Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. It follows that nobody cares about inflation in the traditional sense of the term. As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this technological confusion is not entirely wiped out, there cannot be any question of stopping inflation—Ludwig von Mises
In this issue
March CPI: Stagflationary Forces Enveloping the Philippine Economy One Step at a Time
I. Fiddling with the CPI Statistics to Maintain Easy Money Policies, the Rebasing Magic Redux
II. Philippine Treasury Markets Screams "Stagflation"!
III. The Push to Contain CPI via the USD-Peso: External Borrowing, and Other Reserve Assets
IV. March CPI: Rising Prices Squeezing Transports and Households!
V. March CPI Enigma: Corn Prices Zoom 31%! But Food CPI Only at 2.6%, Is the Philippines Immune to Record World Food Prices?
VI. March CPI: Profit Squeeze in the Manufacturing Sector!
VII. Hiatus in Oil Price Surge: OECD Unleashes Strategic Petroleum Reserves, Chinese Economy Flags on Covid, and Property Woes
March CPI: Stagflationary Forces Enveloping the Philippine Economy One Step at a Time
I. Fiddling with the CPI Statistics to Maintain Easy Money Policies, the Rebasing Magic Redux
Figure 1
Let us open this week’s outlook with intriguing takes from the BSP.
Businessworld, March 31: PHILIPPINE CENTRAL BANK Governor Benjamin E. Diokno said raising the key policy rate to between 2.5% and 2.75% as part of an exit from pandemic-era accommodation would be “reasonable and consistent” with the nation’s economic growth and inflation targets. “We plan to start the normalization process in the second half of the year,” Mr. Diokno said in a mobile-phone message on Wednesday, when asked about the plan for rate hikes. “It is not date specific, but we will continue to be data dependent,” he said, adding that a 2.75% key policy rate “might be reached by next year.”
CNN, April 5: Inflation quickened to an annual rate of 4% in March compared to 3% in February, with the increase in prices mainly driven by food and energy costs, Philippine Statistics Authority figures released Tuesday show. The last time inflation rose by at least one full percentage point (pp) was in December 2019, when it rose by 1.2 pp, said National Statistician Dennis Mapa in a briefing. Inflation has averaged 3.4% so far this year.
Businessworld, April 6: THE PHILIPPINE central bank is ready to take preemptive action if inflation expectations are at risk of being “disanchored,” its governor said on Tuesday. “We are prepared to take preemptive action as needed if inflation expectations become at risk or disanchored,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said at the Philippine Economic Briefing held in Pasay City on Tuesday. He said they continue to be patient and will consider a rate hike adjustment by the second half of 2022.
That is, by rebasing prices to the latest series, central authorities deliberately conceal changes in the CPI.
In effect, inaccurate data have predicated the policy responses of the BSP, which has spurred economic imbalances.
As noted last February,
With a new base rate, the data sanitizes the erosion of the purchasing power from the previous base levels.
See How to Chop the CPI? Change the Baseline Rates! T-Bill Yields Plunge to All-Time Lows as Credit Spreads Tighten! February 6, 2022
A back-of-the-envelope calculation shows that the constant shifting of the statistical base series from 2000, 2006, 2012, and the latest 2018 series vanquished a stunning (about) 74% of the aggregate purchasing power lost in the last 21 years!
SEVENTY-FOUR PERCENT!
How is that for "data dependency?"
Think of it this way, had it been based on 2006 prices, the March 2022 CPI would have registered a 5.0-5.2%. It would have forced the hand of the BSP to raise rates immediately!
But because the CPI is still at "4%," this provides the BSP some "leeway."
Ergo, the BSP resorts instead to playing around with the rhetoric of raising rates to 2.5%-2.75% by next year, then shifting to "pre-emptive action" from "the risk of being disanchored."
The point worth repeating, the rebasing of the CPI shows how authorities purposely and subtly eliminate "inflation" via statistics, allowing it to maintain the privileges derived from zero-bound rates.
Yes, the BSP is hooked or trapped or has become entirely dependent on low rates!
Importantly, the depth of the CPI data has become increasingly scarce, or the BSP seems to limit the span of coverage of the recent series (2000: from 1958 to 2011, 2006: 1994-2017, 2012: 2012-2021). The constriction of data provides the public with a narrower scope of its dynamic.
That is to say, the shorter the picture, the more limited the information available to the public for analysis.
And despite suppression of the CPI, there seems hardly any realization that reaching the 4% threshold has gained increasing frequency.
As it turns out, the March data (2018 series) marks the fourth episode since 2014 or in eight years!
And the present cycle remains in an uptrend after its trough in 2015! Under the 2012 price base, the March CPI could be at 4.4% to 4.6%. Since the 2018 series began only in 2018, it proves our point about the constrained panorama of the CPI.
Yes, while the central authorities seem engaged in the cooking of statistical data, the sustained presence of the 4% threshold and the 8-year uptrend exposes the accretion of economic imbalances.
How can an 8-year uptrend signify claims that higher CPI is "transitory?"
Aside from the base effects, the direct and implicit price controls and the embedded biases in surveys and various regulatory measures compound the distortions in the CPI.
Fiddling with statistics or the markets has unintended consequences. The truth will eventually be out.
II. Philippine Treasury Markets Screams "Stagflation"!
For years, the policies of the BSP seem to have "worked." But that's because the globalization of the EZ money policies of central banks bought time. That epoch has culminated.
Blaming the entirety of the present conditions on exogenous factors may be unwarranted. As noted above, the CPI trend itself represents a picture of mounting economic maladjustments.
Figure 2
Philippine Treasury markets continue to price in dislocations in the economy, defying the BSP's projections. While the CPI slowed, treasury traders sent yield spreads higher. (Figure 2, highest pane)
Or, treasury yields continue to climb regardless of the CPI announcements and the "transitory" gibberish by the establishment analysts.
The surging monthly spreads between 10-Year treasury yields and the BSP’s ON RRP have eclipsed the 2018 highs! (Figure 2, second to the highest pane)
While the BSP intercalated about a 50 to 75 bps increase in 2022, history tells us a different scenario.
To wit, when the spread hit a climax in 2018, it responded with 175 bps in 5-months!
Long story short, the BSP panicked! Will history rhyme soon?
Of course, the surging yield spreads cover the front end.
It is a different story with the back-end. Here, treasury traders see a severe slowdown in the economy. The 20-7 year spread has bounced off an inversion this week. (Figure 2, second to the lowest pane)
Said differently, treasury traders appear to be validating our prognosis of a "stagflationary" economy!
Again, several factors or objectives explain the recalcitrant stance of the BSP through artificially record low rates.
-Persistent bank dependence on the bailout policies of the BSP principally through repressed deposit expenses to depositors.
-A primary hope is that the balance sheet of the industry will improve from bank credit expansion.
-Another mainstream wish is that such bank credit expansion should boost the GDP.
-Authorities also expect higher public revenues from an elevated Nominal GDP.
-Inflating debt away functions as another implicit goal of the BSP, channeled through negative "real" rates (financial repression). Measured in the context of the difference between the Treasury 1-year yield and the CPI, policy-induced subsidies or transfers from savers to borrowers via the inflation tax expanded in March.
-To keep the import prices down, the BSP expects the "low" CPI data to bolster the peso.
III. The Push to Contain CPI via the USD-Peso: External Borrowing, and Other Reserve Assets
Fresh external borrowings recently strengthened the peso.
Figure 3
Inquirer, March 22: Despite a volatile global credit market, the Philippines has raised a total of $2.25 billion from its first offshore commercial borrowing in 2022, including $1 billion via the first-ever issuance of “green” bonds.
As explained last December:
That point made, the current flows of USD/FX from external debt help diminish pressures on the peso by kicking the proverbial can down the road.
See External Debt Growth Accelerates in Q3! Why This Uptrend Will Continue, December 19, 2021
The recent peak of the USD peso coincides with the USD 2.25 billion borrowings by the National Government. (Figure 3, upper window)
Again, aside from external debt, the BSP has relied on other reserves assets (ORA) to bolster its Gross International Reserves (GIR). ORA accounted for a 7.6% share of GIRs in February. GIR increased to USD 107.8 billion in March. (Figure 3, middle and lowest panes)
Authorities continue to resort to increases in balance sheet leverage to maintain the macro-economic facade partly embodied by the USD-peso exchange rate.
Sadly, a band-aid approach should worsen imbalances.
IV. March CPI: Rising Prices Squeezing Transports and Households!
Figure 4
The March CPI data of the Philippine Statistics Agency (PSA) provides some intriguing insights, though.
As previously mentioned, surging oil prices and price controls continue to exact a heavy toll on the transport sector. (Figure 4, upmost pane)
The March CPI data exhibits little relief for them. Paradoxically, how does a loss in purchasing power constitute growth?
The energy price spike also pushed higher the household utility CPI. (Figure 4, middle window)
Unless offset by a matching increase, a redirection of the significant share of household budgets to necessities entails reduced disposable household income.
What factors then should be the source of domestic demand?
How will the redistribution from households to energy and commodity producers benefit an economy structured on debt-financed consumption?
V. March CPI Enigma: Corn Prices Zoom 31%! But Food CPI Only at 2.6%, Is the Philippines Immune to Record World Food Prices?
Interestingly, while authorities tout domestic demand for the GDP, is food outside its realm?
How true is it that the FOOD and non-alcoholic beverage CPI remains depressed? Food and oil prices rose synchronically until October 2021, when they diverged. Why?
As an aside, the March CPI showed that corn prices jumped by a whopping 31.3% YoY!
But because corn comprised a puny weighting of .48% of the CPI basket, it was barely a factor. That is except for the consumers of corn. Amazing!
Figure 5
Based on the World Bank data, agricultural imports accounted for 13.86% of overall imports in 2020. Agricultural imports have been on an uptrend since 2006. (Figure 5, upper window)
In the meantime, based on the UN’s FAO, world food prices continue to etch fresh highs in March. (Figure 5, middle pane)
Surging food and energy prices have incited recent riots in Peru, Sri Lanka, and Pakistan.
The Philippines is one of the principal importers vulnerable to surging food prices, according to the Bloomberg/ZeroHedge. (Figure 5, lowest pane)
Despite the swelling import growth, how immune is the Philippines to the rocketing food prices abroad?
Is the sector’s domestic agricultural produce oozing with surpluses? Or have a deluge in imports overwhelmed demand? But how can the latter happen if there is a scarcity issue abroad?
But what if demand is the issue? What if profits, earnings, rent, income, wages, and jobs growth have not been adequate to sustain demand?
Businessworld, March 28: FEWER LOCAL companies expect to expand their operations even if they plan to hire more workers, according to a study by the Philippine central bank. Companies that plan to expand in the next 12 months fell to 25.6% from 26.8%, the Bangko Sentral ng Pilipinas (BSP) said in its Business Expectations Survey for this quarter.
If true, with little investments, how can the economy grow?
So is the low Food CPI a demand-based issue?
VI. March CPI: Profit Squeeze in the Manufacturing Sector!
And it goes beyond the consumers.
Figure 6
There may be an ongoing squeeze in the retail/wholesale margins. The Producer Price Index has been soaring faster than the CPI. In turn, the CPI-PPI spread turned NEGATIVE last February. (Figure 6, upper window)
According to the PSA, the Producer Price Index is a statistical measure of the average changes in average prices of a basket of goods as they leave the establishment of the producers relative to a base period.
One can construe the negative PPI-CPI spread as the inability of the retail outlets to pass-through such price increases to their customers, crimping their profit margins. That’s if these figures show a semblance of accuracy.
And manufacturers also seem to face the same predicament. But mainstream media construes this as growth!
S&P Global Markit, April 1: The S&P Global Philippines Manufacturing PMI® rose from 52.8 in February to 53.2 in March. Above the 50.0 nochange threshold, the headline index was the highest since December 2018, and signalled a solid improvement in Filipino manufacturing sector operating conditions…However, internationally the picture was negative. New export orders received by Filipino manufacturers declined in March, after expanding for the first time in seven months in February. The pandemic was a recurring reason for the latest downturn, although underlying demand conditions in external markets were reportedly subdued. Alongside the pandemic, geopolitical tensions added to the ongoing strain on the supply-side. Shipment delays due to port congestion and high fuel prices reportedly led to intensified pressures on supply chains in March, as lead times lengthened to a greater extent than in February. Amid material scarcity, rising fuel and energy costs, as well as supplier price increases, latest survey pointed to marked inflationary pressures across the Filipino manufacturing sector. Overall, input costs rose at the fastest pace on record. Reflecting greater cost burdens, firms also hiked their selling prices at the fastest rate since the series began. Furthermore, with concerns regarding future input price increases, manufacturers purchased additional inputs in March in an effort to stockpile and protect their margins. In terms of employment, workforce numbers dropped again in March as firms reported resignations and some instances of cost-cutting initiatives. Nevertheless, backlogs of work fell, signalling an alleviation of capacity pressures.
If this is about growth, why are workers continually being hemorrhaged?
And are the price increases of the sector's output commensurate with the record pace of rising input prices?
If not, similar to the transport sector, intensifying profit squeeze of the manufacturing industry explains the shedding of workers.
The economy is being enveloped by stagflationary forces one step at a time.
VII. Hiatus in Oil Price Surge: OECD Unleashes Strategic Petroleum Reserves, Chinese Economy Flags on Covid, and Property Woes
Finally, the recent pause in the surging international oil prices emanates from the release of strategic petroleum reserves (SPR) from several nations led by the US. (Figure 6 middle pane)
The depressing effects on oil prices should be temporary, given the low investments, low inventories, and massive disruptions in its trade and financial flows. (Figure 6 lowest pane)
A more critical factor in the reduced oil price pressures could be the slowing Chinese economy. Resurgent Covid-19 cases in the face of property woes may have been stymieing demand.
The increasing politicization of economic imbalances translates to more volatility and disorderly adjustments ahead.
Yours in Liberty,
The Prudent Investor Newsletters
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Nota Bene: The newsletter intends to apprise readers of the market conditions based on the information available at the time of the items’ writing, whose accuracy and timeliness of the issues concerned are subject to change without prior notice. Solicitation to trade is neither intended by the contents. In the meantime, the discussion of occasional positioning on particular issues are opinions of this author.
