credit—driven by consumer lending—real GDP barely budged. (Figure 1, lowest pane) 

Interest rates were hardly a constraint. Bank lending surged even during the 2022–23 rate hikes. Yet the policy transmission mechanism seems blunted: credit expansion hasn’t translated into consumer spending, rising prices or real GDP growth. 

Banking sector balance sheets suggest a black hole between credit and the economy—likely a repercussion of overleveraging or mounting balance sheet imbalances. 

More financial easing won’t fix this bottleneck. It’ll worsen it. 

VI. Jobs Boom, GDP Drag

Figure 2

We’re also treated to the spectacle of near-record employment. In June, the employed population reached its second-highest level since December 2023, driving the employment rate to 96.3% and lifting Q2’s average to 96.11%. 

That should be good news. But is it? If so, why has headline GDP moved in the opposite direction? (Figure 2, topmost chart) 

This labor boom coincided with over 25% credit card growth—normally a recipe for inflation (too much money chasing too few goods). (Figure 2, middle visual)

Instead, CPI fell, averaging just 1.4% in Q2. Near-record employment met falling prices, with barely a whisper from the consensus about softening demand. (Figure 2, lowest diagram)

VII. Policy Vaudeville: July .9% Inflation, MSRP and the Php 20 Rice Rollout

Authorities reported July inflation at 0.9%—approaching 2019 lows. But this is statistical kabuki, driven by price controls and weak demand.

Figure 3

Rice prices, partly due to imports, were already falling before January’s MSRP. The Php 20 rice rollout only deepened the deflation. (Figure 3, topmost diagram)

July saw rice prices drop 15.9%. Despite earlier MSRP, meat prices remained elevated—9.1% in June, 8.8% in July.

Because rice carries an 8.87% weight in the CPI basket, its deflation dragged down Food CPI (34.78% weight), driving July’s headline CPI to 2019 lows.

This divergence reveals the optics. MSRP failed on pork, so it was quietly lifted. But for rice, it was spun as policy success—piggybacking on slowing demand, punctuated by the Php 20 rollout even though it simply reinforced a downtrend already in motion.

VIII. Core vs Headline CPI: A Divergence Worth Watching

The growing gap between core and headline CPI is telling. The negative spread is now the widest since June 2022. Historically, persistent negative spreads have signaled inflection points—2015–16, 2019–2020, 2023. (Figure 3, middle window)

Moreover, MoM changes in the non-food and energy core CPI suggest consolidation and its potential terminal phase. An impending breakout looms—implying rising prices across a broader range of goods. (Figure 3, lowest graph)

IX. Deflator Manipulation, GDP Inflation 

Here’s the kicker: statistical histrionics are inflating GDP by repressing the deflator.

Real GDP is not a raw measure of economic output—it’s a ratio: nominal GDP divided by the GDP deflator. That deflator reflects price levels across the economy. Push the deflator down, and—voilà—real GDP pops up, even if nominal growth hasn’t changed. 

Q2’s 5.5% real GDP print looks better partly because the deflator was suppressed by statistical and policy factors: rice imports, price controls, Php 20 rice rollouts or targeted subsidies, and peso defense all helped drag reported inflation to multi-year lows. Rice alone, with an 8.87% CPI weight, deflated nearly 16% in July, pulling down the broader food CPI and, by extension, the GDP deflator. 

If the deflator had stayed closer to its Q1 level, Q2 real GDP would likely have landed closer to the 4.5–4.8% range—well below the official figure. This isn’t economic magic; it’s arithmetic. The “growth” came not from a sudden burst in output, but from lowering the measuring stick. 

Q2 GDP is another "benchmark-ism" in action. 

X. Inflation-GDP Forecasting as Folklore 

Amused by media’s enthrallment with government inflation forecasts, we noted at X.com: "Inflation forecasting is the game of ‘pin the tail on the donkey’ — a guess on a statistical guess, dressed up as science. The mainstream reinforces an Overton-window narrative that serves more as diversion than insight" 

The real economy—fragile, bifurcated, and policy-distorted—remains unseen.

XI. The Official Narrative: A Celebration of Minor Gains 

The establishment line, echoed by Reuters and Philstar, goes something like this: 

"Slowing inflation also helped support household consumption, which rose 5.5% year-on-year in the second quarter, the fastest pace since the first quarter of 2023" … 

"Faster farm output and strong consumer spending helped the Philippine economy expand by 5.5 percent in the second quarter"

Figure 4

But beneath the headlines lies a more sobering truth: a one-basis-point rise in household spending growth has been heralded as a “critical factor” behind the GDP expansion. 

While the statement is factually correct, it masks the reality: household spending as a share of GDP has been rangebound since 2023, showing no real breakout in momentum. 

XII. The Real Driver: Government Spending, Not Households 

The true engine of Q2 GDP was government spending, which rose 8.7%, down from 18.7% in Q1 but still dominant. (Figure 4, topmost window) 

Over the past five quarters, government spending has averaged 10.7%, dwarfing household consumption’s 5.1%.  

This imbalance exposes the fragility of the consumer-led growth narrative. When per capita metrics are used, the illusion fades further: Real household per capita GDP was just 4.5% in Q2, barely above Q1’s 4.4%, and well below Q1 2023’s 5.5%.

This per capita trend has been flatlining at secondary trendline support, locked in an L-shaped pattern—inertia, not resurgence—and still drifting beneath its pre-pandemic exponential trend.  The per capita household consumption “L-shape” shows spending per person collapsing during the pandemic and never meaningfully recovering — a flatline that belies the GDP growth narrative. (Figure 4, middle graph)

XIII. The Consumer Illusion: Retail as a Misleading Proxy

Despite the BSP’s promotion of property prices as a proxy for consumer health—and the Overton Window’s deafening hallelujahs—SM Prime’s Q2 results reveal persistent consumer strain: (Figure 4, lowest chart) 

• Rent revenues rose only 6.3%, the weakest since the pandemic recession in Q1 2021.
• Property sales stagnated, up just 0.2% despite new malls in 2024 and 2025 

So much for the “strong consumer” thesis. 

XIV. Expenditure Breakdown: Only Government Spending Beat the Headline 

In the PSA’s real GDP expenditure table, only government spending exceeded the headline:

• Household: 5.5%
• Gross capital formation: 0.6%
• Exports: 4.4%
• Imports: 2.9%
• Government: 8.7% 

Notably, government spending excludes public construction and private allocations to public projects (e.g., PPPs). Due to the May mid-term elections, real public construction GDP collapsed by 8.2%. 

XV. Inconvenient Truth: The Rise of Big Government—Crowding Out in Action, The Establishment’s Blind Spots and Tunnel Vision

Figure 5

The first half of 2025 exposes a structural shift the mainstream won’t touch:  Government spending’s share of GDP has surged to an all-time high! 

Meanwhile, consumer driven GDP continues its long descent—down since 2001. (Figure 5, topmost diagram) 

As the public sector’s footprint swells, the private sector’s relative role contracts. This isn’t theoretical crowding out. It’s empirical. It’s unfolding in real time. (Figure 5, middle image) 

Importantly, this is not a conspiracy theory—these are government’s own data. Yet the establishment’s analysts and bank economists appear blind to it. 

Proof? 

Banks are shifting focus toward consumer lending, even as the consumer share of GDP trends lower. 

The “build-and-they-will-come” crowd remains locked in a form of tunnel vision, steadfastly clinging to a decaying trend. 

XVI. More Inconvenient Truths: Debt-Fueled GDP—A Statistical Shell Game 

Government has no wealth of its own. It extracts from the productive sector—through taxes, borrowing (future taxes), and inflation. 

As Big Government expands, so does public debt — now at Php 17.3 trillion as of June! 

The June debt increase annualizes to Php 1.784 trillion — eerily close to the Php 1.954 trillion NGDP gain over the past four quarters (Q3 2024–Q2 2025). (Figure 5, lowest visual)

Figure 6 

That’s a mere Php 170 billion gap. Translation: debt accounts for 91.3% of NGDP’s statistical value-added. 

The 91.3% “debt as share of NGDP increase” means almost all of the year-on-year nominal GDP expansion came from government borrowing, not private sector growth — in other words, strip out the deficit spending, and the economy’s headline size barely moved. 

Yet this spread has collapsed to its lowest level since the pandemic recession. (Figure 6, upper pane) 

This isn’t growth. It’s leverage masquerading as output — GDP propped up almost entirely by deficit spending! 

This also reinforces the government’s drift toward centralization—where state expansion becomes the default engine of the economy. 

XVII. The Debt-Deficit Trap: No Way Out Without Pain—Sugarcoating Future Pain 

It’s unrealistic for the administration to claim it can “slowly bring down” debt while GDP remains tethered to deficit spending. 

Debt-to-GDP ratios are used to soothe public concern—but the same debt is inflating GDP through government outlays. It’s a circular metric: the numerator props up the denominator. 

According to the Bureau of Treasury, Debt-to-GDP hit 63.1% in Q2 2025—highest since 2005! 

Ironically, authorities quietly raised the debt-to-GDP threshold from 60% to 70% in August—an implicit admission that the old ceiling is no longer defensible. 

This is a borrow-now, pay-later model. Short-term optics are prioritized, while future GDP is sacrificed. 

Even the PSA’s long-term trendline reflects this drag—confirming the trajectory of diminishing returns. 

And we haven’t even touched banking debt expansion, which should have supported both government and elite private sector financing. Instead, it’s compounding systemic fragility. 

We’re no fans of government statistics—but even their own numbers tell the story. Cherry-picking to sugarcoat the truth isn’t analysis. It’s deception. And it won’t hide the pain of massive malinvestments. 

XVIII. Tail-End Sectors Surge: Agriculture and Real Estate Rebound 

From the industry side, Q2 saw surprising strength from GDP’s tailenders: 

Agriculture GDP spiked 7%, the highest since Q2 2011’s 8.3%. Volatile by nature, such spikes often precede plunges. 

Real estate GDP nearly doubled from Q1’s 3.7% to 6.1%, though still below Q2 2024’s 7.7%. (Figure 6, lower graph) 

Yet initial reports of listed property developers tell a different story: 

-Aggregate real estate sales: +4.1% (Megaworld +10.5%, Filinvest -4.96%, SMPH +0.02%) 

-Total revenues: +5.23% (Megaworld +9.6%, Filinvest -1.2%, SMPH +3.83%)

These figures lag behind nominal GDP’s 7.9%, suggesting statistical embellishment aligned with BSP’s agenda. 

Benchmark-ism strikes again!  

XIX. The Policy Sweet Spot—and Its Expiry Date: Diminishing Returns of Stimulus 

Technically, Q2 and 1H mark the ‘sweet spot’ of policy stimulus—BSP’s easy money paired with fiscal expansion. But artificial boosts yield diminishing returns. 

A 5.5% print reveals fragility more than resilience. 

Once again, the entrenched reliance on debt-financed deficit spending inflates GDP at the expense of future stability—while compounding systemic risk.  

XX. Conclusion: Narrative Engineering and the Keynesian Free Lunch Trap 

GDP has been sculpted to serve the establishment’s preferred storyline: 

• CPI suppression to inflate real GDP
• Overstated gains in agriculture and real estate
• Escalating reliance on deficit spending 

Repressing CPI to pad GDP isn’t stewardship—it’s pantomine. A calculated communication strategy designed to preserve public confidence through statistical theater. 

Within this top-down, social-democratic Keynesian spending framework, the objective is unmistakable: Cheap access to household savings to bankroll political vanity projects. These are the hallmarks of free lunch politics. 

The illusion of growth props up the illusion of competence. And both are running on borrowed time. 

Yet, who benefits from this GDP? 

Not the average household. Not the productive base. As The Inquirer.net reports: "The combined wealth of the country’s 50 richest rose by more than 6 percent to $86 billion this year from $80.8 billion in 2024, as the economy got some lift from robust domestic demand and higher infrastructure investments, according to Forbes magazine." 

GDP growth has become a redistribution mechanism—upward. A scoreboard for elite extraction, not shared prosperity. 

Without restraint on free lunch politics, the Philippines is barreling toward a debt crisis. 

XXI. Post Script: The Market’s Quiet Rebuttal: Flattening Curve Exposes GDP Mirage 

Despite headline growth figures and establishment commentary echoing official optimism, institutional traders—both local and foreign—remain unconvinced by the Overton Window of managed optimism rhetoric. 

The market’s posture suggests skepticism toward the government’s narrative of resilience.

Figure 7 

Following a Q2 steepening (end-June Q2 vs. end-March Q1), the Philippine Treasury curve has flattened in August (mid-Q3), though it remains steep in absolute terms. While the curve remains steep overall, the recent shift reveals important nuances: 

Short end (T-bills): August T-bill yields are marginally lower than June Q2 but still above March Q1 levels. 

Belly (3–5 years): Rates have been largely static or inert, showing no strong conviction on medium-term growth or market indecision 

Long end (10 years): Yields have fallen sharply since March and June, suggesting softer growth expectations or rising demand for duration. 

Ultra-long (20–25 years): Rates remain elevated and sticky, reflecting structural fiscal and inflation concerns. 

After July’s 0.9% CPI print, the peso staged a brief rally, yet the USDPHP remains above its March lows. Meanwhile, 3-month T-bill rates softened slightly post-CPI, hinting at the BSP’s intent to maintain its easing stance. 

Q3’s bearish flattening underscores rising risks of economic slowdown amid stubborn inflation or stagflation. 

The divergence between market pricing and statistical growth exposes the mirage of Q2 GDP—more optical than operational, more narrative than organic.

  

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

As the cycle nears its end, a country is typically beset by chronic fiscal deficits. Low domestic savings and current account deficits render it dependent on foreign lenders. As lenders become wary, the average maturity of the public debt shortens. The central bank finds it impossible to set interest rates at the level which balances the needs of both creditors and borrowers. Once interest rates rise, governments’ debt servicing costs become increasingly onerous. Government finances come to resemble a Ponzi scheme, with new debt being issued to service old borrowing—Edward Chancellor 

In this issue

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

I. Introduction: Evading the Real Issue

II. The Fallacies Behind the CMEPA’s Defense

A. False Equivalence

B. Red Herring

C. Categorical Error

D. Begging the Question

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”)

F. Appeal to the General (Overgeneralization)

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback 

Logical fallacies aren’t harmless—they shape policy narratives. In CMEPA’s case, they obscure financial repression and pave the way for systemic economic backlash. 

This is a follow-up on my original piece: The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

I. Introduction: Evading the Real Issue 

The Capital Market Efficiency Promotion Act (CMEPA) has stirred significant debate, not merely because of its tax provisions but because of what it signals about the evolving relationship between the state and citizen savings. 

While defenders of CMEPA claim it merely modernizes financial taxation and expands savings options, these arguments often rest on flawed logic and misleading equivalencies that mask the deeper issues: the erosion of true savings, the rise of speculation, and creeping state control over private capital.

Besides, in classical economic thought, savings is deferred consumption—a temporal anchor against uncertainty, a moral wager on future stability. Time-bound, low-risk instruments like term deposits have long served this function. They do not aspire; they buffer. When the state flattens the tax incentives protecting this buffer, it doesn’t merely tweak an equation—it alters the meaning of saving. 

II. The Fallacies Behind the CMEPA’s Defense 

CMEPA's defenders lean on several logical fallacies to support their case: 

A. False Equivalence: By equating time-bound savings with speculative financial assets such as stocks or REITs, proponents confuse two fundamentally different financial behaviors. Savings are deferred consumption; risk assets are bets on volatility. 

B. Red Herring: Arguments pointing to alternative investment vehicles like Pag-IBIG MP2 or Retail Treasury Bonds distract from the core concern: CMEPA disincentivizes bank-based, low-risk savings that traditionally fund long-term development. 

C. Categorical Error: To assume that financial markets can substitute for savings systems ignores the institutional role of savings in capital formation, stability, and intermediation. 

D. Begging the Question: CMEPA defenders assume what they must prove: that taxed savings instruments still count as savings (tax = savings or 1-1=2), or that savings will simply shift outside time deposits without consequence. This begs the question. 

It presumes that risk assets and government-managed schemes are natural substitutes for time deposits. It conflates taxation with neutrality, ignoring how incentives shape behavior.

In reality, aside from extraction, tax is a signal, not a passive overlay. And when the signal penalizes duration, it redefines savings itself. 

Worst, it also treats financial repression as benign without examining its structural damage to intermediation, capital formation, and systemic liquidity.

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”) 

Defenders highlight only the seen—that capital might shift to “alternative” instruments like stocks or Pag-IBIG MP2. 

What is seen:

1. Lower taxes on REITs and stocks = more investment.

2. Flat tax on deposits = not new, fairness 

But they ignore the unseen: 

1. weakening of bank intermediation via the erosion of long-term bank funding,

2. The crowding out of private credit channels, and

3. The behavioral shift toward liquidity-chasing speculation, which gives rise to

4. increased market and economic volatility 

Policy must be judged not just by its immediate effects, but by its downstream damage. This is the classic Bastiat fallacy—what is unseen—the fragility, the distortion, the systemic cost—often matters more. 

F. Appeal to the General (Overgeneralization) 

CMEPA’s defenders argue that because some financial instruments like stocks, REITs, or Pag-IBIG MP2 exist, they can generally serve as adequate substitutes for traditional savings. 

But this overlooks key details: liquidity risk, volatility, transitional frictions or tensions, accessibility, ceilings, investor profile and behavioral inertia that constrain real-world reallocation. 

Not all instruments serve the same function—especially for households that need capital preservation over yield. 

This fallacy blurs crucial distinctions between risk assets and true savings vehicles. By appealing to broad categories, it sidesteps the very real limitations and risks of reallocating savings. In policy, the details are the difference between resilience and fragility. 

Policy design and evaluation demands specificity: Without disaggregated data on household savings patterns, bank funding structures, and instrument uptake, differentiating between resilience and fragility, the defense becomes narrative and rhetoric, not analysis. 

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities 

Since the BSP’s structural easing cycle began in the early 2000s, both the savings and time deposit shares of M2 have steadily declined. 

This erosion has profound implications for the liquidity foundations of the Philippine financial system. 

Figure 1 

Notably, time deposits briefly surged during two critical junctures: first, when the BSP’s policy rates hit record lows during the pandemic, and again when aggressive rate hikes resumed in 2022. Yet this rebound proved short-lived. (Figure 1, topmost pane) 

Subsequent M2 growth increasingly leaned on more liquid components—such as demand deposits and currency in circulation—rather than long-term savings. 

In effect, liquidity transformation has shifted away from stable deposits toward more volatile sources: demand-driven credit expansion and the banking system’s financing of government liabilities, as evidenced by the surge in net claims on the central government (NCoCG). (Figure 1, middle graph) 

The CMEPA tax will likely accelerate this liquidity vacuum by further penalizing traditional savings vehicles. 

This structural shift presents a systemic challenge. As deposits decline, credit expansion becomes increasingly unanchored from genuine savings. In tandem with both implicit liquidity support (via bank balance sheets) and direct quantitative easing (via the BSP), this dynamic becomes inherently inflationary and destabilizing. 

The dilemma is mirrored in bank balance sheets. 

The time deposit share of total bank liabilities has collapsed—from over 32% in 2008 to just 17.5% by mid-2022, before rebounding modestly in response to BSP’s tightening cycle. (Figure 1, lowest diagram) 

This plunge coincides with a decade of financial repression: persistently low real rates, high inflation, and the rise of state-directed instruments like RTBs, MP2, and PERA accounts. 

As traditional deposits dwindled, banks turned increasingly to borrowings to fill the liability gap. 

The share of bank borrowings from capital markets has been rising since 2015, ironically peaking just before the pandemic recession in 2019. This share temporarily declined to 5.4% by Q3 2023, as ‘tighter’ policy conditions set in. 

Yet as liquidity stress intensified, bank borrowing surged anew—hitting 7.9% in March 2025—before moderating after the BSP’s second leg of RRR cuts. 

In this context, what CMEPA promotes as capital market reform in practice amounts to an escalation of the erosion of the deposit base. It trades long-term stability for short-term borrowing, redirecting household savings away from private financial intermediation and into state debt. 

The result? A more fragile banking system, less private capital formation, and greater macro-financial risk. 

Moreover, these bank borrowings now compete directly with government financing needs and private sector credit demand—exacerbating the crowding-out effect and tightening liquidity conditions for the broader economy. 

This fragility is amplified by the growing concentration of liquidity within a handful of dominant players.

Figure 2

As of May, Philippine banks controlled 82% of total financial resources or assets, with universal-commercial banks accounting for 76%. (Figure 2, topmost image) 

Meanwhile, even as the M2-to-GDP ratio soared from 63% in 2019 to a pandemic-era peak of 76.2% in 2021, it dropped sharply to 66.3% by Q1 2025—a sign that not only has GDP become dependent on liquidity, but, importantly, money creation is no longer translating into real economic or savings growth. (Figure 2, middle chart) 

Taken together, as banks increasingly monopolize liquidity while time deposits diminish, the financial system becomes more fragile. It is precisely this growing instability that forced the BSP to roll out confidence-boosting measures—including the doubling of deposit insurance coverage and the second phase of the RRR cut. These are not signs of strength. They are signs of deepening systemic stress.

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap 

At first glance, gross domestic savings (GDS) might seem useful for assessing national savings conditions, but its use to account for real savings conditions is generally misleading. 

First, as a derived indicator—not a strict accounting identity—it suffers from definitional inconsistency. 

For instance, the World Bank reports it at 9.3% in 2024, while Trading Economics, citing the same source, shows 29.24%. Same source, vastly different realities. (Figure 2, lowest window) 

Second, it is calculated as: 

GDS = GDP – Total Consumption (private + public). 

But GDP itself is indifferent to distributional nuances. As we always ask here: Cui bono or Who benefits? 

Is the savings outcome driven primarily by genuine productivity gains—or by increasing dependence on leverage? What is the quality of the growth? What ratios of cost, allocation, and extraction were involved? 

Third, the GDS measure masks household savings weakness—especially during capital flight or high profit repatriation. 

Fourth, how are these "savings" reflected in the banking system? 

Even when elevated GDS suggests high aggregate capacity, the reality is that available savings for productive intermediation—such as long-term deposits and investible capital—are scarce. CMEPA threatens to worsen this distortion by tilting incentives toward consumption and speculation. 

Put differently: while 2024 GDS appears deceptively high at over 29% of GDP, net national savings—after accounting for income and transfer leakages—is a mere 9.3%, per World Bank estimates. 

This reveals a deep structural fragility in the country's true capacity to accumulate capital. By penalizing savings and redirecting flows into speculative capital markets, CMEPA threatens to widen this gap and exacerbate the very vulnerabilities it claims to address.

Figure 3

Yet—and this is key—BusinessWorld recently produced a chart based on Philippine Statistics Authority (PSA) data showing the second widest gap between saving rates (apparently from the World Bank) and investment rates —which we discussed last March. (Figure 3, topmost visual) 

If savings were truly robust, why does this gap persist? What finances this chasm? 

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage 

Cherry-picking numbers to defend the law ignores that the savings-investment gap has been manifested through ‘twin deficits’—fiscal and external trade. Despite supposed normalization post-pandemic, the Philippine economy remains at pandemic-level dependency on credit. (Figure 3, middle graph) 

Here’s the key: public spending is part of those investment rates. 

Bureau of the Treasury data revealed that the 2025 first-half fiscal deficit hit a record Php 765.49 billion—even without a recession! This confirms earlier warnings, which we’ll expand on in another post. (Figure 3, lowest diagram) 

So, who finances this? Domestic banks and foreign lenders are now absorbing this growing imbalance. 

As previously noted: 

"A shrinking domestic savings pool limits capital accumulation, increases dependence on external financing, and exposes the economy to risks such as debt distress and currency fluctuations."— Prudent Investor, March 2025

Figure 4

As of May, public debt hit a record Php 16.918 trillion, with June data expected to breach Php 17 trillion —the all-time high deficit will accelerate its increase. Didn’t the administration hint at pushing up the debt-to-GDP corridor from 60% to 70%? (Figure 4, upper graph) 

Meanwhile, combined with total bank credit expansion, systemic leverage reached a new record of Php 31.225 trillion, or 118% of 2024 nominal GDP. (Figure 4, lower chart) 

And that figure excludes: 

• Capital market debt issuance (corporate bonds, CMBS)
• FDI-linked intercompany loans
• Informal debt (pawnshops, personal lending, unregulated finance)

Think of the costs: this credit buildup means rising debt servicing burdens, declining real incomes, and growing risks of delinquencies and defaults. 

More importantly, in the absence of productivity-led savings growth, the Philippine economy is running on borrowed money—and borrowed time.

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2 

Defenders of CMEPA point to alternatives like RTBs or Pag-IBIG’s MP2 as substitutes for taxed time deposits. 

But these are neither comprehensive nor scalable: 

MP2 has annual ceilings and requires Pag-IBIG membership. 

RTBs are state-managed, episodic, and offer limited liquidity.

Figure 5 

Latest BSP data: (Figure/Table 5) 

• Total time deposits in the PH banking system: Over Php 5 trillion
• Long-term deposits (>5 years): ~Php 500–Php 700 billion
• RTB retail uptake: ~Php 175 billion
• MP2 inflows: ~Php 30–Php 50 billion/year 

Combined, RTBs + MP2 absorb just 5–10% of the capital displaced by CMEPA’s flattening of tax incentives. The rest sits idle, chases risk, or exits the formal system. 

More critically, these instruments are not substitutes for a diverse, open savings ecosystem. They represent state-controlled pipelines—a form of financial repression where household capital is diverted into funding public consumption, and paid for by the diminishing purchasing power of the peso. And this is supposed to ‘encourage’ savings growth? Really?

This contradicts the narrative that these flows remain as ‘savings outside’ time deposits. On the contrary, it is a narrowing of financial autonomy. 

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den 

As previously discussed, the policy-induced gambling mentality has migrated to the equity markets. Instead of encouraging true savings, CMEPA will foster boom-bust cycles that further erode wealth and fuel capital consumption. 

This week’s coordinated pre-closing and afternoon pumps illustrate how institution-dominated markets manage the main index for optics—what we might call "benchmark-ism." (Figure 5, lower graph)

Though it escapes the Overton Window, this behavior—like CMEPA—distorts the price signal function of capital markets, leading to the misallocation of capital goods in the economy. 

By stoking gambling instincts, markets become casinos where savings and credit—someone else’s savings or bank-issued liquidity—is converted into house profits. 

When capital markets are manipulated for non-market goals, the effect is the same: momentum cloaking a wealth transfer. 

CMEPA leads savers straight into the lion’s den. 

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

In an age where reform rewards liquidity and penalizes patience, true saving becomes a philosophical—and revolutionary—act. It’s no longer just economic prudence. It’s resistance to engineered ephemerality. 

The ideology driving CMEPA whispers: Be fast. Be fluid. Be speculative. Be extravagant. Be taxable. Be subservient to the state. 

The public must reply: Be steady. Be real. Be cautious. And above all—be sovereign. 

This is not academic critique—it’s a warning. When incentives distort prudence, the fallout is material, not theoretical. 

CMEPA does not act alone. It fuses with a wider architecture of distortion:

• BSP’s redistributionist easing cycle
• Record deficit spending
• An implicit USDPHP soft peg
• Accelerating bureaucratization and economic centralization 

Together, they form the scaffolding of financial and social maladjustment. 

And when crises surface—households hemorrhaging stability, banks scrambling for duration, systems unraveling under engineered fragility—the reckoning will be felt everywhere. 

In that moment, accountability will matter. 

We must remember: Who authored this distortion? Who rationalized it as progress? 

And we must prepare—for its backlash. 

___

References

Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025, Substack

 

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

 

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

In this issue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Subjective Nature of Personal Utilities

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

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

As we explained in 2022 (bold original):

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

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

2. CPI as a Political Statistic 

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

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

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

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

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

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

3. The CPI Data and Official Narrative on Inflation 

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

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

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

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

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

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

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

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

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

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

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

Figure 1

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

4. The CPI as a Tool for Narrative Control

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 2

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

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

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

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

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

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

This brings us to several critical questions:

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

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

>Which mainstream experts have anticipated and explained this phenomenon?

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

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

Figure 3

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 4

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 5

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

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

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

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

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

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

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

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

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

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

As we previously noted,

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

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

Figure 6

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

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

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

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

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

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

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

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

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

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

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

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

___

References: 

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

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

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

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

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

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