Inflation is a tax. Money for the government. A tax that people don’t see as a tax. That’s the best kind, for politicians—Lionel Shriver
In this issue
First Order Inflation: Q2 2022 Sales of Listed Food Retailers Boom, Non-Food Retailers Increased Financed by Record Credit and Money Expansion
I. BSP: Rate Hikes Designed to Control "Second-Round" Effects or Demand
II. First Order Inflation: Q2 Sales of Listed Food Retailers Soared Defying the Unperturbed Restaurant CPI
III. First Order Inflation: Non-Food Retailers Outperform Representative Segments of CORE CPI
First Order Inflation: Q2 2022 Sales of Listed Food Retailers Boom, Non-Food Retailers Increased Financed by Record Credit and Money Expansion
I. BSP: Rate Hikes Designed to Control "Second-Round" Effects or Demand
When the BSP commenced its unprecedented speed of policy rate hikes last May, they noted that this action was necessary to control the "second-round" effects.
In their report highlight, they noted that (bold added)
"The timely increase in the key policy rate, based on the latest outlook on inflation and economic growth, is expected to help slow down further price increases from second-round effects and manage inflation expectations." (BSP, 2022)
In their footnote, they further elaborated:
"Second-round effects happen when inflation pressures from the supply side, such as higher oil prices, remain persistent leading to increase in prices and wages in the country that affect demand."
Monetary inflation rather than dislocations of the supply side are the fundamental cause of widespread and sustained price increases in the economy.
Note that a price of a good is the amount of money paid for the good. If the stock of money in an economy increases while the amount of goods remains unchanged, more money will be spent on the given amount of goods—i.e., prices will increase—all other things being equal.
Conversely, if the stock of money remains unchanged, it is not possible to spend more on all the goods and services; hence no general rise in prices is possible, all other things being equal. By the same logic, in a growing economy with a growing amount of goods and an unchanged money stock, prices will decline. (Shostak, 2022)
Here are some pieces of evidence.
II. First Order Inflation: Q2 Sales of Listed Food Retailers Soared Defying the Unperturbed Restaurant CPI
Figure 1
Philippine authorities attributed the recent surge of the headline CPI to rising prices of food and energy.
In their data, the Food segment of the CPI surged in the 2Q of 2022. However, ironically, the Restaurant CPI even steadied (at 2.8% for three consecutive months!). (Figure 1, topmost pane)
This divergence must have led to a considerable profit margin squeeze for the restaurant outlets as input prices rose higher.
But the financial performances of listed restaurant outlets stated otherwise.
Instead, many food retailers posted a surge in sales in Q2.
So aside from Jollibee, major food retailers such as McDonald's, Shakey's Pizza, and Fruit generated robust sales growth as measured in the peso trend. Meanwhile, sales of Max's group trailed the industry. (Figure 1)
It is unclear what proportion of the increases in sales constituted the pass-through effect from higher input prices.
Further, the Restaurant CPI should have registered increases in demand and price hikes. Instead, that move came in the 3rd Quarter.
Moreover, despite rising food prices, profit margin squeezes were almost inexistent in Q2. Consumers instead absorbed the price hikes by the major food retailers!
Figure 2
The Industry's GDP even registered an explosive 25.7% (current) or 20.7% (real) in the 1H! (Figure 2, topmost pane)
How is this supposed to have been a "second-round" effect?
How can this happen without monetary inflation?
Though explained elsewhere, into the climax of the national elections, cash in circulation (in pesos) reached a new record in Q2. Meanwhile, universal and commercial banks reported back-to-back milestones also in credit card usage in Q2! (Figure 2, middle and lowest pane)
Salary loans emerged next in Q3.
As an aside, the loss of purchasing power, expressed by negative income/wages, has stirred many to use credit extensively to augment incomes. In the face of rising rates, many must have also tapped credit cards to take advantage of the BSP cap on interest rates at the expense of the banking system. Nonperforming consumer credit will likely swamp the banking system.
That is to say, the election spending bonanza and the accelerated use by consumers of credit cards financed the recent spending spree.
But the thing is, the disconnect between CPI and the financial activities of food retailers, which tempered the statistical inflation, helped boost the GDP of that period.
III. First Order Inflation: Non-Food Retailers Outperform Representative Segments of CORE CPI
Figure 3
The disparities between the CPI and the financial performance of listed firms have been evident also in the non-food retailers.
Or, the actual sales results of non-food retailers were disconsonant with some of the segments of the CORE CPI.
Prices of CPI components like personal and miscellaneous goods and services, clothing and footwear, household furnishing, equipment, and maintenance barely rose in Q2.
Though it was a mixed performance of the listed retail non-food firms, in aggregate, industry sales improved but were less spectacular than the food retailers.
Except for the record-breaking run of Wilcon and Philippine Seven, the aggregate sales in pesos of the eight listed retailers registered a modest improvement too. The industry's sales jumped 27.7% YoY primarily due to the low-base effect. The eight listed firms are SM Retail, Puregold, Robinsons Retail, Metro Retail, SSI Group, Philippine Seven, Wilcon, and AllHome. But trend-wise, their collective sales remained 10% below 2019 levels.
Aside from the base effects, distinguishing between improvements in sales from price hikes relative to unit volume was ambiguous.
Or, it wasn't clear how much of the sales increases were from price hikes than from volume sales.
Also, the industry's profit margins were barely affected by the imbalances from the PPI-CPI spread, implying that the consumers were unfazed by or glossed over the price hikes of retail outlets.
Needless to say, the CPI didn't manifest the demand exhibited by the revenue growth of the non-food retail outlets.
Again, how is the performance of non-food retailers a function of "second-round" effects?
Instead, the performances of listed food and non-food retail industries in Q2 indicate that monetary-powered demand magnified the supply-side dislocations that spilled over to prices. The feedback loop effect.
Second-Round effects? Has it not been a wonder why the BSP had to raise rates at an unprecedented speed?
Paradoxically, the revenue share of the eight listed firms to the retail current priced GDP (NGDP) declined anew in Q2, which reinforced its three-year downtrend. This data suggest that non-listed retail firms outshined the listed peers despite the many closures brought about by lockdown policies from 2020 to 2021.
How valid is the notion from this data that the nationwide sales of sari-sari stores and smaller retail outlets trumped the titans in that period, especially when the former category was devastated by the lockdown policies of 2020-21?
August Vehicle Sales "Doubled": Bullish for the Auto Industry?
Figure 4
News articles like this signify a head-scratcher.
Businessworld, September 15: SALES OF VEHICLES in the Philippines nearly doubled in August, driven by strong demand for commercial vehicles as Congress considers a measure removing the excise tax exemption for pickup trucks. According to a joint report by the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) and Truck Manufacturers Association (TMA), local vehicle sales surged by 90.5% to 30,185 units in August, from 15,847 units sold in the same month last year. Commercial vehicle sales more than doubled to 23,452 in August, accounting for 78% of the month’s sales. This was mainly due to the 106% rise in sales of light commercial vehicles to 17,973 units and 210% increase in sales of Asian utility vehicles (AUVs) to 4,589 units. Sales of passenger cars also rose by 38% to 6,733 units, accounting for 22% of the total in August…However, CAMPI earlier warned sales of commercial vehicles will take a hit if Congress approves a measure removing the excise tax exemption for pickup trucks. In August, the House Ways and Means Committee approved the fourth package of the Comprehensive Tax Reform Program which included the elimination of the excise tax exemption for pickup trucks.
Sure, vehicle sales in August "doubled" compared to last year. But that's one side of the story. The low-base effect represented the unmentioned portion which resulted in the "doubling" of sales. Lockdowns still affected the comparative base period, which magnified last month's sales.
And yes, while vehicle sales bounced to the 2019 levels in August, it remains 12.4% below the November 2019 highs.
Furthermore, August sales remain 33.7% below the December 2017 acme, where in anticipation of the TRAIN tax hikes, many scampered to acquire a vehicle.
Global oil prices may be heading down today in anticipation of a sharp economic slowdown. But because supplies remain tight, a recovery or a loosening of financial conditions by the world's central banks or an escalation of geopolitical conflict/tensions may reverse the present trend or send oil prices higher again! (Figure 4, lowest pane)
Are vehicle owners immune to elevated oil prices? Are their incomes and earnings growing faster than the energy price inflation rate?
Additionally, since credit funds most vehicle purchases, how will rising rates affect consumer and commercial vehicle sales? And how will it affect the present owners of vehicles who bought on credit?
What's more, prices of pick-up trucks will substantially increase should the fourth package of TRAIN be implemented that repeals its excise tax exemptions.
How are high oil prices, rising credit rates, and increased taxes bullish for the industry?
After the plunge in vehicle unit sales from the imposition of TRAIN, rising rates capped its performance in 2018. So will history repeat?
Finally, an ominous rising wedge likewise plagues CAMPI's unit sales chart.
For the consensus, any positive number represents "growth."
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REFERENCES
Bangko Sentral ng Pilipinas, Report Highlights, Monetary Policy Report - May 2022, May 19, 2022, bsp.gov.ph
Dr. Frank Shostak, The Fed Is Wrong to Make Policies Based upon the Phillips Curve, September 15, 2022, Mises.org
