January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

  

The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters—Ludwig von Mises 

In this issue

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction

II. January 2025 2.9% CPI: Key Highlights

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

IV. Baseline Changes: Engineering GDP Growth

V. The Falling Rice Prices: Why the Food Emergency Security?

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism

VII. Treasury Markets Are Already Telegraphing Inflation Risk

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices?

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks 

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction 

·         January’s CPI provided a temporary breather against the looming risk of an inflation rebound.

·         Despite falling rice prices, authorities pushed forward with a Food Security Emergency—one in a series of interventions aimed at suppressing CPI in the short term.

·         Meanwhile, rising domestic and external debt, coupled with declining foreign reserves (GIR), amplify risks of peso devaluation and feeding the inflation cycle.

II. January 2025 2.9% CPI: Key Highlights 

Businessworld, February 6, 2025: HEADLINE INFLATION remained steady in January as lower utility costs offset a spike in food prices, preliminary data from the Philippine Statistics Authority (PSA) showed. It also settled within the 2.5%-3.3% forecast from the Bangko Sentral ng Pilipinas (BSP). The January print was also slightly higher than the 2.8% median estimate in a BusinessWorld poll of 16 analysts... Core inflation, which discounts volatile prices of food and fuel, settled at 2.6% during the month — slower than 2.8% in December and 3.8% a year ago…On the other hand, rice inflation contracted to 2.3% in January from the 0.8% clip in December and 22.6% jump a year prior. (bold added) 

Nota Bene: As of January, the BSP has yet to release data on bank lending, liquidity conditions, and its central bank survey. This leaves us with the January CPI—interpreted through the lens of what the government intends to highlight: supply-driven inflation!

Figure 1 

Momentum: January’s data suggests stalling momentum in the year-over-year (YoY) change for both headline and core CPI. 

However, a trend analysis of the month-over-month (MoM) change reveals that while headline CPI remains above the upper boundary of its trend line, core CPI remains rangebound, albeit slightly lower than recent highs. (Figure 1, topmost image)

Bottoming Phase? These MoM rates suggest a bottoming phase. It remains uncertain whether this will remain rangebound or break to the upside, requiring further confirmation.

Uptrend of the Third Wave of the Inflation Cycle Intact. Nonetheless, the broader uptrend in the 10-year headline and core CPI remains intact. In fact, MoM trends reinforce the case for a bottoming—a potential launching pad.

It's important to remember that this CPI backdrop occurs amidst the BSP's pursuit of easy money policies since the second half of 2024. This is coupled with a series of all-time highs in bank credit expansion and a near-record unemployment rate in December 2024. (Figure 1, middle and lowest charts)

Figure 2

Level vs. Rate of Change. It is a misimpression to state that January's CPI is at the same level as December's. While the rate of change may be the same, the level is definitively not.

The Philippine Statistics Authority's (PSA) nominal prices determine the level, whereas the CPI figures represent the base-effect represented in percentages. (Figure 2, topmost graph)

The nominal rates also reveal the cumulative effects of the CPI. Even if growth rates stall or decrease (slow), the continued increase in general prices persists.

This leads to sustained hardship, especially for those living on the margins.

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

Authorities often employ self-serving attribution bias—crediting successes to internal factors while attributing failures to external ones—to explain economic phenomena. For instance, they attribute recent food price increases to 'typhoons/weather disturbances' or diseases like African Swine Fever.

The Philippines experiences an average of 20 typhoons annually. If the establishment's logic were consistently true, food prices should be perpetually elevated.

A review of the 10 worst typhoons to hit the country—events that, according to the establishment narrative, should have triggered inflation surges—shows little correlation with CPI spikes. In fact, food CPI exhibited a downtrend in seven of the nine years when these devastating typhoons occurred (the other two took place in 2020). (Figure 2, middle pane)

But, of course, the vulnerable public is expected to accept the official narrative without question—because the echo chamber insists on it!

IV. Baseline Changes: Engineering GDP Growth

Policymakers are always seeking ways to justify their free-lunch economic policies. 

Now, they are signaling a change in the baseline rates of the most sensitive data—particularly the CPI and the GDP—starting in 2026.

Inquirer.net, February 6, 2025: The Philippine Statistics Authority (PSA) will change again the base year used to calculate inflation and gross domestic product (GDP) so that key data could better capture the latest economic conditions.

This adjustment, while technical in nature, conveniently offers a tool for reshaping inflation narratives, making future price pressures appear more benign.

Well, if history serves as a guide, "could better capture the latest economic conditions" often implies adjusting baseline rates to lower the CPI. Comparing the CPI with an overlap of the 2006 and 2018 baselines reveals a significant difference, with the 2018 baseline showing a markedly lower CPI. (Figure 2, lowest diagram)

The BSP still publishes data series from 2000, 2006, 2012, and 2018.

Fundamentally, a high Nominal GDP (NGDP) when calculated against a reduced CPI (as a deflator or implicit price index) results in a HIGHER headline GDP! Voilà! A statistical boom! 

Will the Philippine government achieve its coveted "middle-income status" economy by inflating its statistics? 

V. The Falling Rice Prices: Why the Food Emergency Security?

Authorities also claim that "rice inflation contracted to 2.3% in January from the 0.8% clip in December." 

If this is the case, why the sudden need for a Food Emergency Security (FES) program, which includes light-handed price controls (a maximum Suggested Retail Price) and the release of the National Food Authority’s "buffer rice" or reserves?

Figure 3

If anything, these interventions have temporarily suppressed CPI in the short term. 

In any case, here is a timeline of political interventions in the food and agricultural industry, which should serve as template. 

February 15, 2019: GMA News: Duterte signs rice tariffication bill into law

March 11, 2020: DTI: Nationwide price freeze on basic necessities in effect amid COVID-19 emergency 

February 2, 2021: Inquirer: DA: Price ceiling on pork, chicken products to start on Feb. 8

April 8, 2021: Portcalls: Duterte signs EO lowering tariff for pork imports 

June 1 2024: DTI: DTI secures voluntary price freeze commitments for more basic necessities 

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Figure 3, topmost graph)

Ironically, the easing of interventions may have contributed to the decline in CPI from the end of 2022 to mid-2024. 

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism 

Price ceilings create artificial demand spikes. With buffer stocks being released into the market, their rapid depletion seems inevitable. This means authorities will soon have to replenish reserves—betting that global rice prices remain stable. (Figure 3, middle window)

But even if global rice prices decline, large-scale stockpiling would exacerbate the twin deficits (fiscal and trade deficits). The agricultural sector reported near milestone trade deficit in Q3 2024. (Figure 3, lowest image)

This, in turn, would put additional pressure on the USD-PHP exchange rate, where further peso depreciation would translate into higher import costs, which would help feed into the current inflation cycle.

And now, the Department of Agrarian Reform (DAR) is considering imposing FES on pork prices as well!

It appears authorities believe they can override market dynamics and economic laws through sheer force of policy. But history has shown time and again that such attempts only lead to greater imbalances—necessitating even more interventions in an endless loop of self-inflicted crises.

Good luck to the believers!

VII. Treasury Markets Are Already Telegraphing Inflation Risk

The Philippine Treasury markets are already reflecting this narrative.

Figure 4

The yield curve continues to fall, leading to a bull steepening—a clear signal that the BSP is likely to cut rates. (Figure 4, topmost graph)

While this may provide short-term relief, it also carries risks: looser monetary policy could reignite inflationary pressures while signaling heightened economic uncertainty. 

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices? 

If rice prices are declining and core CPI is slowing, why are authorities aggressively pushing a Food Emergency Security (FES) program? 

The short answer: they want their free lunches to continue. 

Whether through subsidies, price controls, or other interventionist policies, they are ensuring a steady flow of populist measures. 

By the way, the National mid-term Election is in May! 

Importantly, this push signifies a calculated move to secure easier access to cheap credit—leveraging monetary easing to sustain economic illusions. 

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP 

The Bureau of the Treasury (BTr) has yet to release its cash operations report for February 28, limiting our full-year assessment of fiscal health. 

Still, while public debt eased slightly from Php 16.09 trillion in November to Php 16.05 trillion in December, total 2024 public debt closed at an all-time high. 

While the consensus was previously pleased that a slowing deficit had led to a decrease in net debt increases, 2024 experienced "a 9.8% or Php 1.44 trillion increase from the end-2023 level."  (Figure 4, middle chart)

The Bureau of Treasury (BTr) further reported that the "corresponding debt-to-GDP ratio of 60.7% was slightly above the 60.6% revised Medium-Term Fiscal Framework estimate, on account of the lower-than-expected full-year real GDP growth outcome of 5.6%" (Figure 4, lowest diagram)

Yet, this debt increase came despite a supposedly “restrained” deficit—largely due to (potential) record government spending in 2024. 

Put simply, the Php 1.44 trillion debt increase was the trade-off for achieving 5.6% GDP growth. 

There is a cost to everything. 

Yet, the full cost of debt servicing has yet to be published. 

Crucially, this 5.6% GDP growth was artificially fueled by: 

-BSP’s easy money policies,

-Record public spending,

-All-time high public debt,

-Historic bank credit expansion, and

-Near full employment.

Any reversal of these factors—or even a partial pullback—could WIDEN the fiscal deficit to new highs and PUSH debt-to-GDP further upward. 

There is more.

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks

Figure 5

External debt jumped 11.4% in 2024, reaching an all-time high of Php 5.12 trillion. 

Its share of total debt rose for the third consecutive year, now at 31.9%—partly due to peso depreciation but mostly from fresh borrowings totaling Php 401.7 billion. (Figure 5, topmost chart)

Meanwhile, BSP’s January 2025 Gross International Reserves (GIR) shrank by $3.24 billion—its steepest decline since September 2022. This was largely due to their defense of the Philippine peso, even though USD/PHP barely hit 59. (Figure 5, middle pane)

The BSP appears to have adjusted its intervention ceiling or their "upper band" to around 58.7. 

Falling GIR is a price to pay for the USD/PHP peg. (discussed last January)

And remember, 'ample reserves' have barely slowed the USDPHP's juggernaut. (Figure 5, lowest chart)

The BSP also revealed another reason for the GIR decline was a "drawdown on the national government’s (NG) deposits with the BSP to pay off its foreign currency debt obligations." 

Adding another layer of irony, the Philippine government raised $2.25 billion and €1 billion on January 24th. These fresh funds may temporarily boost February’s GIR, reflecting the National Government’s deposits with the BSP. 

Going forward, the government will require even more foreign exchange to service its external debt over time. This suggests continued reliance on foreign borrowing—expanding the BTr’s outstanding FX debt stock and increasing the risk of further peso depreciation. 

With growing dollar scarcity, the BSP’s need to refinance public debt, and the rising FX debt appetite of elite institutions, the government and central bank path-dependence on liquidity injections via easy money and fiscal stimulus have only deepened. 

This, in turn, heightens inflation risks—potentially fueling the third wave of the present inflation cycle. 

Take heed.

Trump's Inauguration: Declares War on Interest Rates; Philippine Peso Rallies, Treasury Yields Steepen, While PSEi 30 Lags Behind Asian Peers

 

Speculation is a name given to a failed investment and… investment is the name given to a successful speculation–-Edward Chancellor 

Trump's Inauguration: Declares War on Interest Rates; Philippine Peso Rallies, Treasury Yields Steepen, While PSEi 30 Lags Behind Asian Peers

In this issue

I. Year of the Snake: Trump’s Baptism of Fire:  Declares War on Interest Rates 

II. Asian Markets Embraces Trump’s Inaugural Risk-On Rally: Stronger Currencies, Falling Bond Yields, and Equity Gains 

III. Philippine Peso Rallies as the Philippine Raises in $3.29 Billion in Bonds, Yield Curve Steepens 

IV. The PSEi 30 Misses out on the Electrifying Surge in Global Risk-Taking Appetite; the January Effect and More on the Chinese Zodiac Cycle 

V. Will This Week's Q4 GDP Announcement Alter the PSEi 30's Pervasive Negative Sentiment? 

VI. PSE Activities: Financial Casino for the Big Boys 

VII. Foreign Selling Drives PSEi 30 Decline, Low Savings Contribute to Thin Market Volume and the Sunk Cost Fallacy 

Trump's Inauguration: Declares War on Interest Rates; Philippine Peso Rallies, Treasury Yields Steepen, While PSEi 30 Lags Behind Asian Peers

Trump 2.0 opens with a declaration of war against interest rates. Global and Asian markets cheer. The Philippine peso rallies, the Treasury yield curve steepens, while the PSEi 30 trails behind its Asian peers.

I. Year of the Snake: Trump’s Baptism of Fire:  Declares War on Interest Rates

Donald Trump kicks off his presidency with a bang. 

He fired his opening salvo against the U.S. Federal Reserve, demanding they slash interest rates and threatening to raise tariffs on OPEC members if they fail to lower oil prices. 

In a video message to the World Economic Forum (WEF) in Davos, Switzerland, he stated(via Reuters): "I'll demand that interest rates drop immediately. And likewise, they should be dropping all over the world. I’m also going to ask Saudi Arabia and OPEC to bring down the cost of oil." (bold and italics mine) 

He also softened his stance on China, refraining from arbitrarily imposing tariffs.

Bloomberg/Yahoo Finance reported: "We have one very big power over China, and that’s tariffs, and they don’t want them," the U.S. leader told Fox News host Sean Hannity in an interview that aired Thursday in the U.S. "And I’d rather not have to use it. But it’s a tremendous power over China." (italics mine)

Either Trump’s advisors suggested that slashing interest rates could slow inflation, or, as we noted two days before the U.S. election, tariffs were seen as an instrument or tool for his trade policies, much like in Trump 1.0. 

Perhaps also, in recognition that ongoing wars contribute to supply disruptions and thus influence interest rates, President Trump suspended foreign aid for 90 days.

This move could apply pressure on both Ukraine and Israel in their pursuit of continued warfare or military objectives. The U.S. government has provided billions in financing and material support to sustain the conflicts in Ukraine (at least USD 69.5 billion according to the U.S. State Department) and Israel (USD 12.5 billion as reported by the Council on Foreign Relations).

If we are not mistaken, most of the critical actions taken during his first week were interconnected and could have been designed to curb inflation and lower interest rates. 

However, Trump has been notably reticent about addressing the snowballing deficit spending, which is currently at an all-time high. 

With the possibility of easy money in the air, U.S. and global markets celebrated Trump’s inauguration. The major U.S. equity benchmark, the S&P 500, hit a record high, while Bitcoin neared its all-time high, and the crypto market entered a hyper-volatile phase. The US oil benchmark, WTIC, fell 3.5% over the week. 

According to the Wall Street Journal, "The crypto industry eagerly awaited Donald Trump’s return to the White House. Now, it’s reeling after the president and first lady launched a pair of meme coins. Dubbed $TRUMP and $MELANIA, the tokens serve no economic purpose—their value is largely driven by internet meme popularity. Since their launch Friday night, the market cap of the president’s coin has surged to $8.4 billion, while the first lady’s token is valued at approximately $800 million, according to CoinMarketCap." (italics mine) 

Trump's ascension has ignited hyper-volatility in the crypto sphere, epitomizing the intensification of resource misallocation, symptomatic of an entrenched and deepening global speculative mania. 

Is this a sign of its terminal phase? 

Similarly, as stated last week, Trump’s administration, which begins in the Year of the Snake, "promises to be a period of intense geopolitical activity, where traditional alliances might be tested, and new power dynamics could emerge, all under the ambitious and often unpredictable deal-making leadership." 

Trump’s first week in office marked a baptism by fire for geopolitics, the global economy, and financial markets. 

Of course, one week doesn’t make a trend.

II. Asian Markets Embraces Trump’s Inaugural Risk-On Rally: Stronger Currencies, Falling Bond Yields, and Equity Gains 

How has all this affected Asia?

Figure 1

First, the U.S. Dollar Index $DXY fell by 1.8%, marking its largest weekly drop since November 2023, primarily due to a 2.2% gain in the euro $EURUSD.

The DXY, an index measuring the U.S. dollar's value against a basket of foreign currencies, fell from a two-year high. This drop might reflect overbought conditions or could be a relief countertrend activity spurred by Trump's actions. 

Despite this, the sinking dollar lifted all Asian currencies quoted by Bloomberg. The U.S. dollar weakened most against the Malaysian ringgit $USDMYR, Thai baht $USDTHB, and South Korean won $USDKRW. (Figure 1)

Figure 2

Next, the U.S. Treasury market hardly reacted to the dollar’s steep decline, with yields on 10-year notes falling only marginally. 

However, yields on most ASEAN treasuries dropped significantly, or ASEAN bond prices rallied strongly. The Philippines, in particular, mirrored its U.S. Treasury counterpart $TNX. (Figure 2)

Figure 3

Lastly, with the prospect of easy money, 13 of the 19 national indices in Asia closed the week higher, averaging a 0.73% return in local currency terms. Sri Lanka’s Colombo and Mongolia’s MSE both hit their respective all-time highs. Sri Lanka, Japan's Nikkei 225, and Hong Kong's Hang Seng Index were among the top performers for the week. (Figure 3, upper window) 

Rallies in Japan and Hong Kong benchmarks reached the resistance levels of their respective trading ranges. (Figure 3, lower chart) 

III. Philippine Peso Rallies as the Philippine Raises in $3.29 Billion in Bonds, Yield Curve Steepens

And what of the Philippines? 

Figure 4

Despite a strong rally among its regional peers, the USD-PHP exchange rate slipped by 0.56% week-over-week, largely due to a 0.7% rally on Friday. (Figure 4, topmost image) 

This comes amidst the National Government's successful $3.29 billion bond sale, which included U.S. dollar and euro-denominated bonds, some of which were sustainability-focused offerings. The funds raised are intended to help finance the government’s budget, according to Reuters and Interaksyon. 

Muted gains, despite significant U.S. dollar and euro inflows for Q1 2024? There could be more borrowings in the coming two months. 

For example, the Bangko Sentral ng Pilipinas (BSP) reported $3.21 billion in approved foreign borrowings for Q4 2024: "For the period from October to December 2024, the Monetary Board approved six (6) public sector medium- to long-term foreign borrowings, amounting to $3.21 billion. This is 3.35% (or $0.11 billion) lower than the $3.32 billion in foreign borrowings approved for the same period last year." (italics added) 

Approved loans have been on an upward trend since at least Q4 2022, with a notable spike in Q1 2023, followed by a dip in Q2 before continuing to trend higher. (Figure 4, middle diagram) 

These approved loans are part of the BSP’s external borrowings, meaning higher debt loads will result in higher debt-servicing costs, which include both principal repayment and interest expenses—exacerbating the Philippines’ US dollar "short" conditions. (Figure 4, lowest graph) 

Furthermore, National Government borrowings deposited with the BSP should contribute to the Gross International Reserves (GIR), though this represents "borrowed reserves" that require debt servicing. 

The focus on maintaining benchmarks to project an image of sound macroeconomics is, in reality, more of a façade.

Figure 5

Secondly, not only have Philippine treasury rates been climbing from the belly to the long end of the yield curve, but they have also been transitioning into a bearish 'steepener,' with short rates reflecting the BSP's insistence on continuing its easing cycle, which raises inflation risks. 

Unknown to the public, this may be linked to the administration’s proposed "food security emergency," which was initially scheduled for implementation on January 22nd but has since been delayed "due to non-transmittal of documents," or legal technicalities. 

Like Trump, local authorities aim to curb inflation through a combination of quasi-price controls and by injecting government reserves into the marketplace under the guise of a "food security emergency". 

However, this approach fails to address the demand component, which is evidenced by record-high bank lending, unprecedented levels of public sector spending resulting in all-time high public debt, and historically high nominal liquidity conditions. 

Moreover, it misunderstands the dynamic nature of human actions, where suppressing activity in one area can lead to complex, unpredictable "multiplier" feedback loops (or second to nth-order effects) that ultimately undermine the original intent or objective. 

The effort to suppress interest rates through the "food security emergency" reflects the administration’s entrenched belief in "free lunch" politics, which the markets have resisted. 

IV. The PSEi 30 Misses out on the Electrifying Surge in Global Risk-Taking Appetite; the January Effect and More on the Chinese Zodiac Cycle

The Philippine equity benchmark, the PSEi 30, missed out on the adrenalin-powered risk-taking appetite following Trump’s inauguration and his push for a return to a global free-money regime.

Among Asia’s 19 national indices, it was one of the six equity laggards—an outlier. 

The PSEi 30 fell by 0.88%, marking its third weekly drop and pulling down its year-to-date performance to -3.56% with only a week left in January. 

The "January effect" has traditionally dominated the PSEi 30’s first-month performance, with only three declines in the last 12 years (since 2013). (Figure 5, middle pane) 

While a strong January doesn't necessarily guarantee positive annual returns, historical data shows that after three negative Januarys—2016, 2020, and 2021—the market experienced negative annual returns. Therefore, if this pattern and correlation holds, a deficit in the PSEi’s performance this January could signal that the negative trend may persist through the year. 

Moreover, January's positive returns have been slowing over time. 

Still, when viewed from the perspective of the Chinese Zodiac cycle, which follows the lunar-solar calendar rather than the contemporary Gregorian calendar, the Chinese New Year typically falls between January 21 and February 20. 

Therefore, in this context, examining PSEi 30 returns for the Year of the Snake from February to February reveals heightened volatility with a downside bias emerges: +16.7% in 1989, -12.85% in 2001, and -4.4% in 2013. 

V. Will This Week's Q4 GDP Announcement Alter the PSEi 30's Pervasive Negative Sentiment? 

The Philippine Statistics Authority (PSA) is scheduled to announce the Q4 and annual GDP figures on January 30.

In any case, the PSEi 30's weakness have emerged even before the GDP announcement. 

Historically, the week prior to the GDP release has typically resulted in positive returns, with twelve out of twenty pre-GDP weeks since 2020 showing gains. (Figure 5, lowest chart) 

On average, this has resulted in a 0.67% gain up to last week. 

That said, the PSEi 30 has suffered four consecutive negative performances in the past four pre-GDP weeks, which has weighed on its average returns amid a backdrop of slowing GDP growth.

VI. PSE Activities: Financial Casino for the Big Boys 

While the public often views the PSEi 30 as a barometer of the "market," it is important to recognize that only a few stocks drive its performance.

Figure 6

Despite the index’s recent losing streak, the top five market heavyweights still accounted for 51.7% of the index as of January 24, while the top 10 had a combined 74.1% free-float-adjusted weight. (Figure 6, upper image) 

This degree of concentration does not operate in isolation; the top 10 brokers accounted for 57.7% of this week’s trades, primarily driven by institutional brokers. 

The top 10 and 20 most traded issues made up 65.9% and 82.2% of main board volume, respectively. 

These figures highlight the concentration of trading activities among a limited set of entities, with minimal participation from retail investors and punters. 

Our humble guess is that PSE trades are dominated by third-party depository institutions like banks and other financial institutions, which constitute our "national team," operating under the indirect behest of the BSP to support the Philippine stock market. 

Since 2020, the steep bear market rallies of the PSEi 30 have been dominated by local financial institutions. 

Aside from the post-recess "afternoon delight" phenomenon, this explains the significant use of the pre-closing 5-minute floating period for both pumps and dumps (mostly pumps) to shape the PSEi’s end-of-day outcome. 

Apart from this, the establishment's embrace of "benchmarkism" or status signaling through market or economic symbols has been evident in the membership mechanics of the PSEi 30 composite.

The Philippine Stock Exchange (PSE) constructs the PSEi 30 not just to favor companies with strong price performance, but also to serve as a "moat for elite-owned and controlled firms," as we pointed out back in February 2023. 

The PSE announced changes in the PSEi 30 membership last week. It removed price laggards, including Wilcon Depot, from the downstream real estate services sector, and Nickel Asia from the nickel mining sector. 

They were replaced by AREIT, an Ayala-owned Real Estate Investment Trust, and the high-flying China Banking Corp (CBC), thereby expanding the Sy Group's influence with a second bank in the PSEi 30, effective February 3, 2025. (Figure 6, lower chart) 

Still, with low domestic savings to support stocks, foreign money flows play an instrumental role in determining the outcome of the PSEi and the PSE. 

It goes without saying that the recent sell-offs have resulted from foreign money outflows that have overwhelmed the low savings and insufficient use of credit by the 'national team' and local punters to support the index. 

VII. Foreign Selling Drives PSEi 30 Decline, Low Savings Contribute to Thin Market Volume and the Sunk Cost Fallacy

Figure 7

This week's net foreign selling of Php 1.9 billion accounted for 9.3% of gross volume. Over the last three weeks (YTD), net foreign outflows have represented 8.8% of the gross volume, which have coincided with the PSEi 30's breakdown from 6,529 in 2025. (Figure 7, topmost window) 

Although seventeen of the thirty issues closed the week lower, averaging a 0.92% decrease, the performance of the top 5-6 biggest market cap issues determined the 0.88% fall of the PSEi 30 based on free-float adjusted performance. (Figure 7, middle graph)

In short, gains from SM and BPI were insufficient to offset the declines of ICT, BDO, SMPH, AC, and ALI. 

The broader market sentiment was similarly fragile, with declining issues outnumbering advancing issues on all five trading days last week. Declining issues led by 86. This negative trend has been ongoing since the start of the year. 

On a sectoral basis, while SM led holding firms gained with 0.2%, the material declines of ICT (-3.46%) weighed on services (-2.02%), and SMPH (-3.05%) and ALI (-2.33%) pulled down the property sector (-1.99%). 

Once again, this downturn coincides with eroding volume. Main board volume slumped 21.14%, from Php 4.8 billion to Php 3.8 billion. (Figure 7, lowest diagram) 

Overall, with current "trickle-down" political-economic dynamics leading to an unparalleled savings-investment gap, the PSEi 30 would find scarce support from diminishing savings, accompanied by rising risks of debt-financed malinvestments. 

Despite support from the "National Team," which only compounds capital goods mispricing and amplifies resource malinvestments, this merely delays the inevitable: an unpalatable market clearing process or an unpleasant rectification of past mistakes. 

The first law of holes states, "If you find yourself in a hole, stop digging." Yet, the sunk-cost fallacy ensures that the mainstream will remain in vehement denial and persist in digging deeper.

Philippine CPI’s September 6.1% "Shocker"; Eight Reasons Why the Rice Price Ceiling Failed

 Government bailouts are like potato chips. You can’t stop with just one—Thomas Sowell 

 

In this issue 

Philippine CPI’s September 6.1% "Shocker"; Eight Reasons Why the Rice Price Ceiling Failed 

I. Another CPI "Shocker" as September CPI’s 6.1% Beat Estimates 

II. Eight Reasons Why the Rice Price Ceiling Failed 

III. The Growing Systemic Risks from Perpetual Interventions 

IV. Other Features of the September 6.1% CPI Shocker 

V. Supply Side Inflation? Inflationary Biases from the Economic Transformation towards "Financialization"  

VI. The Inflationary Tendencies from the Structural Shift of Bank lending to Consumers Over Producers 

 

Philippine CPI’s September 6.1% "Shocker"; Eight Reasons Why the Rice Price Ceiling Failed

September's CPI was another mainstream shocker.  This post explains the eight reasons why the rice price ceiling failed and the embedded inflationary bias of the political economy. 

I. Another CPI "Shocker" as September CPI’s 6.1% Beat Estimates 

 

Figure 1 

 

In another "shock" to the transitory/supply-side crowd of experts, September CPI ripped higher to 6.1%, an ocean away from the median estimates of 5.3% and 5.4%.  Not even the highest of the private sector estimates came close. (Figure 1, upper graph) 

 

With a 5.3% to 6.1% range, the CPI came on the top end of the BSP's estimation.    

 

That the BSP hit the CPI within its range puts them ahead of the private sector, which, of course, is the purpose of this guessing game.  

 

This "pin-the-tail-on-the-donkey" guessing game represents a futile exercise designed to justify the authority's supposed handle on the economy for reasons previously expounded.  

 

Yet, the September CPI puts into the limelight the failure of the rice price ceiling policy, as expected. 

 

II. Eight Reasons Why the Rice Price Ceiling Failed 

 

Here are the eight reasons. 

 

First, even in the short term, had it worked, the administration should have prolonged its implementation.  Instead, after a month, the administration lifted (euphemism for repealed) the price ceiling (on October 4^th).  

 

Second, having been shoved down on the public's throat with little cost-benefit analysis or consultation, the policy signified a product of a power play.  As proof, the administration's economic team admitted to not being consulted, even initially "shocked" at the price caps, which implies a backdoor opposition to it by some influential quarters.  But the same economic team eventually defended it, possibly for face-saving purposes. 

 

And for appeasement, the administration kept telegraphing the immediacy of its lifting.  

 

Third, September's CPI was almost a textbook response to a price cap.   

 

As previously noted, although part of the design of the price ceiling was to sugarcoat the statistical inflation, the substitution effects and reservation demand (hoarding) from uncertainties over its implementation must have caused price surges to ripple into a broader dimension of other food products, mainly cereals and vegetables. Other food prices also rose but to a lesser degree. The BSP's table showed this. (Figure 1, lower table) 

 

Fourth, September's CPI partially mirrored the CPI response to the rice 1995 price cap.   The Food CPI almost doubled from 6.9% in July to 13.9% in March 1996 or in 8 months. (Prudent Investor, September 2023)  

 

Had the price ceiling been extended, the effects could have been at par or worse. 

 

Fifth, despite media coverups, reports of enforcement leakage and defiance still occurred.   

 

And aside from the natural administrative "public choice" frailties, the constant signaling of the lifting of the price caps should have weakened enforcement. 

 

Sixth, the administration used its purse or threw money (deficit spending) to counteract its errors. 

 

Authorities extended a bailout to farmers (Php 12.7 billion) and sari-sari stores.  The NFA also increased its buying price (Php 15-16 billion).  The earlier debt jubilee of farmers' liabilities should also add to it (Php 58 billion).  

 

Though they seem to believe that financial bailouts would cover part of the rice imbalances from their root causes, extending the price caps meant more and more unsustainable deficits. 

 

Seventh, for political grandstanding, officials opted for photo ops of raids on alleged rice "hoarders" and "smugglers " who functioned as convenient political scapegoats. Since photo ops are signals to shore up popularity, these subtly transmit the limitations of the price cap's short-term efficacies. 

 

Last but not least, the President's popularity rating plunged, according to the administration’s favorite polling firm.   Acknowledging this, the leadership ended the rice price cap in a snap of his fingers.  

 

Oddly, the consensus experts seem lost about the effectiveness of the rice cap, looking for answers in government data.  Government data!  Will bureaucratic agencies publish data that defies one of the leadership's signature policies? 

 

On the other hand, the Philippine Statistics Authority can't tell whether it worked or not.  

 

Were these people absent when their teachers taught the demand-supply curve in their economic classes?   

 

Maybe it is time to abolish economic classes or substitute it with a preamble, "economics is what the government says it is." Political Statistics 101. 

 

The extent of propaganda has just been incredible. 

 

III. The Growing Systemic Risks from Perpetual Interventions 

 

In any case, all actions have intertemporal consequences. 

 

The fundamental frailties of the agricultural sector emanate from its intense politicization or protectionism and the lack of market institutions (e.g., commodity futures), resulting in few investments that have led to sluggish productivity growth.    

 

The BSP's easy money regime has also aggravated this by encouraging farmland conversions to the real estate bubble.  Underinvestment in the agricultural sector led to credit-financed overinvestments in the property sector.  Why wouldn't inflation balloon? (Prudent Investor, September 2023) 

 

The thing is, imbalances are cumulative and surface over time.  Maladjustments from the latest rice price ceiling should pile up on the 2021 pork price ceiling, worsening the fundamental backdrop.   

 

As the series of interventions expands, uncertainties and distortions in the marketplace intensify, leading to increased dependency on political actions and redistribution.  Modern technology will do little to aid productivity when dole-outs and political string-pulling become the operating model for the industry.  

 

Instead of productivity growth, risks to credit and the real economy will expand.  Or all these should amplify systemic risk. 

 

IV. Other Features of the September 6.1% CPI Shocker 

 

Yet here are the other notable developments from the September CPI.   

Figure 2 

 

First, the rice CPI surged past the 2018 highs to reach 2009 levels.  Of course, as mentioned above, rice wasn't the only factor in the 6.1% CPI.  But it was the media's fixation.(Figure 2, topmost graph) 

  

Second, the Headline CPI exceeded the CORE CPI for the first time since February 2023, which pointed to slower demand and the growing slack in the economy. (Figure 2, middle window) 

 

Third, the bounce of the international price (US WTI) of oil has recently contributed to the "external" source of inflation.  But oil prices have plummeted over the past week.  Reduced global demand may aggravate the developing weakness in the domestic economy. (Figure 2, lowest chart)  

Figure 3 

 

Fourth, the MoM change spiked further to 1.14% in September.  Since 2018, in all four previous episodes where this exceeded 1%, an inflection point (top or bottom) occurred. (Figure 3, upper chart) 

 

Lastly, September's CPI bounce has barely convinced Treasury traders that the rebound in the CPI is sustainable.  The bearish steepening of momentum of August has stalled in September. (Figure 3, lower chart) 

 

The long trend of the CPI is up, but of course, deflationary forces from a stalling domestic and global economy could represent an interim countertrend. 

 

We deal with fundamentals on the long-term trend below. 

 

V. Supply Side Inflation? Inflationary Biases from the Economic Transformation towards "Financialization"  

 

Reuters, October 6: But Balisacan, who is not a member of the central bank's policy-making monetary board, said raising interest rates "can hurt" the economy and consumers. "The source of the inflation is supply side. It is not the demand side that requires a monetary solution," Balisacan said. He said he was also wary of the impact of higher interest rates on the peso for that could make the local currency stronger and make the country's exports more expensive, Balisacan said. (bold added) 

 

Such claims are fantastic.  And they know it.  

 

To be sure, supply-side factors may be an aspect, but what of demand? 

 

Do bank credit expansion and BSP liquidity injections only have a neutral effect on the economy? 

 

Aside from the previous impact of low rates, are we not seeing the delayed effects of the BSP's Php 2.3 trillion liquidity injections to rescue the banking system? 

Figure 4 

 

Based on BSP data, at no time in Philippine history has the money supply transformed into a critical factor driving the GDP!   

 

While M2 and M3 as a share of the GDP have slowed to 68.6% and 70.5% in Q2 from their peak of 75.6% and 79.4% in Q1 2020, these are way above the 2002 to 2019 average of 48% and 49.7%! (Figure 4, topmost window) 

 

And at no time ever have Philippine banks commandeered the share of the nation's financial resources as it has today!  Banks control 82.52% of it as of July! (Figure 4, lowest chart) 

 

The M2/M3 and the bank's capture of financial resources spiked in 2013, accelerated in 2019 before the pandemic, and peaked during the BSP's unprecedented injections. 

 

It is also not a coincidence that the BSP's low-rate regime has been instrumental in the facilitation of the structural transformation of financial resources in favor of the banking industry. The pandemic recession only strengthened the bank’s stranglehold of financial resources. 

 

In a nutshell, the Philippine economy’s inherent inflationary bias emanates from the "financialization" of the economy or the deepening dependence on bank credit expansion to drive the GDP and public revenues (taxation). 

 

VI. The Inflationary Tendencies from the Structural Shift of Bank lending to Consumers Over Producers 

 

There's more. 

 

The historic transformation is not only about banks relative to financials and the economy but the industry's operating or business model, as well.   

 

Figure 5 

 

Bank lending growth to consumers has been relentless in the context of speed and share.  (Figure 5, upper and lower charts) 

 

Or, the bank's preference to lend to consumers over production means extending purchasing power from the future to the former relative to diminished domestic production output.  Won't that be "too much money chasing too few goods?"  

 

In the meantime, the increased reliance on imports to satisfy this gap translates to gaping trade deficits that require even more external borrowing. Won’t this magnify the risks of an external debt crisis?  

 

Figure 6 

 

The universal commercial bank data of August only strengthens this dynamic.  The record pace of consumer loan growth (22.7%) continues to eclipse production loans (5.54%) in percentage and in peso. (Figure 6, topmost graph) 

 

Thanks to the interest rate cap on credit cards, banks "backed up the truck" on consumers.   

 

Meanwhile, to maintain their present lifestyles, consumers borrowed to substitute the vacuum from the loss of purchasing power.  This, of course, created a feedback loop of fueling higher prices and responding to it with more borrowings.   Even the nominal loans segment showed credit cards transcend loans of all other industries.  

 

It is not just the credit card.  While salary loan growth has slowed, levels are at a record high.  Auto loans also picked up.  This bank data excludes consumer real estate borrowing. (Figure 6, middle window) 

 

On the other hand, the rapidly slowing manufacturing loan growth has mirrored the PPI (producer price index), which means producers could be anticipating a slowdown in demand (internal &/or exports).  (Figure 6, lowest chart) 

 

Fundamentally, consumers have been spending today tomorrow's income by leveraging up their balance sheets. A steep downturn or a recession should send credit delinquencies to the moon.  

 

Ultimately, the defense of consumers could be a disguise for the primary beneficiary of low rates—the government's debt-financed deficit spending.  

 

Is it their implicit goal to drown the public with debt? 

 

That said, present policies showcase the structural inflationary tendencies of the political economy.   

 

___ 

References 

 

Prudent Investor, The Philippine August CPI "Shock;" Stagflation Ahoy: Rising Oil Prices, Firming USD, Structural Deficits, and Asymmetric BSP Policies September 11 Substack Blogger 

 

Prudent Investor, Philippine Rice Crisis 2.0: Why the Price Ceiling Policy Will Fail! The Role of Protectionism and the Real Estate Bubble September 3, Substack Blogger