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

There is no escape from debt. Paying for the government’s fictitious promises in paper money will result in a constantly depreciating currency, thereby impoverishing those who earn a wage or have savings. Inflation is the hidden tax, and it is very convenient for governments because they always blame shops or businesses and present themselves as the solution by printing even more currency. Governments want more inflation to reduce the impact of the enormous debt and unfunded liabilities in real terms. They know they can’t tax you more, so they will tax you indirectly by destroying the purchasing power of the currency they issue—Daniel Lacalle

 In this issue

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

I. Unveiling the Likely Hidden Messages Behind the Declaration of Victory Over Inflation

II. Treasury Curve was Spot On about Inflation, Short-Term Treasury Yields Plunge! Will the BSP Cut by 50 bps?

III. Supply-Side Disinflation? Despite Strong Credit Growth, Manufacturing Remains in the Doldrums, as Reflected by PPI Deflation and Output Sluggishness

IV. Supply-Side Disinflation? Lethargic Consumer Imports and July FDI Reflect Frail Capital Goods Imports

V. Demand-Side Disinflation? September CPI Plunged Despite Vigorous August Consumer Bank Lending, Liquidity Growth Dived

VI. Disinflation with Employment at Near Historic Highs Backed by a Credit Boom? Slower Deficit Spending Puts Pressure on Liquidity Strains

VII. SWS’s Self-Rated Poverty Survey versus the Government’s CPI 

Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees: Unveiling Its Hidden Messages

A Philippine media outlet proclaimed that the Philippine government won its battle against inflation, while a private survey contradicted this view. Who's right?

I. Unveiling the Likely Hidden Messages Behind the Declaration of Victory Over Inflation

Figure 1 

Two interesting headlines that hallmark this week’s conflicting message on inflation. 

Inquirer.net, October 7, 2024: The Philippines may now declare victory in its long and painful fight against inflation after price growth last month eased to a four-year low, helping create the perfect economic condition for gradual interest rate cuts…The BSP is now at a point where it has to undo its most forceful tightening actions in two decades, which had sent the benchmark rate to its highest level in 17 years to tame stubbornly high inflation. Cutting borrowing costs is necessary amid market predictions that the economy may grow below the government’s target for this year after consumption showed signs of weakening…Moving forward, Governor Eli Remolona Jr. said the central bank would take “baby steps” until the key rate falls to 4.5 percent by the end of 2025, suggesting that monetary authorities would unlikely resort to jumbo cuts that may stir up market fears that the economy is headed for a hard landing. (bold mine)

SWS.org.ph, October 9, 2024: The national Social Weather Survey of September 14-23, 2024, found 59% of Filipino families rating themselves as Mahirap or Poor, 13% rating themselves as Borderline (by placing themselves on a line dividing Poor and Not Poor), and 28% rating themselves as Hindi Mahirap or Not Poor. The September 2024 percentage of Self-Rated Poor families rose by 1 point from 58% in June 2024, following a significant 12-point rise from 46% in March 2024. This was the highest percentage of Self-Rated Poor families since June 2008. The estimated numbers of Self-Rated Poor families were 16.3 million in September 2024 and 16.0 million in June 2024. The percentage of respondent households rating themselves as poor was applied to the Philippine Statistics Authority medium-population projections for 2024 to arrive at the estimated numbers of Self-Rated Poor families… The September 2024 survey found the percentage of Borderline families at 13%, up by 1 point from the record low 12% in June 2024 following an 18-point decline from 30% in March 2024… As of September 2024, the percentage of Not Poor families was at 28%, 2 points below the record high 30% in June 2024. (bold mine)

First and foremost, what does "declare victory in its long and painful fight against inflation" mean? (Figure 1, upper tweet)

The Philippine CPI posted two straight months of DEFLATION (statistical price decreases) in September (-0.37%) and October (-0.19%) 2015; yet, the media and establishment experts barely made such a brazen pronouncement until now.

Yes, Q3 2024 statistical inflation of 3.2% has dropped to its 9-year support level, but this doesn’t mean that the inflation cycle has been broken.

Figure 2 

In Q3 2015, the CPI slipped into deflation at -0.1%, which prompted banks to accelerate their net claims on central government (NCoCG) or indirect QE. Ironically, this germinated the current inflation cycle, which is now on its ninth-year.  (Figure 2 upper image)

Despite its recent decline, given that the CPI has remained on an uptrend since 2015 and appears to have settled at the support levels, what assurances does the establishment hold that it won’t be subject to a third wave?

Second, the September CPI of 1.9% doesn’t translate to the evisceration of inflation; it only means that GENERAL prices have risen at REDUCED rates (or have dropped to within the BSP’s target), but they are still RISING!

In fact, BSP data tell us that even in the context of the understated inflation rate, over 99% of the purchasing power of the peso has been eroded since 1957! How is that for "declaring victory over inflation"? (Figure 2, lower chart)

On the other hand, while authorities and media bask in this pretentious statistical feat, a private sector survey tell us a different story: slower inflation has exposed the persistent and growing burden of a lower standard of living! (More on this below.) (Figure 1, lower tweet)

Third, "declaring victory over inflation" was NEVER a goal of the BSP’s monetary policy anchored on inflation targeting.

From the BSP: The primary objective of the BSP's monetary policy is “to promote price stability conducive to a balanced and sustainable growth of the economy” (Republic Act 7653). The adoption of inflation targeting framework of monetary policy in January 2002 is aimed at achieving this objective. Inflation targeting is focused mainly on achieving a low and stable inflation, supportive of the economy’s growth objective. This approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period. (bold mine)

There is no defined quantification or qualification of "low and stable inflation" because statistical inflation has always been a subjective measure, arbitrarily defined by the BSP.

That said, the goal of the politics behind inflation targeting has been to keep the inflation "genie" confined within the boundaries of the BSP’s proverbial "lamp."

That’s because inflation, as a hidden tax, benefits the government most.

However, the inflation genie has been set loose, or has gone beyond its bounds, marking the difference between the previous era and today.

In this way, the BSP can be conservatively said to have been "asleep at the wheel."

At worst, and unbeknownst to the public, the BSP’s policies have unleashed the inflation genie!

Or, although authorities continue to push the narrative of supply-side-driven inflation to shift the blame onto the private sector, the current inflation cycle signify an unintended consequence of their policies!

Yet, has anyone among the array of establishment experts, including those in government, been correct in predicting the incumbent inflation cycle? 

Fourth, the CPI is just a statistic. While its intent is to approximate changes in general prices, it neither reveals the full accuracy nor explains the causes of those changes. 

The fact is that inflation statistics are misleading.

My inflation rate and yours are different.  This is because of dynamic individual spending habits and ever-changing preferences that vary not only over time but also differs across individuals. 

Is it not the averaging a Netflix subscription and rice an exercise of apples-to-oranges comparison?  If so, would this not be applied to the CPI? 

Or, not only is the weighted averaging of goods and services across different groups of people a flawed metric, but people’s spending preferences are constantly changing! 

How accurate is an inflation rate derived from averaging the spending patterns of billionaires with those of the bottom 30%? 

Even on a personal level, my preferences are always changing. If I prefer sautéed prawns with bread this moment, adobo with rice later, and only sinigang for tomorrow, how could the inputs used to create these meals be accurately averaged? How would this apply to a population of 110 million people? 

Furthermore, because the CPI is a politically sensitive statistic—created and calculated by politically sensitive institutions—it is prone not only to errors (in assumptions, inputs, etc.) but also to political biases. 

For instance, changing the base year of the CPI can lead to different outcomes. If I’m not mistaken, using the now-defunct 2006 base would produce a much higher CPI today than the current 2018 base. 

Since the CPI is used as a primary benchmark for the market’s pricing of interest rates, wouldn’t the government—as the biggest borrowers—have the incentive or motivation to suppress it to influence the cost of borrowing? 

Fifth, what happened to journalism? 

Isn’t journalism about "seeking truth and providing a fair and comprehensive account of events and issues"? 

When media outlets use ambiguous qualifications like " declare victory against inflation" to describe the "perfect economic condition for gradual interest rate cuts" intended to support "consumption (which) showed signs of weakening," could this not signify cheerleading or an advocacy for a biased policy stance? For whose benefit? 

Might this be seen as advancing the interests of vested groups, particularly the primary beneficiary, the government and the politically connected elites? How is this different from propaganda, misinformation, or disinformation? 

Importantly, if an alleged news article makes an economic generalization, why would it lack narratives supported by economic logic? 

Or, are low rates a GUARANTEE of an INCREASE in consumption? How so, and based on what theory and evidence? 

Why cite partisan and non-sequitur explanations from "establishment experts" whose principal-agent problems have hardly been laid bare to the public? 

Have media outlets distilled such insights or selected statements for print that only promote their biases? I’ve seen this happen (personally) before, which is why I refuse interviews. 

Sixth, if media pronouncements reflect exuded marketplace confidence, could such article/s signify a manifestation of the magazine/headline cover indicator or express an extreme state of sentiment? 

Or have the media’s declarations echoed the "overconfidence" stemming from recent euphoria over the price spikes in Philippine assets (stocks, bonds, and the peso)? 

Seventh and lastly, could this be related to the upcoming elections? 

Will declaring 'victory in its long and painful fight against inflation' be part of the campaign to promote the electoral chances of the administration’s national slate in the 2025 midterm elections? 

Ultimately, the establishment's obsession has been to promote a regime of easy money, using the declaration of triumph over inflation as justification. 

As the great Austrian economist Ludwig von Mises once explained 

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last (Mises, 2019)  

II. Treasury Curve was Spot On about Inflation, Short-Term Treasury Yields Plunge! Will the BSP Cut by 50 bps? 

While the headline CPI plummeted from 3.3% in August to 1.9% in September—its lowest monthly rate since May 2020—excluding food and energy, the core CPI slipped to 2.4%, signifying 17 of 18 months of decline (one unchanged) since peaking at 8% in March 2023. 

Before that, we showed how changes in the Philippine yield curve have accurately predicted the CPI slump. 

despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Prudent Investor, August 2024) 

… 

Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August.  

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.   

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble. (Prudent Investor, September 2024) 

Volatility has crescendoed in the Philippine treasury curve.

Figure 3

The present slope exhibits an astounding collapse in short-term rates (STIR), manifesting institutional market expectations of substantial cuts in BSP rates. Will the BSP cut by 50 bps this October? (Figure 3, upper graph) 

Yet, the curve’s magnified volatility has been incredible: following the gradual transition from flat to an inverted curve, then swiftly to a bullish steepening, and next to the current abrupt regression to a partial belly inversion—even with the plunge in STIR—how could this not be conducive to the rising risks of stagflation?

III. Supply-Side Disinflation? Despite Strong Credit Growth, Manufacturing Remains in the Doldrums, as Reflected by PPI Deflation and Output Sluggishness 

While we perceive government statistics with cynicism, we still use them because almost every financial market participant does.

Instead of focusing on the potential factors for the drop, the mainstream fixates on the prospective policy easing by the BSP.

Could the plunge in inflation have been a supply-side phenomenon marked by a glut?

In a word: Barely.

Manufacturing value grew by 2.9% in June, 6.45% in July, and 1.78% in August, while volume was up by 3.2%, 6.9%, and 2.8% over the same period.

Meanwhile, despite strong Universal Commercial Bank (UCB) loan growth to this sector—rising by 8.9%, 9.5%, and 9.8%—the Producer Price Index (PPI) deflated by -0.2%, -0.4%, and -1%. (Figure 3, lower chart)

Here’s the question: Why has robust credit growth not been reflected in output performance?

Worse yet, why is the deflation in the PPI escalating? PPI defined by the Philippine Statistics Authority, "measures the average change over time in the prices of products or commodities produced by domestic manufactures and sold at factory gate prices."

Where has all the credit money generated gone?

Has it been diverted to real estate or other undeclared allocations? Or has it been used for refinancing existing liabilities?

IV. Supply-Side Disinflation? Lethargic Consumer Imports and July FDI Reflect Frail Capital Goods Imports

If manufacturing growth has been unimpressive or sluggish, the situation is even worse for imports.

Imports in USD posted a 7.3% YoY contraction in June, then rose by 7.3% in July and 1.8% in August.

Converted to average pesos, imports were down by 2.63% YoY in June, surged by 14.3% in July, and grew by 4.6% in August, with the last month’s growth reflecting revaluation effects from a strong peso.

Figure 4

Here’s the thing: Consumer goods USD imports contracted by 7.3% in June, increased by 3.1% in July, and remained unchanged in August. (Figure 4, topmost pane)

Meanwhile, capital goods imports shrank by 8.8% in June but surged by 9.5% and 9.6% in the next two months. A substantial segment of the YoY changes reflects base effects. (Figure 4, middle diagram)

Nonetheless, the growth in capital goods imports partly reflected foreign direct investment (FDI).

The prosaic July FDI growth of 5.5% YoY (7.5% year-to-date) resonated with mediocre import growth. (Figure 4, lowest graph)

Yet, debt accounted for 74.3% of total FDI inflows and 63.5% of year-to-date FDI inflows. How much of this represent actual investments?

Still, why is the growth rate of FDIs declining?

Importantly, where are the investment pledges from the US-NATO allies?

V. Demand-Side Disinflation? September CPI Plunged Despite Vigorous August Consumer Bank Lending, Liquidity Growth Dived

Was the CPI slump a function of demand?

In short, yes!

We should put into context the seismic transformation of the Philippine banking system, with its recent focus on consumer loans coming at the expense of the supply side.

Figure 5

Universal Commercial (UC) bank consumer lending slowed from 24.3% year-over-year (YoY) in July to 23.7% in August, marking its slowest pace since November 2023. (Figure 5, topmost chart)

Consumer loan growth was strong across all segments in August: credit cards +27.44%, auto loans +19.3%, salary loans +16.4%, and others +26.8%.

Meanwhile, production loans continue to accelerate, expanding from 8.8% in July to 9.4% YoY in August, primarily in the real estate and trade sectors.

Overall, UC bank lending grew from 10.4% to 10.9% in August (Figure 4, second to the highest graph)

Despite mainstream claims of "restrictiveness" or "tightness" due to elevated rates, UC Bank's loan growth has been on an uptrend. Still, the CPI continues its downward trajectory!

Worse yet, despite this, financial liquidity plummeted in August.

M3 growth, which was 7.3% in July, dived to 5.5% in August. Incredible.

Incidentally, the yield curve inversion reflected this!

Once again, what happened to all the record money creation by the banking system and the BSP? Why the black hole?

VI. Disinflation with Employment at Near Historic Highs Backed by a Credit Boom? Slower Deficit Spending Puts Pressure on Liquidity Strains

Why could this be happening when employment rates are near all-time highs?

It was 96% last August, only a smidgen lower than the 96.9% record set last December 2023. (Figure 5, second to the lowest window)

Could it be that, aside from trade, government jobs were the primary source of growth in August? (Figure 5, lowest image)

Or could it also have been that employment growth has been mostly about low-quality labor? Alternatively, could the employment data also have been embellished?

Figure 6

Moreover, as we previously noted, because Philippine public spending has slowed, the fiscal deficit slightly "narrowed" year-to-date (YTD) as of August. Public spending has tracked the CPI over the long-term. (Figure 6, topmost diagram) 

As a result, aided by the strong peso, public debt marginally weakened in August.

Moreover, has the stalling growth in system leverage (UC bank credit + public debt) contributed to the demand pressures reflected in the CPI? (Figure 6, second to the highest graph)

Consequently, net claims on the central government (NCoCG) by banks and the BSP plateaued or consolidated. (Figure 6, second to the lowest chart)

Or, aside from the BSP, liquidity injections channeled through banks have slowed slightly.

This, combined with a stealth rise in bank non-performing loans (NPLs) and elevated levels of held-to-maturity assets (HTMs), has contributed to the liquidity squeeze.

And this has occurred despite the record nominal bank credit expansion and historically high employment rates. The plunge in September’s CPI might reflect a downturn in public and private demand, possibly worsened by mounting signs of a liquidity shortfall.

VII. SWS’s Self-Rated Poverty Survey versus the Government’s CPI 

Things don’t happen in a vacuum.

The BSP suddenly announced a massive reduction of the banking system’s reserve requirement ratio (RRR) on September 20th, obviously in response to such developments. The adjustment takes effect on October 25.

The PSA’s September CPI data exhibits a broad-based decline in price growth. While food prices had the biggest influence on the CPI’s significant downside volatility, slowing aggregate demand reflected the diminishing pace of price increases across most sectors. (Figure 6, lowest image)

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

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

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

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

____

References 

Ludwig von Mises, The Boom Is Worse than the Bust, November 30, 2018 Mises.org 

Prudent Investor, The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk August 12, 2024

 

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing September 1, 2024

  

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Doom-loops don't occur in isolation: they interact with each other, reinforcing each other. Attempts to suppress one doom-loop by papering over the unwelcome reality accelerate other doom-loops—Charles Hugh Smith 

In this short issue 

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

I. July’s CPI Momentum Accelerates

II. July Headline and Core CPI’s Diametric Paths 

III. Philippine Treasury Market Defied the July CPI Data

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Not only inflation, but stagflation remains a principal risk to the Philippine political, financial, and economic landscape

Inquirer.net, August 6, 2024: Headline inflation in July reached its highest rate in nine months, driven by higher price increases in housing, water, electricity, gas and other fuels, transport items, and food and non-alcoholic beverages, the Philippine Statistics Authority (PSA) reported on Tuesday. Preliminary data from the agency showed the consumer price index grew by 4.4 percent year on year in July, accelerating from the 3.7 percent in June, but slower than 4.7 percent in the same period last year…Inflation print in July marked the fastest growth in nine months or since the 4.9 percent logged in October 2023.  

Some observations from the July CPI Data:  

I. July’s CPI Momentum Accelerates

Figure 1

First, a greater than 0.5%—but less than 1%—spike in the Month-on-Month (MoM) growth rates has typically been a harbinger of a sustained uptick in the Headline CPI Year-over-Year (YoY). July’s MoM rate jumped by 0.72%. (Figure 1 upper image) 

Does this imply a higher CPI in August and the strengthening of the third wave of this first CPI cycle?

II. July Headline and Core CPI’s Diametric Paths 

Second, while the Philippine headline CPI surged from 3.7% in June to 4.4% in July, core CPI dropped from 3.1% to 2.9%. The gap between the headline and core reached its widest level since 2022. (Figure 1, lower graph) 

In the past, this chasm was a result of the headline rising faster than the core or vice versa. Or, while both were headed in the same direction, the divergent pace or speed resulted in the disparity. The recent gap signified a product of path divergence. 

Energy was the primary source of July’s "inflation." According to the BSP, although food inflation also accelerated due to faster price increases of meat and fruits, "the uptick in July inflation was traced mainly to non-food inflation, particularly higher electricity rates and upward adjustments in domestic prices of petroleum products."

Figure 2

Interestingly, the transport CPI spiked from 3.1% to 3.6% despite the moderation in global oil prices as measured by the US WTI. (Figure 2, upper window)

According to the BSP’s inflation basket, food, transport, electricity, and gas constitute 53.5% of the CPI basket. 

However, the antipodal directions indicate generally weak demand for non-food and transportation items. 

Could this signify an escalation of stagflation? 

Moreover, the weakening MoM change in the core CPI has barely supported the rise in general prices in the economy. (Figure 2, lower diagram) 

III. Philippine Treasury Market Defied the July CPI Data

Figure 3 

Next, despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Figure 3, upper chart) 

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation 

Needless to say, the escalating tensions between the deflationary and inflationary forces in the economy should lead to more volatility, and this directional impasse will likely be resolved by (path-dependent) government policies. 

Or, while we are not fans of government statistics, should the government maintain the pace or speed of the latent "Marcos-nomics stimulus," forces of inflation are likely to prevail in this phase of the CPI cycle. 

Marcos-nomics, as Q2 GDP has validated, will continue to anchor on boosting GDP (infrastructure and welfare), funding pre-election, and defense spending. 

That is to say, such stimulus would increase demand by intensifying systemic leverage. 

Figure 4 

The combination of record Universal Commercial Bank lending levels—or rebounding growth rate—and the upsurge in the government’s deficit spending has prompted the most liquid of the money supply measures (M1) to accelerate upward. (Figure 3, lower chart, Figure 4, top and bottom graphs) 

If sustained, this should send the CPI higher over time. 

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

Lastly, using official data, the CPI reveals shades of broadening inequality.

The Bottom 30% (B30) income households buy at the same prices as others.

Figure 5

In July, the headline CPI rose faster than the B30, which pulled their spread marginally lower after reaching 2018 highs last June. (Figure 5, topmost graph) 

However, the spread in the Food CPI between the headline and the B30 remains wide and at 2022 levels. (Figure 5, middle image) 

The widening gap in the PSA’s B30-headline inflation data partially confirms a private sector poll’s finding that hunger rates have been rising—not limited to the B30 class, but also on self-poverty ratings. (Figure 5, lowest chart) 

Stagflation is already present among the average citizens. 

Until the government and the BSP discipline themselves from their free-money "trickle-down" policies, stagflation will remain a primary political-economic-financial risk.

  

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

If people really could formulate all their knowledge in algorithmic terms and calculate as economic theory assumes, there would be no need for real-life markets. The virtue of the real market is precisely that it calls forth knowledge that people cannot explain, justify, or defend intellectually—Stephan Marglin 

In this Issue

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

I. Are Filipinos Really Spending More On Non-Essentials?

II. How the BSP Controls the Inflation Narrative

III. Widening Wealth Gap: While May CPI Inflation Rate Climbed to 3.9%, the Bottom 30% Struggle with Higher Prices

IV. Has the May CPI Peaked? Stagnating Monthly CPI Rate Changes and the Bullish Flattening Treasury Curve

V. Peak CPI? Manufacturing and Import Weakness Signals Demand Slump

VI. Bank Credit Expansion’s Diminishing Returns as Credit Card and Salary Loans NPLs Spiked in Q1 2024!

VII. Peak CPI? Labor Conditions Worsen in April as Unemployment, Underemployment and Part-Time Jobs Swell

VIII. Peak CPI? Restrained Public Spending May Ease on Supply Constraints

IX. Stagflation Ahoy! Economic and Financial Rescue Measures to Power the USD-Philippine Peso

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

May CPI reached 3.9%, but could this be the peak? Signs from various parts of the financial economy, including a spike in credit card and salary loan non-performing loans (NPLs), indicate so. Have Filipinos been unaffected by inflation?

I. Are Filipinos Really Spending More On Non-Essentials?

Inquirer.net, May 31, 2024: Filipino consumers are now spending less on essential goods and services, and consuming more of nonessential items—a shift that’s not surprising at all as the Philippines moves closer to “upper-middle income” economy status, HSBC Global Research said. (bold added)

Figure 1

A closer examination of the data raises questions about the validity of this claim. (Figure 1, topmost image)

First, let's ask some crucial questions:

-Is the Philippines the subject of the study? 

-Has the generalization been anchored on an ideological slant of advocating spending one’s way to prosperity? 

-Have vested interest groups commissioned this study?

-Or has it been designed to ingratiate with incumbent political agencies promoting their supposed "upper-middle income" agenda? 

The most striking feature of that news quip is the adverb "now."

It assumes that, having been awash with savings, Philippine residents have broadly leveled up their spending patterns from the physiological needs (Maslow’s Hierarchy) towards the myriad wants (safety, social, esteem, and self-actualization). To repeat, broadly. 

By inference, it should also mean that Filipinos have been spending more than enough on essentials while in the transition to an upgrade. 

Ironically, the study didn’t point out how and what financed this shift to "consuming more of nonessential items." 

But, as previously explained, the consumer spending share of GDP relative to the government spending peaked in 2013 and has been southbound since.

That is to say, government spending has risen at the cost of consumers. (Figure 1, middle window) 

Are they saying that the current weakness in consumer spending growth will reverse with more deficit spending or more implicit transfers favoring the government and its cronies? Or how will increasing this reverse the current trend? 

Importantly, as earlier elaborated, despite the historic bank consumer credit boom, revenue growth of retail (non-construction) chains, retail construction chains, and food chains have been on a downside drift through Q1 2024. 

In contrast, consumer loans (including real estate) hit a historic Php 2.7 trillion pesos, while its % share of Total Loan Portfolio soared to an unprecedented 21.4% in Q1 2024. Consumers continue to gobble up a larger share of the banking industry’s loans. (Figure 1, lowest graph) 

So, why has the growth of retail sales been slowing despite unprecedented consumer lending by banks? 

Notwithstanding, their next assertion starkly contradicts such blissful assumptions: "While the decline in household furnishing was expected amid a high-interest rate environment that ruined Filipinos’ renovation plans, which are typically funded by credit, HSBC said the weaker demand for food and clothing was “surprising.”"

So, did this wonderful transition stop at the doorstep of household renovation? Or, has persistent real estate vacancies been the source of the slowdown in the demand for household furnishing? 

And if armed with savings, why should local consumers be vulnerable to higher rates? Won’t higher rates—which increase their interest income—increase their spending capacity? 

Figure 2

But having peaked in 2013, the bank's peso deposit growth rates continue to dwindle through April 2024. (Figure 2, topmost visual) 

It didn’t take long for another article to negate this presupposed shift to "consuming more of nonessential items." 

Inquirer.net, June 4, 2024: Universal Robina Corp. (URC) saw brisk sales in its low-priced food products, including snacks and instant coffee, as consumers looked for cheap alternatives to deal with inflation hurting the power of their wallets.  

From this factual perspective, is the decline in spending on essentials due to reduced spending on non-essential items or diminished real income, forcing individuals to cut back on essentials?  

Is this study based on a "false dichotomy?"  

Needless to say, how would higher inflation or the ‘loss of purchasing power of the peso’ bring about this alleged magnificent transformation to an "upper-middle income" economy? 

Has the study even incorporated the sentiments from polls showing the persistence of high levels of self-rated poverty and hunger among a high portion of the population? 

Alas, is the path to an "upper-middle income" economy increasingly dependent on the buildup of leverage in the balance sheets of the government, supply-side, and consumers than a productivity-driven one?

II. How the BSP Controls the Inflation Narrative 

Reuters, June 5, 2024: Philippine annual inflation quickened for a fourth straight month in May due largely to the faster pace of increases in housing, utility and transport costs, the statistics agency said on Wednesday. The consumer price index rose 3.9% in May from 3.8% the previous month, marking the fastest rise since November 2023, bringing the five-month average inflation to 3.5%, well inside the central bank's 2.0%-4.0% target for the year. Economists in a Reuters poll had forecast annual inflation at 4.0%.  

Here's how the pin-the-tail-on-the-donkey inflation prediction game is played: 

1. The Bangko Sentral ng Pilipinas (BSP) initially offers its inflation projection for a given month through a range (usually covering 90 basis points), typically a few days before its announcement. While the BSP has its own department to calculate this, it can also coordinate with the Philippine Statistics Authority (PSA) on the latter’s preliminary tabulation using its survey inputs. 

2. Then, the mainstream experts typically choose a number from the BSP’s range to use for their individual "forecast." 

3. The media then calculates the "median" from this consensus. 

4. Subsequently, the PSA announces the CPI figure, and the media depicts the difference between the consensus forecast and the actual PSA result. 

All of this reinforces the public’s (mis)perception about the BSP’s definition of inflation. 

For instance, the BSP’s extrapolation of the May’s CPI (May 31, 2024):"The latest inflation outturn is consistent with the BSP’s projections that inflation is likely to exceed the target range temporarily due to the possible impact of adverse weather conditions on domestic agricultural output as well as positive base effects. Nonetheless, the BSP expects full-year average inflation to settle within the target range for 2024 and 2025." 

For them, the attribution of inflation is always to the supply side, which leads to an inflation narrative that focuses primarily on statistics. The irony is that they use their monetary tools (rate hikes or cuts) to "anchor or un-anchor" the public's "inflation expectations"—a strategy that is fundamentally at odds with their supply-side diagnosis. 

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

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

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

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

In doing so, any institutions will run the risk of regulatory discrimination or lose commercial intercourse when dealing with it or the national government, or even their financial colleagues. 

The CPI as defined by the PSA (bold added): "The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases." (PSA, FAQ) 

To put it bluntly, the CPI is the most politically sensitive statistic, making it prone to political manipulation aimed at advancing the interests of political leaders and the bureaucracy. 

In any case, the realities of human action—not statistics—eventually shape economic and financial outcomes. 

III. Widening Wealth Gap: While May CPI Inflation Rate Climbed to 3.9%, the Bottom 30% Struggle with Higher Prices 

The Philippine government reported that their Consumer Price Index (CPI) inched higher to 3.9% in May. In contrast, core inflation (non-food and energy) slipped to 3.1%. This divergence showcased that the increases were centered around food and energy.  (Figure 2, middle chart) 

While food inflation contributed significantly, it slowed down in May, decreasing from 6% in April to 5.8%. The transport CPI, however, saw the largest jump, increasing by 90 basis points, from 2.6% in April to 3.5% in May.  (Figure 2, lowest diagram) 

Interestingly, this surge occurred despite the decline in international prices of oil, which typically has a significant impact on it. West Texas Intermediate (WTI) prices fell by 5.2% month-on-month from USD 81.7 per barrel in April to USD 77.44 in May. 

As it stands, widening wealth inequality continues to be exposed even in the government's statistical inflation or CPI. 

Figure 3

Despite easing from the 5.8-year high last April, the gap between the headline CPI and the bottom 30% income remained barely changed. (Figure 3, topmost chart) 

According to the PSA (bold added), "The CPI for the bottom 30% income households is compiled by the PSA to measure the changes of prices of commodities commonly purchased by the families that belong to the bottom 30% income decile.  The process of price collection and CPI computation is the same as that of the CPI for all income households.  However, there is a separate market basket and weights for the CPI for the bottom 30% income households." (PSA, FAQ) 

This signifies one of the many pieces of evidence illustrating why the CPI is highly flawed: the individual is not the community, the community is not the region, and the regions are not the nation. The CPI of billionaires is not the same as that of the bottom dwellers. 

This disparity is evident in the fact that people from the bottom 30% still buy goods at the same prices from the same stores, yet changes in the CPI's basket and weights lead to stark differences. 

Of course, the weights are determined by assumptions made by the PSA, which do not align with individual circumstances. 

The thing is, in contrast to the 2018 episode where the CPI of both the headline and the bottom 30% were synchronized to the downside, today, the downtrend in the CPI has only amplified the bottom 30% CPI. 

The reality is that the bottom 30% has experienced a sharper decline in their purchasing power. 

And this phenomenon is not an anomaly, but rather a 4.8-year trend, as evident from the PSA's data, representing a consistent pattern in the CPI's performance over this period. 

Moreover, this trend represents a "boiling frog" phenomenon, where the erosion of the middle class is gradually but inexorably occurring. It's essential to acknowledge this reality rather than ignoring it. 

On the other hand, the Cantillon effects of money/credit/liquidity expansion imply that the primary beneficiaries are those who have direct access to its creation: the government and elites (Thornton, 2022) 

This is a stark reminder of the widening wealth gap from the redistributionist "trickle-down" policies embraced by the Philippine government. 

IV. Has the May CPI Peaked? Stagnating Monthly CPI Rate Changes and the Bullish Flattening Treasury Curve 

But May's CPI may have exhibited signs of reaching an interim "zenith." 

First, from the perspective of the PSA's data, although the year-on-year CPI increased for the third consecutive month, its month-on-month (MoM) change continues to languish. Successive increases in the MoM rate have accompanied previous surges in the CPI, which have been absent in the current uptrend. (Figure 3, middle image) 

Second, following a sharp bearish steepening, the Philippine treasury curve has partially shifted to a bullish flattening. Yields from last week's close have slightly dipped below those of May 31st and sharply against the end-of-April highs. Are treasury traders sensing a slowdown in inflation and GDP? (Figure 3, lowest chart) 

We should observe how this evolves by month-end. 

Figure 4

Third, despite the growth in lending, we are not yet seeing a significant impact on the broader economy or even the CPI. 

Or while banking loans continue to surge higher, unfortunately, they appear to be suffering from the law of diminishing returns. 

Universal commercial (UC) bank loans increased by 9.6% last April, the highest rate in a year, reaching a record Php 11.56 trillion, supported by a 7.8% increase in production loans and a scorching 25.3% growth in consumer loans. (Figure 4, topmost and middle charts) 

Conversely, as evidence of slowing demand, Jollibee recently announced price reductions for their bestsellers. 

V. Peak CPI? Manufacturing and Import Weakness Signals Demand Slump 

Let us examine the supply side. 

First, the manufacturing sector. 

Following the February spike to 5.9% YoY, UC manufacturing loan growth slowed to 4% in April. Interestingly, the Producer Price Index (PPI or factory gate prices) remained in a deflationary phase, with a -0.8% decline in the last two months. (Figure 4, lowest graph) 

Although the deflationary trend has been easing, the PPI's sustained decline suggests that the increase in output has not been supported by demand. 

According to PSA's manufacturing data, the sector reported a value and volume growth of 5.9% and 6.7% in April, respectively. However, on a year-to-date basis, the sector has stagnated, with zero growth in both value and volume sales. 

Reported value and volume sales also increased by 6.4% and 7.2%, correspondingly, but due to sharp declines in two of the last four months, year-to-date growth also slackened. 

Again, the sustained decline in the PPI (factory gate prices) suggests that the increase in output has barely been supported by demand. The improvement in April’s sales has yet to translate into higher prices. 

Next, let's consider imports.

Figure 5

March imports in USD plunged by 19.95%, while imports for the first quarter of 2024 decreased by 3.23%. In pesos, March imports plummeted by 18.42%, while first-quarter 2024 imports fell by 5.7%. (Figure 5, topmost diagram) 

Consumer goods imports were a significant contributor to this decline, with YoY and MoM figures of -19.11% and +4.15%, respectively. Cumulatively, consumer goods imports remained unchanged year-to-date. (Figure 5, middle graph) 

Consumer goods imports contributed significantly to this trend: year-on-year -19.11%, month-on-month +4.15%, with cumulative year-to-date unchanged. 

In terms of percentage of total imports, consumer goods accounted for 19.6% in March and 19.5% in Q1 2024. 

In summary, the notion of a supply-side driven inflation is hardly supported by PSA's manufacturing and imports data. 

Instead, the evidence suggests that supply-side strains are indicative of ongoing weakness in demand. 

VI. Bank Credit Expansion’s Diminishing Returns as Credit Card and Salary Loans NPLs Spiked in Q1 2024! 

Furthermore, surging non-performing loans (NPLs) in banking loans represents a concern. 

That record upside streak for credit card and salary loans doesn’t come for free. Unless supported by proportional income growth, the increased leveraging of balance sheets will eventually come home to roost. 

In Q1 2024, credit card NPLs raced to levels last seen in Q4 2021, while salary loans hit an all-time high! (Figure 5, lowest window) 

That is to say, many individuals, corporations, or institutions have been borrowing more, which has inflated the bank loan data and has been misinterpreted as "growth." However, they are likely borrowing for liquidity purposes or to refinance themselves to stay afloat. 

This refinancing dynamic has been evident even among listed companies on the Philippine Stock Exchange (PSE). For instance, SM Prime Holdings recently had a Php 100 billion bond offering. 

From the Inquirer.net, May 23, 2024 (bold added): Net proceeds from the offer could reach P24.72 billion, assuming the overallotment option is fully exercised. The funds will be used to refinance the listed company’s debt and expand its property portfolio. 

Therefore, refinancing has been used by the banking system to conceal the mounting liquidity and solvency issues that are plaguing it. 

We are oblivious to the actual numbers of "zombie" institutions, which survive by constantly rolling over debt and remaining afloat solely through the accumulation of debt. 

Aside from relief measures and regulatory subsidies, the banking system continues to accumulate imbalances, exacerbated by the BSP's pseudo "tightening" policies, which are actually easy money policies. 

In reality, the BSP cannot afford to "tighten" as it did in 2018, as it would risk triggering a domino effect or contagion due to the growing liquidity and solvency issues. 

The Philippine economy and financial system have been gradually devolving into a Ponzi finance-economy. 

VII. Peak CPI? Labor Conditions Worsen in April as Unemployment, Underemployment and Part-Time Jobs Swell

On top of the above, we find a considerable deterioration in jobs and job quality.

Inquirer.net, June 7, 2024: The widespread drought caused by the El Niño weather phenomenon since the start of the year forced many farmers out of work, raising the country’s unemployment rate in April to 4 percent from 3.9 percent the previous month, the Philippine Statistics Authority (PSA) reported on Thursday. This translated to 2.04 million unemployed Filipinos, higher than the 2 million who were jobless in March. Preliminary results of the statistics agency’s Labor Force Survey (LFS) for April showed the unemployment rate was the highest in three months, but lower than the 4.5 percent in April 2023 and January this year.

An amazing extrapolation based on a skewed version of the presented data. 

Although we are a hard-core skeptic of government data, we use it to understand the mainstream and public perception.

Figure 6

Firstly, unemployment rates did increase in April, but so did the non-labor population or the decline of the labor force. In other words, the upturn in non-labor population camouflaged the increase in the unemployment rate. (Figure 6, topmost chart) 

Secondly, the underemployment rate surged from 11% to 14.6% month-on-month. This was supported by the fact that the share of part-time jobs soared from 30.5% in March to 32.6% in April. (Figure 6, second to the topmost graph)

Sure, among the largest employers, agricultural jobs declined, but so did trade jobs (602,000 MoM). Manufacturing and Finance also shed 284,000 and 111,000 jobs respectively. (Figure 6, second to the lowest chart) 

As a side note, despite the reported 684,000 month-on-month job losses in agriculture due to El Niño, fishing jobs saw an unexpected surge of 413,000. Using available bias and post-hoc logic, one might wonder if job creations signify a consequence of the mounting standoff between the Philippines and China? Ironically, the defense industry and government reportedly shed about 466,000 jobs.

Has China and the Philippines reached a deal involving the fishing industry? 

The data reveals that job retrenchment affected the biggest employers. Have record heat temperatures contributed to these job losses? 

But there’s the rub. Despite the record unemployment last December 2023, part-time jobs have consisted of about a third of the workforce. Instead of increased spending, this led to unprecedented growth in salary loans and credit card loans.

While escalating non-performing salary loans and credit card loans may be attributed to job decreases, credit delinquencies occur when the ability to service liabilities grows faster than income. 

In summary, slower employment growth should contribute to a decline in demand, and the upsurge in credit delinquencies should accelerate it. 

VIII. Peak CPI? Restrained Public Spending May Ease on Supply Constraints 

Then, there’s government spending. 

Rocketing public debt servicing may be stalling the government’s appetite for spending, but this reprieve may not last. 

What the government spends, it takes from the private sector. This leaves little room for the latter to increase production to meet domestic consumption needs. 

Reduced production, coupled with demand subsidies by the BSP, leads to economic imbalances that manifest in prices. 

As such, the nominal growth in public spending has resonated with the general trend of the CPI. (Figure 6, lowest image) 

Figure 7

Moreover, insufficient production has led to an increasing dependence on imports and subsequently, the 'twin deficits.' 

The slowdown in public spending has been reflected in the net claims on the central government (NCoCG) of the banking system and the BSP. This tapering has escalated the liquidity drought in the banking system, where cash-to-deposits reached new multi-year lows in April, and liquid assets-to-deposits also declined sharply. (Figure 7, topmost chart) 

The combination of disguised bank credit delinquencies and record levels of held-to-maturity (HTM) assets has worsened liquidity conditions, which will likely be exacerbated by escalating consumer non-performing loans (NPLs). (Figure 7, middle diagram) 

Additionally, rising public debt servicing is expected to further exacerbate these conditions. 

IX. Stagflation Ahoy! Economic and Financial Rescue Measures to Power the USD-Philippine Peso 

Such conditions are the perfect recipe for a slowdown in the Consumer Price Index (CPI) and the Gross Domestic Product (GDP). 

However, officials are unlikely to permit this scenario to unfold. Therefore, this would provide the impetus for officials to increase their desire for the Bangko Sentral ng Pilipinas (BSP) to cut interest rates, which the latter would eventually oblige. 

And if the GDP does slow, it would prompt the government to unleash all sorts of stimulus (fiscal and monetary)—using the pandemic template. 

However, this would likely fuel more energy to the US dollar (USD). 

Should the $USDPHP breakout, this would partly offset the deflationary forces—leading to stagflation. (Figure 7, lowest chart) 

We have been asserting that the BSP’s Gross International Reserves (GIR) have been stuffed by "borrowed reserves" such as external debt and Other Reserve Assets (ORA). 

The BSP has recently confirmed our views that it is adding to its position on US shorts: "The month-on-month increase in the GIR level reflected mainly the National Government's (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP's investments abroad. (BSP, 2024) 

The national government raised USD 2 billion last May, which it deposited with the BSP and included in its GIR. However, "borrowed" means it needs to be repaid. 

The ensuing USD-based "asset-liability mismatch" represents the "short position."

____

references 

Philippine Statistics Authority, Frequently Asked Questions

Arnold Kling, Once Again, Subsidize Demand and Restrict Supply, September 22, 2016, Arnoldkling.com

Mark Thornton, Cantillon Effects: Why Inflation Helps Some and Hurts Others, March 11, 2022, Mises.org 

Bangko Sentral ng Pilipinas, End-May 2024 GIR Level Rises to US$104.48 Billion, June 7, 2024 bsp.gov.ph