Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen—Ludwig von Mises
In this issue
Stagflation Ahoy! Philippine February CPI Rebounds as January Employment Rate Fell
I. An Unexpected Rebound of the February CPI
II. Nine-Years of Supply-side "Transitory" Inflation? The Third Wave of the Inflation Cycle Lurks in the Shadows
III. January 2024 Employment Rate Fell After Hitting a Record Last December 2023
IV. January Labor Survey: Crucial Economic Perspectives and Hints of Stagflation
V. Proof of Financial Easing: Led by Consumers, January UC Bank Credit Surged
VI. Stagflation Ahoy! Bank’s Record Monetization of Public Debt Adrift Historic Highs
Stagflation Ahoy! February CPI Rebounds as January Employment Rate Fell
The rebound in February CPI reflects the loosening of financial conditions as the January employment rate surrenders part of the historic December gains—leading to the prospects of stagflation.
I. An Unexpected Rebound of the February CPI
Reuters, March 5, 2024: Philippine annual inflation sped up for the first time in five months in February because of faster increases in food and transport costs, likely giving the central bank little reason to consider lowering interest rates. The consumer price index (CPI) rose 3.4% in February from a year earlier, the statistics agency said on Tuesday, which was above the previous month's 2.8% and the market forecast of 3.1%, but still within the central bank's 2% to 4% target for the year.
In the establishment's statistical guessing game of "pin the tail on the donkey," the financial punditry generally missed their single number estimates of February 2024's CPI.
Compared to the BSP, the February CPI of 3.4% fell within their 80-bps range (2.6% to 3.6%) projection, which makes them look credible.
Figure 1
But as noted in my March 01st tweet, the markets appeared to have smelled the comeback of inflation. (Figure 1, upper picture)
Rising short-term yields have been narrowing the gap with the BSP's official rates, which means that Treasury traders have begun to realign their outlook.
In a phrase, the Treasury markets have called the BSP's "hawkish" stance bluff. The intent of BSP's hikes is for headline consumption.
Aside from Treasury activities, financial easing has been evident with the record high in public debt, an all-time high in the bank-dominated Total Financial Resources (TFR), historic consumer and public debt, and the surging PSEi 30.
Yet, the same establishment has not seen the emergence of the second wave of the incumbent inflation cycle.
II. Nine-Years of Supply-side "Transitory" Inflation? The Third Wave of the Inflation Cycle Lurks in the Shadows
The present inflation cycle has lasted nine years (thus far) and counting. (Figure 1, lower visuals)
Instead, they have instilled in the public that inflation has been supply-side driven, which implies “transitory,” while demand for the mainstream represents a “second-order” effect.
The embedded stylized assumption is that price increases of primary commodities trigger price “inelasticities” in other areas, funded by “elastic” demand (total income, disposable income, and access to credit and savings)! The law of abundance substitutes the law of scarcity! Incredible.
That’s right, “transitory” equals nine years of inflation?
After all, unless markets are allowed to clear or function normally, interim price increases from supply imbalances will tend to be “transitory.”
That inflation comes in waves of a cycle points to STRUCTURAL demand or money/liquidity-driven inflation.
Thus, the narrative alluding to “supply-side” causes defies the law of demand and supply.
When inflation is seen as a general rise in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes. In this framework, not only does the central bank have nothing to do with inflation, but on the contrary, the bank is regarded as an inflation fighter (Shostak, 2022) [bold added]
Essentially, denying the role of money and credit in the CPI protects the “integrity” of the BSP.
Nonetheless, a more realistic account of the demand-supply imbalances of the Philippine manufacturing conditions last February, as reported by the S&P PMI.
The imbalance between growing demand requirements and insufficient output to complete sales put a strain on inventories. Companies often utilized stocks to meet production requirements. February data highlighted fresh falls across both pre- and post-production inventories. Moreover, the latter was depleted at the strongest rate since January 2022. (S&P Global, 2024) [bold added]
The question is, what has been driving domestic demand”
Further, last February, Core inflation slipped from 3.8% to 3.6%, even as the headline CPI bounced from 2.8% to 3.4%.
Figure 2
While rising oil prices could increase pressure on the Transport CPI and spill over to the other economic "supply" aspects, this would depend on domestic demand. (Figure 2, upper diagram)
Proof? Oil price volatility (US WTIC) hardly affected Japan's three decades of stagnation (largely disinflation). (Figure 2, lower chart)
While solid evidence that could validate a potential inflection point of the CPI has yet to emerge, the boost in February's food and transport CPI may be appetizers.
But inflation's third wave of its long-term cycle, a simulacrum of the 1950s to the early 1980s, has been lurking in the corner.
III. January 2024 Employment Rate Fell After Hitting a Record Last December 2023
In other related news, authorities reported a surge in unemployment last January as labor participation plunged.
Inquirer.net, March 8, 2024: The country’s unemployment rate jumped to 4.5 percent in January from the record-low rate of 3.1 percent in December, with fewer job seekers also recorded in the first month of the year. A nationwide survey of 169,700 households showed there were 2.15 million unemployed Filipinos in January, higher than 1.60 million recorded in December, the Philippine Statistics Authority (PSA) reported Friday…The increase in unemployment rate coincided with the drop in the country’s labor force, which represents people aged 15 and above who are actively looking for jobs. In January, 48.09 million people were part of the labor force, down from 52.13 million in December. That was equivalent to a labor force participation rate of 61.1 percent in January, lower than 66.6 percent in the previous month.
The government produces statistics with bizarre and contradictory logic.
After a historic December, the January Philippine Statistics Authority (PSA) labor survey data reported a dramatic fall in employment and labor participation rates.
The employment rate, which hit an all-time high of 96.9% last December, slipped to a four-month low of 95.5% this January.
On the other hand, the labor participation rate plummeted from 66.6% in December to a five-month low of 61.1% last January.
On a YoY basis, here are several factors to consider:
-Population (15 years and older) grew by 2.01% or 1.55 million to 78.66 million
-But the labor force fell by 3.3% or 1.63 million to 48.09 million
-As a result, the unemployed population plunged by 9.4% or 222,000 to 2.15 million
-Or, the employed population slipped by 3% or 1.41 million to 45.943 million
-Hardly mentioned is that the "not in the labor force" sector jumped 11.6% or 3.18 million to 30.562 million
The formula:
Labor participation rate = labor force / total population
Unemployment or employment rate = unemployed (or employed) population /labor force.
Population = Labor force + not in the labor force
The Non-Labor Force as defined by the PSA: "Those not in the labor force are persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability. Examples are housewives, students, persons with disability, or retired persons."
That is to say, the non-labor force is the euphemism of the "informal economy."
IV. January Labor Survey: Crucial Economic Perspectives and Hints of Stagflation
Some critical insights:
Figure 3
1. The government makes it appear that employers treat employment like the stock market, characterized by amplified volatility.
Employers recruited and discharged employees as if they were automatons, not subject to domestic labor regulations.
The month-on-month change in January was the largest since 2021! (Figure 3, topmost window)
2. The plunge in the labor force translates to a substantial increase in the non-labor force. (Figure 3, middle image)
The PSA barely mentions that the non-labor force accounted for 38.9% of the population—the second-highest level since July 2023! Amazing.
So, was the sudden surge in January 2024's non-labor population due to "housewives, students, persons with disability, or retired persons?"
Or was it that January 2024's data was an attempt to rectify the misstatement of December 2023's record employment rate?
Or, could employers be anticipating the ratification of high minimum wages?
Or could it be that these were symptoms of a deterioration of the formal economy, which caused a shift to the informal economy?
3. Authorities didn't say what caused the sharp decrease in the labor force.
Still, the labor force remains the divisor of employment and unemployment rates, which likely means that in moving a chunk of the labor force to the non-labor force, the labor survey vastly understates the unemployment and exaggerates the employment rates.
4. In January, though part-time jobs (as a share of the labor force) fell more, even full-time jobs slumped—which likely means that the January slump partly represented the "excess" temporary hiring last December. (Figure 3, lowest graph)
Figure 4
5. The jobs hit by the job retrenchments were the trade and agricultural sectors (YoY and MoM)! (Figure 4, topmost pane)
Or, the most significant sectors of the labor force bore the brunt of the labor culling measures.
Importantly, could consumer retrenchment have spurred a massive exodus of wholesale and retail jobs? What then happened to the consumer economy?
Could this also signify the growing vacancies in retail commercial real estate?
And does the shortfall in agriculture workers translate to more "supply-side" problems for the industry? Or does this represent a sudden growth in productivity?
6. The job survey anchors the GDP and the CPI, which extrapolates to further a substantial weakening last January.
The universal commercial bank's consumer credit card portfolio sustained a brisk growth rate last January despite the fall in the employed population. (Figure 4, middle chart)
If the labor survey data reflected accurate estimates, does this herald a spike in credit card NPLs?
Resembling part of the Phillips curve, in 2022, increases in employment dovetailed with the rise of the CPI. However, the historic employment rates in Q4 2023 have emerged with falling CPI accompanied by a slowdown in household consumption—even as consumer credit has risen to all-time highs! (Figure 4, lowest graph)
Or could the falling CPI mean the swelling of the unemployed with a time lag? Or could this signify "stagflation"—a resurgent inflation amidst a higher unemployment rate?
In my humble opinion, stagflation is the likely outcome in the fullness of time.
Finally, when some polls say that firms are likely to hike wages—that would be a pipe dream. It may be true for some job specializations. But it is unlikely to occur in the face of the general labor force reeling under the weight of an enormous non-labor force population plus the unemployed.
V. Proof of Financial Easing: Led by Consumers, January UC Bank Credit Surged
The employment data and the CPI are closely related, which implies causation with monetary conditions.
As mentioned above, February's CPI bounce reflected financial easing.
Aside from the unparalleled surge in the Bank-led Total Financial Resources (TFR) and the organized pumps of the PSEi 30 (7.63% YTD and 16.2% from the October 2023 lows, as of March 8th), the BSP noted that Universal-Commercial bank credit rebounded last January.
Figure 5
Universal commercial bank production loans grew 5.9%, representing a 3-month high. In the meantime, the growth rate of consumer loans reaccelerated to 25.2%—a 15-month high! (Figure 5, topmost image)
Though the UC bank credit card growth has mainly anchored this phenomenal growth rate, the expansion was broad-based. (Figure 5, middle visuals)
Credit card loans zoomed by 30.1%, signifying six consecutive months of over 30% clip. The salary loan growth rate also picked up tempo—up by 14.6%—a 6-month high! The 19.7% growth rate in auto loans signified was the highest since June 2020!
In all, the metamorphosis of the UC bank business model towards consumer loans at the expense of production lending exhibits the entrenchment of structural inflation, which puts more money on consumption while diminishing exposure in production. The record contribution of consumers--excludes consumer real estate exposure. (Figure 5, lowest graph)
In short, the bank's latest business model indicates "too much money chasing too few goods!"
Funny and ironically, the mainstream keeps touting a (supply side) problem brought about by the BSP's policies.
VI. Stagflation Ahoy! Bank’s Record Monetization of Public Debt Adrift Historic Highs
But there's more.
Figure 6
It's no coincidence that the rebound in February inflation has coincided with the historic growth in December's government's deficit spending, with a time lag. (Figure 6, topmost image)
Not just record public debt, but the bank's NCoG (net claims on the central government)—though slightly down (-2.6%) MoM last January—continued to post a double-digit growth rate (15.9%). In pesos, bank NGoC remains adrift at historic levels! (Figure 6, middle pane)
So, banks continue to monetize the colossal buildup of public debt!
Essentially, consumer credit subsidies and bank (and non-bank financials) monetization represent a backdoor loosening of the nation's financial conditions, which permits the BSP to remain "hawkish."
In any case, consumer and government consumption deepens the nation's dependence on external trade and financing, which galvanizes the credit-financed misallocations from the "twin deficits."
By implementing aggressive experimental liquidity policies, the technocracy continues to gamble with the economy.
At the end of the day, extensive balance sheet leveraging by consumers has started to "spill over" as Non-Performing Loans (NPLs) in Q4 2023, even as the employment rate reached an all-time high last December! (Figure 6, lowest graph)
Should the government use its fiscal "stabilizing" tool to reflate the deflationary impulse from a resurgence of bank NPLs, expect the worsening of the balance sheet health of banks, the government, and the economy, "stagflation" would be its likely outcome.
____
References
Ludwig von Mises, 6. Economics and the Citizen, Human Action, 1998, p.875. Mises Institute
Frank Shostak, Inflation Is Not Price Increases. Inflation Causes Price Increases. Mises.org, November 11, 2022
S&P Global, Sustained growth across the Filipino manufacturing sector in February S&P Global Philippines Manufacturing PMI, March 1, 2024
