EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

 

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference—Ludwig von Mises 

In this issue:

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

I. From Oil Shock to Emergency Response

II. The Rice Policy Template

III. Administrative Pricing Returns: The Suspension of the Power Spot Market

IV. Price Control Proof Is Already in the Streets: Shortages Appear

V. Crisis Messaging and Political Theater

VI. Crony Gains in an Energy Emergency

VII. The Financial Stability Motive

VIII. Markets Push Back

IX. Intervention Begets Intervention

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr.

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure 

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention 

How EO-110, emergency powers, and BSP policy are converging into a nationwide price-control regime. 

I. From Oil Shock to Emergency Response 

In a previous report, we warned that the Philippines might be entering the early stages of an oil shock.

Events over the past week suggest the policy response is now accelerating. 

Within a span of only a few days, the government has rolled out an unusually rapid sequence of interventions. 

• On March 24, the administration issued Executive Order 110, declaring a national energy emergency.
• On March 25, Congress moved to grant emergency authority to suspend fuel excise taxes.
• On March 26, the Bangko Sentral ng Pilipinas (BSP) held an off-cycle policy meeting and decided to keep interest rates unchanged. 

Each step has been framed as an effort to protect consumers from the impact of rising energy costs. 

Yet taken together, they reveal something broader: the emergence of an integrated policy approach aimed at suppressing the economic transmission of the oil shock. 

This strategy is not entirely new. 

It closely resembles the template already deployed in another politically sensitive sector—rice. 

II. The Rice Policy Template 

Over the past year, rice policy has increasingly relied on administrative intervention. 

The government imposed maximum suggested retail prices (MSRP), released reserves through the National Food Authority, introduced the highly publicized Php 20 rice program, and deployed fiscal subsidies to farmers and importers. 

In effect, the state has attempted to contain consumer prices by transferring costs elsewhere—through fiscal spending, balance-sheet adjustments, and administrative supply management. 

Public choice theorists such as James M. Buchanan and Geoffrey Brennan in The Power to Tax describe this phenomenon as fiscal illusion: the obscuring of the true cost of government through indirect financing—such as borrowing, inflation, or off-budget transfers—allowing policymakers to sustain the appearance of relief while shifting the burden forward. 

This same policy template now appears to be extending into energy markets. 

The national response to the oil shock has included:

• Suspension of transport fare increases
• fuel subsidies for operators
• intensified price monitoring and enforcement
• emergency procurement of oil supplies
• the suspension of fuel excise taxes
• intervention in electricity markets to contain price spikes 

Demands for price controls are also broadening, now encompassing LPG and imported rice. 

As with the rice program, these measures aim to soften the visible price impact of scarcity—while redistributing the underlying costs across the fiscal system and the broader economy.

Figure/Table 1

Policy intervention appears to be expanding sector by sector. Measures initially introduced to stabilize politically sensitive goods are gradually extending into energy markets and financial policy. (Table 1) 

III. Administrative Pricing Returns: The Suspension of the Power Spot Market 

The spread of price suppression is not limited to transport fuels. 

On March 25, the Energy Regulatory Commission ordered the temporary suspension of the Wholesale Electricity Spot Market (WESM) across the Luzon, Visayas, and Mindanao grids after simulations suggested electricity prices could surge to around ₱9 per kilowatt-hour amid the Middle East energy shock. 

The WESM is the Philippines’ real-time electricity trading platform, where elite owned and controlled power producers and distributors buy and sell electricity based on supply and demand conditions. Prices in this ‘caged’ market normally fluctuate to reflect fuel costs, generation capacity, and grid constraints. 

By suspending the market, regulators effectively replaced price discovery with administrative allocation. 

The objective is straightforward: prevent a sudden spike in electricity prices from feeding into consumer inflation. 

But the economic implications are significant. 

Spot markets exist precisely to coordinate supply and demand under changing conditions. When prices rise, they signal scarcity and encourage additional generation or conservation. 

Administrative suspension interrupts that signal. 

Instead of electricity being allocated through price adjustments, dispatch decisions increasingly become centralized—determined by regulatory directives rather than market incentives. 

The result may temporarily contain visible price increases, but it also risks creating deeper distortions in the power sector. 

Power producers must now operate under uncertain compensation conditions, while distributors and large consumers lose the market signals that normally guide electricity procurement. 

In effect, one of the country’s most important energy markets has been replaced—at least temporarily—by administrative pricing. 

This development reinforces a broader pattern emerging across sectors: the gradual substitution of price mechanisms with regulatory control. 

But suppressing prices does not eliminate the underlying imbalance between supply and demand. 

As Friedrich Hayek famously argued in The Use of Knowledge in Society, prices function as signals coordinating dispersed knowledge across the economy. Suspending markets may suppress volatility, but it also suppresses the information that allows the system to adjust. 

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them 

Or suppressing those signals inevitably disrupts the coordination process. It also shifts the adjustment to other parts of the economy.

Yet authorities have not only suspended WESM; they are reportedly considering permanently repealing the only partially deregulated segment of the energy sector, as well as the removal of VAT. Both measures may provide temporary relief, but such band-aid solutions carry the risk of future unintended consequences. 

Moreover, while reducing taxes may be desirable, without corresponding spending constraints this approach would likely worsen fiscal deficits and heighten the fragility of public finances. 

In effect, short-term interventions may shield consumers today, but they also deepen structural vulnerabilities that could amplify costs tomorrow. 

IV. Price Control Proof Is Already in the Streets: Shortages Appear 

Basic economic theory predicts that price ceilings eventually produce shortages. 

Early signs of this dynamic are already emerging. 

Reports indicate that more than 400 gasoline stations have temporarily closed, citing supply difficulties even as authorities insist that fuel inventories remain sufficient. 

Public transport is showing similar strains. 

Jeepneys in Quezon City and bus operators in Metro Manila (about 20%) and Baguio City (up to 50%) have significantly reduced operations, with stranded commuters and growing protests highlighting the mismatch between controlled fares and rising fuel costs. 

As an aside, this is just the first few days! 

Despite subsidy rollouts, the economics of operating public transport under capped fares have become increasingly difficult.

Figure 2

The result is a classic outcome described in the literature on price ceiling: supply contraction rather than price adjustment. (Figure 2, upper window) 

Retail markets are beginning to reflect the same pressures. 

Supermarkets and some food manufacturers have signaled price increases beginning April 1, reversing a March commitment to uphold a temporary two-month price freeze. The Department of Trade and Industry (DTI), however, insists that any price adjustments should not take effect until April 16. 

In the aviation sector, the pattern has been equally revealing. 

After the president warned that aircraft might be grounded if fuel shortages worsened, Philippine Airlines assured the public that jet fuel supplies were sufficient for the ‘foreseeable future.” 

Shortly afterward, the airline quietly cut several domestic and international flight routes  suggesting fuel conservation moves. 

These episodes illustrate a recurring feature of interventionist policy regimes: the widening gap between official reassurance and market behavior. 

V. Crisis Messaging and Political Theater 

Public messaging surrounding the energy situation has evolved rapidly. 

Initially, officials emphasized that there was ‘no energy crisis.’ 

More recently, the government has declared an energy emergency while simultaneously insisting that there is still no reason to panic. 

The pattern echoes a famous observation often attributed to Otto von Bismarck:

never believe anything until it has been officially denied. 

Policy actions suggest a far more serious assessment than the rhetoric implies. 

Authorities have begun cracking down on alleged fuel hoarding, floated the possibility of repealing elements of the country’s oil deregulation law, and raised the prospect of removing the value-added tax on petroleum products (as noted above). 

At the extreme end of the policy spectrum, discussions have even surfaced about the possibility of an energy lockdown should supply conditions deteriorate further. 

As political economist Albert O. Hirschman observed in The Rhetoric of Reaction, crisis politics often produces a distinctive rhetorical pattern: policies framed as temporary necessities gradually become permanent features of governance. 

Taken together, these measures suggest a steady expansion of administrative control not only over the energy sector, but more broadly across society. 

VI. Crony Gains in an Energy Emergency 

While the policy framework emphasizes consumer protection, the distribution of benefits within the energy sector tells a more complex story. 

Several large corporate groups appear poised to gain from the shifting landscape. 

Petron Corporation, a subsidiary of San Miguel Corporation (SMC), has reportedly sourced discounted Russian crude, including last week’s shipments of roughly 700,000 barrels. 

At the same time, Tycoon and SMC chair, Ramon S. Ang has revived proposals for the government to acquire Petron—a move that could effectively transfer part of the firm’s humungous debt burden onto the public balance sheet. 

Such a shift reflects what Gordon Tullock described as rent-seeking dynamics: firms capture gains during favorable market conditions, yet seek to socialize losses when the cycle turns. Private upside, public downside. 

Other developments point in a similar direction. Amid public pressure against coal, policymakers have signaled support for its “temporary” expansion under the banner of energy security—even as official rhetoric continues to favor renewables. 

Despite its political unpopularity, Department of Energy data indicate that coal accounted for an all-time high 62% of gross power generation in 2024. (Figure 2, lower image) 

A subsidiary of Manila Electric Company, Meralco PowerGen Corp. (MGEN), has reportedly expressed interest in assets linked to Semirara Mining and Power Corporation (PSE: SCC). 

Notably, some of these assets had already been subjected to regulatory or contractual rebidding processes prior to the current crisis.  

In that context, the present moment may be less a sudden policy shift than an acceleration of an existing trajectory—one in which administrative actions reshape ownership and market structure. The result is a coal sector that may not only revive, but consolidate under a few hands through policy-mediated channels.

Meanwhile, announcements surrounding the Camago-3 field within the Malampaya Phase 4 gas field development have been presented as evidence of incoming domestic supply. Yet such projects typically take years to materially affect output, and gas contracts remain indexed to global prices.  Absent subsidies, price relief is unlikely in the near term. For now, these announcements function more as reassurance than resolution. 

While the timing of benefits to consumers remains uncertain, the consortium—particularly Tycoon Enrique Razon led Prime Energy—is clearly positioned to capture upstream gains 

As Mancur Olson observed in The Rise and Decline of Nations, crises tend to strengthen “distributional coalitions”—organized interests that secure concentrated benefits while dispersing costs across the broader public. 

The pattern is hardly new. Frédéric Bastiat, in The Law, warned that when the state becomes an instrument for particular interests to extract from the public, law itself is transformed—from a protector of rights into a vehicle for legalized transfer. 

The emerging picture suggests not merely an energy response, but a reconfiguration of advantage. The beneficiaries appear to be those corporate groups already positioned to consolidate and potentially cartelize segments of the country’s energy supply chain. 

In effect, the crisis is not only redistributing costs—it also seems to be concentrating access to resources, decision-making power, and control in fewer hands. 

VII. The Financial Stability Motive 

The government’s intervention in energy and monetary policy may extend beyond protecting consumers. 

Energy shocks transmit rapidly through the financial system: higher fuel prices feed into consumer inflation, which in turn pressures the central bank to tighten policy. The BSP recently revised its 2026 inflation forecast to 5.1%—well above its 2–4% target, underscoring the magnitude of underlying price pressures. Rising interest rates reduce asset valuations and weaken collateral across the banking system.

Figure 3 

As an aside, the BSP’s 5.1% 2026 inflation forecast reveals much about their expectations. With January and February CPI at 2% and 2.4%, this implies that the average CPI for the remaining ten months would need to reach roughly 5.68%. Such a trajectory would push monthly CPI above 6%, potentially testing or exceeding the 8.7% high recorded in February 2023! If realized, this would reinforce what appears to be our long projected third wave of the CPI cycle since 2015. (Figure 3, upper graph) 

Banks in the Philippines are heavily exposed to property lending and government securities. A rapid rise in rates could trigger cascading balance-sheet pressures—falling bond prices, declining property valuations, and rising non-performing loans. From this perspective, suppressing the visible impact of the oil shock may help delay financial tightening. 

The BSP’s off-cycle decision to hold policy rates steady has been widely interpreted as part of this stabilization effort. Officials from the Bureau of the Treasury have acknowledged or admitted that maintaining stable borrowing conditions in the bond market was an important consideration. 

In effect, the policy response aims to keep inflation, interest rates, and asset prices contained simultaneously. 

These constraints are consistent with the structural limitations faced by semi-peripheral economies. The Philippines’ persistent savings–investment gap makes it reliant on external capital, which limits independent monetary policy and exposes the financial system to global market pressures. As Giovanni Arrighi observed, countries in the semi-periphery are structurally dependent on foreign financing and currency, leaving central banks with limited room to maneuver. 

The BSP is therefore not simply choosing between “good” and “bad” options; it is deciding which part of the balance sheet to protect first. 

VIII. Markets Push Back 

Financial markets rarely remain passive. The US dollar–Philippine peso exchange rate has surged to a record 60.55, marking a historic low for the peso. 

At the same time, government bond yields—particularly in the one- to seven-year segment—have moved decisively higher, underscoring growing unease about fiscal stability and inflation risks. (Figure 3, lower chart) 

Although Philippine equity markets have declined, trading patterns suggest that downside volatility is being deliberately managed, or at least cushioned, within the heavily weighted components of the PSEi-30 index. 

The market’s verdict appears clear: the Bangko Sentral ng Pilipinas (BSP) is likely to absorb external pressures through currency adjustment rather than aggressive rate hikes and use of reserves, constrained by fiscal realities. 

Inflation is nearing 5%, with second-round effects increasingly visible across transport, food, fertilizer, and electricity costs. These pressures are no longer isolated—they are feeding into broader economic feedback loops. 

Meanwhile, signs of strain are becoming more evident across the broader economy. 

The retail sector continues to undergo restructuring. Marks & Spencer has withdrawn its operations despite earlier signals of recalibration, while Robinsons Retail has announced the closure of its No Brand outlets. The conglomerate is also reportedly considering the possibility of delisting from the Philippine Stock Exchange. 

Taken together, these developments may reflect more than isolated corporate decisions. They point to a tightening environment for both consumers and listed firms, as financing conditions gradually shift and economic pressures intensify.

IX. Intervention Begets Intervention

Figure/Table 4

Intervention often follows a self-reinforcing cycle. Initial controls distort market signals, producing shortages that then justify further administrative action. (Figure 4) 

The trajectory of recent policy decisions follows a pattern long recognized in economic theory.

Austrian economist Ludwig von Mises argued that partial government intervention in markets tends to generate unintended distortions that eventually require additional intervention. 

Wrote the great von Mises 

Price control is contrary to purpose if it is limited to some commodities only. It cannot work satisfactorily within a market economy. The endeavors to make it work must enlarge the sphere of the commodities subject to price control until the prices of all commodities and services are regulated by authoritarian decree and the market ceases to work.

Either production can be directed by the prices fixed on the market by the buying or the abstention from buying on the part of the public; or it can be directed by the government’s offices. There is no third solution available. Government control of a part of prices only results in a state of affairs which—without any exception—everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest. 

The preeminent Dean of Austrian School of Economics, Murray Rothbard’s concept of triangular intervention helps explain how regulating one set of exchanges can distort others, setting off a chain of interventions across sectors. 

A triangular intervention occurs when an intervener either compels a pair of people to make an exchange or prohibits them from making an exchange. The coercion may be imposed on the terms of the exchange or on the nature of one or both of the products being exchanged or on the people doing the exchanging… 

Directly, the utility of at least one set of exchangers will be injured by the control. Indirectly, as we find by further analysis, hidden, but just as certain, effects injure a substantial number of people who thought they would gain in utility from the imposed controls. The announced aim of a maximum price control is to benefit the consumer by giving him his supply at a lower price; yet the objective effect is to prevent many consumers from having the good at all. The announced aim of a minimum price control is to insure higher prices to the sellers; yet the effect will be to prevent many sellers from selling any of their surplus. Furthermore, the price controls inevitably distort the production and allocation of resources and factors in the economy, thereby injuring again the bulk of consumers. And we must not overlook the army of bureaucrats who must be financed by the binary intervention of taxation and who must administer and enforce the myriad of regulations. This army, in itself, withdraws a mass of workers from productive labor and saddles them onto the remaining producers—thereby benefiting the bureaucrats, but injuring the rest of the people. 

More broadly, the expansion of state authority during crises was famously analyzed by historian Robert Higgs, who observed that emergency conditions often lead to permanent increases in government control over economic activity. 

The emerging policy response to the oil shock appears to be following this familiar path.

• Price controls lead to shortages.
• Shortages trigger enforcement actions.
• Enforcement expands administrative authority.
• Administrative authority creates new political and economic beneficiaries. 

The cycle then repeats.

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr. 

The Philippines has confronted energy shocks before. But the institutional setting of the crisis today differs profoundly from the one that shaped the policy response half a century ago. 

During the global oil shocks of the 1970s—particularly the 1973 Oil Crisis and 1979 Oil Crisis—the Philippines was already operating under authoritarian rule. Ferdinand Marcos Sr. had declared Martial Law in the Philippines in September 1972, consolidating political power and weakening institutional checks on executive authority. 

Energy policy therefore unfolded within a centralized political system capable of imposing controls, directing credit, and reorganizing industries with limited resistance. 

The current oil shock, by contrast, is unfolding under the presidency of Ferdinand Marcos Jr. within a formally democratic political structure. Instead of authoritarian command, policy is emerging through a rapid layering of interventions—executive orders, emergency powers, regulatory suspensions, subsidies, and monetary accommodation. 

This difference matters.

Figure/Table 5 

Energy shocks have struck the Philippines under both Marcos administrations. The key difference lies in the institutional pathway of intervention: centralized command under martial law in the 1970s versus layered regulatory and fiscal intervention within a democratic framework today. (Figure/Table 5) 

In the 1970s, authoritarian institutions allowed the state to impose controls directly and sustain them over time. Today, similar economic objectives must be pursued through a more fragmented political process involving subsidies, administrative pricing, and financial policy coordination. 

Yet the economic trajectory may still converge. 

The interventionist policies of the 1970s ultimately culminated in the Philippine external debt crisis of 1983, when mounting fiscal deficits, rising external borrowing, and weakening investor confidence forced a restructuring of sovereign obligations. 

Today’s macroeconomic backdrop exhibits its own form of imbalance. 

Fiscal deficits remain historically elevated. Public debt has risen sharply relative to national output. Liquidity conditions—reflected in rapid monetary expansion and sustained deficit financing—have reached levels rarely seen in the country’s economic history. 

Measured as shares of GDP, many of these indicators appear manageable. But GDP itself increasingly reflects government spending and credit expansion rather than productivity growth. 

In that sense, the underlying dynamics bear an uncomfortable resemblance to the earlier era.

The key difference is speed. 

During the 1970s, the accumulation of distortions took years to unfold. Today, early symptoms are appearing within days of the policy response. 

Transport shortages are already emerging only days after the declaration of the energy emergency. If such distortions persist, the policy logic may lead to further escalation: larger subsidies, deeper price controls, emergency procurement programs, and expanding administrative authority. 

Economic crises have historically been fertile ground for political centralization. Severe shocks—whether economic, geopolitical, or social—often generate the conditions under which governments justify extraordinary powers. 

The Philippines’ current constitutional framework imposes safeguards against such outcomes. Yet history also shows that institutional constraints can erode rapidly under sustained crisis conditions. 

Whether today’s oil shock remains an economic problem—or evolves into a broader political one—will depend less on official assurances than on the incentives shaping policy decisions in the months ahead. 

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure 

The oil shock may only be the beginning. EO-110 could come to be seen not as a solution, but as the opening phase of a broader cycle of intervention. 

From rice to fuel, from transportation to energy markets, policy is increasingly aimed at suppressing how rising costs flow through the economy—seeking to contain inflation, stabilize financial conditions, and preserve asset values. 

Yet economic reality rarely accommodates such efforts for long. Suppressing prices does not remove scarcity; it merely redirects it. The adjustment reemerges elsewhere—through fiscal strain, currency pressure, supply disruptions, or financial instability. 

The Philippines may therefore be entering not just an energy emergency, but a wider economic experiment: an attempt to delay market adjustment through expanding intervention. History suggests these efforts seldom end as intended. 

The real question is no longer whether adjustment will occur—but where the pressure will surface next.

 

 

 

Headline CPI at 40-month Low Diverges with the CORE; Plummeting M2’s Savings Deposits Should Spur the BSP to Relaunch QE Soon

In any type of activity or business divorced from the direct filter of skin in the game, the great majority of people know the jargon, play the part, and are intimate with the cosmetic details, but are clueless about the subject—Nassim Nicholas Taleb

In this issue

Headline CPI at 40-month Low Diverges with the CORE; Plummeting M2’s Savings Deposits Should Spur the BSP to Relaunch QE Soon

-As Political Statistics, the CPI May Reflect on Political Agenda; Negative Variance Between Headline and CORE CPI Hits Record!

-The Logical Inconsistencies of the CPI Data

-Unrealistic CPI: Consumers on Credit-Financed Spending Spree as Supply Side Remains Lackluster

-Will Stumbling CPI Fuel a Boom in GDP and Stocks?

-Dialing Back on Rice Tariffication; DEFLATION of M2’s Savings Deposits Should Spur the BSP to Relaunch QE!

Headline CPI at 40-month Low Diverges with the CORE CPI; Plummeting M2’s Savings Deposits Should Spur the BSP to Relaunch QE Soon

As Political Statistics, the CPI May Reflect on Political Agenda; Negative Variance Between Headline and CORE CPI Hits Record!

With the roundtrip of the CPI to a 40-month low, political authorities have swiftly claimed credit for it.

Reported the Inquirer (October 4, 2019): One of the loudest cheers at the 0.9 inflation rate in September came from the Bangko Sentral ng Pilipinas (BSP) which had forecast an inflation range of 0.6 to 1.4 percent, nearly hitting the exact mark…In a statement, the BSP said the 0.9 inflation rate was “driven by continued decline in rice prices and electricity rates which offset higher prices of petroleum and selected food products.”

From another Inquirer article (October 4, 2019): Malacañang welcomed Friday the slowest inflation rate in over three years, which the Philippine Statistics Authority (PSA) pegged at 0.9 percent in September, saying that it shows the administration is “delivering results.”  “We are elated to hear the Philippine Statistics Authority report that inflation is at its slowest pace in over three years. Despite the criticisms this administration receives, economic indicators show that our government is delivering results,” Communications Secretary Martin Andanar said in a statement.”

The CPI, along with the National Accounts (GDP), represents government constructed statistics that have a significant impact on the financial and political front.  

The Philippine Statistics Authority on the Primer on the CPI: “The CPI is most widely used in the calculation of the inflation rate and purchasing power of the peso. It is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy.” (bold added)

Because of the incentives to influence the political environment are inherent in a political organization, and because such statistics are not subject to audit, the CPI may be indirectly constructed to promote policy agendas than for objective reporting.

And since a critical source of government financing emanates from the capital market, which is sensitive to the perception of inflation, the central banks may use the CPI as a “signalling channel” tool designed to influence the marketplace.

This October 7th headline from the Inquirer, “T-bills sold out, but rates fall amid skimpy inflation”, provides a clue.

And for the first time since the Philippine Statistics Authority published CPI under 2012 price methodology, the September data reveals a milestone divergence between the CORE and Headline CPI! (figure 1, upper window)

That is, the free fall of the headline CPI in September was a product of the price deflation in two of its major components, namely Food and Alcoholic Beverage and the Transport CPI!

Figure 1

Comprising the component with the biggest 38.34% pie of the CPI basket, the Food and Non-alcoholic beverages (FNAB) CPI registered a -.94%, a deflation, in September from +.56% in August. (figure 1, middle pane)

Deflation in the Transport CPI, the fourth main constituent of the basket, widened to -.93% in September from -.14% a month ago.

Meanwhile, at 2.74%, the CORE CPI remains adrift, not so distant from its previous peaks of 2013 (3.27% in December 2013) and 2017 (2.89% in March 2017).

In perspective, while the CORE CPI was down by 46.3% from its zenith at 5.1% reached last November 2018, the headline CPI collapsed by 86.3% from its acme at 6.7% reached last September 2018. Put differently, the differentials between the headline and the CORE CPI rates, a negative, hit a landmark. (figure 1, lowest pane)

Such divergence, an anomaly, should put a doubt on the credibility of such data.

The Logical Inconsistencies of the CPI Data

And what an irony, as food prices nose-dived, the Restaurant and Miscellaneous Goods (RMG) CPI had barely been changed! The RMG CPI dropped only to 2.97% in September from 3.16% in August as FNAB plunged to -.94%, a deflationary zone. (figure 2, upmost pane)

Figure 2

The first implication: instead of consuming food at home, households had their meals at restaurants. It stands to reason that the plunging food CPI, in the face of seemingly inelastic Restaurant CPI, must translate to a spike in the restaurant’s profit margins!

Such a gigantic boost on the income statement of publicly listed restaurant chains had barely found support from 1H data. The asymmetry between Food and Restaurant CPI had been a dominant phenomenon this year.

The next inference: Even the expanded demand from the Restaurant industry failed to bolster the overall prices of food indicates! Such represents statistics operating in a void!

Consequently, the marginal decline in the Restaurant CPI, if anywhere accurate, should extrapolate to lower revenues from dampened demand!

Third, the September data exhibits that the emergence of the African Swine Fever (AFS) had a NEGLIGIBLE impact on the nation’s food supply!

While the data supported the official perspective, even authorities recognize that the slack in pig supply would entail a substitution of consumption to other food items. In other words, should the outbreak intensify, the AFS would REDUCE, not just the supply of pigs, but the OVERALL or TOTAL food supply, ceteris paribus!

So UNLESS the supply of the other food items materially improves to sufficiently meet the increased demand from substitution, the AFS would represent a temporary supply shock that would noticeably raise food prices (thereby bring about an increase in supplies)!

Public official maintains a benign outlook of the impact of the AFS on the national pig supply. However, other studies see the risk that the spreading of the AFS could knock off a considerable supply of pigs!

Fourth, in the world of statistics, it is a land of aplenty!!!

So aside from rice (-8.9%) and corn (-4.1%), vegetable prices (-4.7%) likewise suffered from a deflation. So scratch out a veggie diet in September!

And since meat (+2.4%) and fish (+1.2%) prices had tempered inflation in the same period, only fruit prices (+7.9%) saw a spike.

So have households been having a mostly fruit diet at the expense of meat and veggies? Or has the general public been fasting?  Or have Martians provided the Philippines with alternative meals?

Logical inconsistencies reveal the inaccuracies from egregious errors, or numerical gymnastics applied by statisticians to arrive at such incredible self-contradicting numbers.

Unrealistic CPI: Consumers on Credit-Financed Spending Spree as Supply Side Remains Lackluster

And it doesn’t stop here.

Developments in the demand and supply spectrum, predicated on credit and liquidity data, don’t seem to fit.

The BSP reported on the Banking System’s August Loan Portfolio: “Loans for production activities—which comprised 87.4 percent of banks’ aggregate loan portfolio, net of RRPs—expanded at a slower pace of 9.0 percent in August from 9.8 percent in the previous month. The growth in production loans was driven primarily by lending to the following sectors: real estate activities (17.7 percent); financial and insurance activities (16.3 percent); electricity, gas, steam and air conditioning supply (11.2 percent), construction (39.2 percent); and wholesale and retail trade, repair of motor vehicles and motorcycle (3.7 percent). Bank lending to other sectors also increased during the month, except those in professional, scientific and technical activities (-38.9 percent) and other community, social and personal activities (-35.9 percent). Meanwhile, loans for household consumption grew by 25.4 percent in August from 23.0 percent in July, due to faster growth in motor vehicle, credit card, and salary-based general purpose consumption loans during the month.

So while the bank loans to the production side of the economy continue to decelerate, consumer borrowing caught fire! (figure 2, middle pane)

Bank lending to the consumer hit an all-time high rate of 25.4%, backed by credit card growth, which zoomed to a historic 26.4% clip! Auto loans rocketed to 28.94% in August! Even payroll loan growth jumped 7.7% from 6.4% from a month ago. (figure 2, lowest pane)

Have consumers been imbibing more leverage to augment, possibly, burgeoning deficiencies in income growth?

Bank lending to the consumer’s auto loans flourished in August, yet vehicle sales growth shrunk by 2.4%. (figure 3, upmost window) Will sales exhibited by the excess credit financing in August appear in a ‘stronger than expected’ data in September?

The only segment that showed an increase in the CPI data — a huge one — was alcoholic beverage and tobacco [ABT] CPI, which vaulted to 14.3% in August from 10.07% in July, a 42.07% spike. The ABT spiral may be due to hoarding in anticipation of the likely imposition of a higher sin tax.

Outside vehicle sales and rice, what undergirded the consumer's booming use of credit card and the improvement in payroll loans? If not for spending, has these been about the settlement of existing loans? Why has the CPI not manifested these? Has the supply side of consumer goods grown at the pace of credit-fueled demand?

Figure 3

Neither domestic production nor imports support the view that the supply side matched consumer demand growth. The PSA’s August data on industrial production reported a 7.8% contraction, its 9th straight month, or a recession! Food manufacturing even crashed by -18% in August, worse than -11.4% in July. (figure 3, middle window)

Meanwhile, import growth shrunk 11.77% in August, according to the PSA, marking the fifth consecutive month of declines!  

Downside pressures have afflicted the supply side for months, in response to the softening of previous demand as a consequence of a liquidity crunch. Since the August CPI was 1.7%, September’s .9% could even mean lower numbers! (figure 3, lowest pane)

If the boom in consumer credit has been about spending, why should the CPI sink to such level when the supply has barely been growing?

The CPI is supposed to represent a process, a trend. Therefore, the time lag in the published data of the bank credit and supply side showcases the previous infirmities contributing to the September’s .92% CPI.

Will Stumbling CPI Fuel a Boom in GDP and Stocks?

Falling CPI, it has been popularly held, would automatically translate to boost in the consumer’s spending power that should distill into earnings and GDP.

While this notion embeds some grain of truth, the CPI should reflect on the balance of demand and supply. What has caused the plunge of the CPI? Has it been an avalanche of output? Or has relatively weaker spending, from the productive sector or the households or both, been its cause?

Figure 4

Instead, the current CPI downturn has been a product mostly of demand, as evidenced by the downtrend in the growth of credit in the production sector, which has diffused into money supply growth.

Falling CPI equals a boom in GDP? Even empirical evidence defies this notion! Tumbling CPI translates to a raging PhiSYx? Empirical evidence points to the other direction! (figure 4)

In contrast, in the past, it has been loose money conditions, which drove the CPI higher that has provided a boost not only to the Nominal GDP but also to the stock market with a time lag. When surging CPI reaches a threshold of pain, ventilated through political outcries, that’s when the CPI backfires on the GDP.

To be sure, it is true that real economy inflation has been decelerating, but the CPI has been overstating this.

Dialing Back on Rice Tariffication; DEFLATION of M2’s Savings Deposits Should Spur the BSP to Relaunch QE!

But the CPI should mount a comeback.

First of all, shifting political winds may alter the supply-side conditions.

The record divergence of the Headline and the CORE CPI alludes to the politicization of the rice supply in response to last year’s shortages. Or, the frantic political response has signified a critical source of the so-called deflation in the food CPI, and consequently, the headline CPI.

Cascading rice prices, which have affected farmer's income, nevertheless have prompted the National Government to reckon with a dial back on the shift to tariffs from quotas for rice imports. Rice inventories in September 2019 soared by 57.9% from a year ago, according to the PSA.

And the proposed adjustments on the Tariffication law would come in the form of significant hikes in tariffs and from the likely imposition of non-tariff barriers, through quality restrictions or ‘safeguard duties’.

Once this political change takes hold, then the manna from the deflation of rice prices should reverse.

Next would be the demand component from money supply growth.

From the BSP’s August report on Domestic Liquidity: “Preliminary data show that domestic liquidity (M3) grew by 6.2 percent year-on-year to about ₱11.9 trillion in August 2019, slightly slower than the 6.7-percent growth in July. On a month-on-month seasonally-adjusted basis, M3 increased by 0.3 percent. Demand for credit remained the principal driver of money supply growth. Domestic claims grew by 6.2 percent in August from 5.8 percent (revised) in the previous month. This was due mainly to the sustained growth in credit to the private sector. Loans for production activities continued to be driven by lending to key sectors such as real estate activities; financial and insurance activities; electricity, gas, steam and airconditioning supply; construction; and wholesale and retail trade, repair of motor vehicles and motorcycles. Loans for household consumption increased due to the growth in credit card loans, motor vehicle loans, and salary-based general purpose consumption loans during the month. Meanwhile, net claims on the central government grew by 2.1 percent following a 1.8-percent contraction in July, reflecting the increased borrowings by the National Government.” (bold added)

Because “demand for credit remained the principal driver of money supply growth”, the sinking growth rate of the banking system’s overall portfolio have not only reduced growth in the benchmark M3 money supply but also contributed to the CPI’s crash. 

The thing is, WHY has the money supply has been in a slump?

Figure 5

The BSP defines money supply M3 as composed of the following:

M1: currency outside depository corporations (in circulation) and Transferable Deposits included in broad money

M2: M1+ other deposits in broad money consisting of savings deposits and time deposits, lastly

M3: M2 + securities other than shares included in broad money (deposit substitutes)

The collapse of the savings deposits component of M2 has fundamentally fueled the plummeting M3 rate.

M2’s Savings Deposits shriveled (-) 2.2% in August, the second time after June’s -.6%, representing the biggest contraction of the year! The last time banks suffered from savings deposit deflation, as reflected in the money supply conditions, was over 10-years ago or in February 2009 in the aftermath of the Great Recession!

At any rate, savings deposits deflation signifies more symptoms of the banking system in distress.

But the growth rates of the other M3 components have been headed downhill too.

After its growth pinnacle in April 2016 at 20.2%, cash in circulation has been southbound. It registered a 12% clip in August, a 27-month low, was slightly down than 12.4% rate in July. Needless to say, the growth rate of cash last August has signified a 40.6% crash from its April 2016 apex.  

The growth rate of M2’s Time Deposits slipped to 11.7% in August from 13% a month ago, but has rallied from a 5.3% low in September 2018. Time Deposits growth has climaxed at 22.7% rate in September 2017.

In the meantime, the growth rate of M1’s Transferable Deposits growth almost doubled to 8% from 4.8% over the same period.  The spike of M1 had been accounted for by Transferable Deposits and not by cash in circulation.  According to the BSP’s Glossary: Transferable Deposits Included in Broad Money, Other Resident Sector refers to the “BSP's peso deposit holdings of its employees' provident and housing funds.” So funds from the BSP’s employees had been responsible for such an upside spiral.

And deposit substitutes have signified the only M3 component in a steady uptrend. Following a trough in December 2016, Deposit substitutes (Securities Other Than Shares Included in Broad Money) growth continued to climb higher and has presently been drifting at a 10-year high.

And since ‘Securities Other Than Shares’ represent all types of money market borrowings by banks like promissory notes, repurchase agreements, commercial papers/securities and certificates of assignment/participation with recourse, its surge highlights the financial system’ sharp increase in the use of leverage, including very short-term lending!

So not only have savings deposits flowed into the coffers of the National Government and the banking system, but it has funded many forms of leveraging too amplifying systemic fragility!

With the stumble of M3’s savings deposits into deflation territory, the BSP will likely supercharge its QE, if the RRR cuts would prove to be ineffectual.  Liquidity represents the primary risk, as admonished the BSP Governor Ben Diokno in their latest (2018) FSR, “If there are risk issues to raise, it will have to be the prospects of managing liquidity”.*

*Diokno’s 2018 FSR Report Warns on Bank’s Mounting Liquidity, Fund Mismatching, Settlement Fails and Concentration Risks; the BSP Chops RRR rates by 100 bps! October 6, 2019

And history should rhyme.  When the headline CPI dropped to deflation in September (-.4%) and October (-.2%) 2015, the BSP revved-up the direct funding (net claims) to the National Government that catapulted the CPI, the GDP and the USD-php.

While current conditions are different compared to 2015, the BSP would surely mount a rescue of the banking system.

As it stands, the steepening of the Philippine treasury curve, suggests a forthcoming revival of the moribund CPI, which most likely will usher the era of stagflation!

Summary and Conclusion

In summary…

As a politically sensitive statistic, the CPI may manifest on the administration’s political agenda than objective reporting.

Several inconsistencies have emerged in the CPI, mainly stemming from the unmatched divergence between the Headline and the CORE as exhibited by logical contradictions.

Besides, the banking system’s loan portfolio and liquidity conditions also reveal its economic flaws. For instance, while the consumer credit growth rate has stormed to unparalleled heights, production loans have fallen to multi-year lows. If consumer credit has been about augmenting spending, why would prices not reflect such a spike on the slack in production?

The mainstream tells the public that lower CPI equals a boost to consumer spending, thereby diffusing into the GDP. While such may hold some grain of truth, this depends on the cause. If a shortfall in demand has prompted for a lower CPI, rather than from a deluge of supply, such would hardly provide support to consumption. At present, constraints in financial liquidity have contributed to the deficiencies in demand.

But like in 2015, CPI’s decline is likely temporary. Politics will likely be its primary cause.

On the supply side, the slump in rice prices, which constituted the gist of the current downturn in the CPI, has also signified a political response to the last year’s crisis. Since there has been a political backlash on the Tariffication Law, authorities have considered taking measures of walking back some of its features. Such actions are likely to put a stall on the current inventory buildup of rice, thus reverse food deflation.

On the demand and monetary side, the contraction in savings deposits has incited the sustained plunge in the money supply conditions. In 2015, when money supply growth pulled the CPI to the deflationary zone, the BSP responded by launching the Philippine version of Quantitative Easing, or the direct financing of the NG through debt monetization. This time with savings deposit under pressure, to jumpstart liquidity and rescue the banking system, aside from RRR cuts, the BSP is likely to recharge QE. The reactivation of QE should re-ignite the CPI upwards.

The domestic treasury market has been signaling the reemergence of inflation through its steepening slope.