Inflation is a form of taxation without representation. It is the kind of tax that can be imposed without being legislated by the authorities and without having to employ additional tax collectors—Milton Friedman
In this issue:
Ripping into the Popular Narrative, Philippine October CPI Rockets to 14-Year High, as Authorities Lose Grip!
I. The CPI Bull Market: Momentum Accelerates, Confirmed Reversal in its Long-Term Downtrend!
II. Authorities are Losing Grip of the Inflation Narrative: The Ever-Shifting Goalposts
III. The Inflation Blackhole: Rocketing Growth in Consumer Credit, Back-to-Back Record Credit Card and Salary Loans!
IV. The Inflation Blackhole: Credit Financed Demand from the Supply Chains!
V. Booming Credit Growth on the Backdrop of Diminishing Monetary Liquidity; PSEi 30 Propped Up by Bank Loans to the Financial Industry?
VI. Why Higher Rates for Longer
Ripping into the Popular Narrative, Philippine October CPI Rockets to 14-Year High, as Authorities Lose Grip!
Philippine authorities declared that statistical inflation, or the CPI, hit a 14-year high last October.
To contain it, the BSP signaled plans to match the aggressive rate hikes of the US Federal Reserve. Meanwhile, the executive department announced that it proposes to pursue subsidies and supply-side remedies to ease the public's burden.
Our thesis is that misdiagnosing its causal factors results in its mistreatment that only exacerbates the underlying economic pathology.
I. The CPI Bull Market: Momentum Accelerates, Confirmed Reversal in its Long-Term Downtrend!
Figure 1
The October CPI spiked by 7.7%, the highest rate since the 2Q of 2008!
In the eyes of a chartist, the recent trend breakouts only confirm its reversal from the previous secular downtrend.
Not only has the breakthrough been supported by the recent acceleration in momentum, but the long-term reversal patterns appear to be materializing.
First, the October headline CPI data reinforce the foray from the neckline of the reverse head and shoulder pattern. (Figure 1, upper pane)
Worst, the price pattern of CORE CPI (non-food and energy) has violated the 25-year downtrend, bolstered by a rounding bottom. (Figure 1, lowest window)
Above all, these statistics incorporate numbers undistinguished by the base rates applied. For instance, the recent methodology of the CPI has been calculated based on the 2018 rates. Had the 2012 base been used, the CPI would probably be around 8.1% to 8.2%. It would be much higher using the 2006 base rates.
Apart, authorities impose various degrees of price controls (e.g., SRPs, and price freezes).
And a media report suggests that there could be mounting resistance to it among retailers.
ABS-CBN News, November 3: (Translated to English) The group of supermarket owners is promoting the removal of the suggested retail price on basic and prime commodities monitored by the government. But the Department of Trade and Industry and many consumers immediately opposed it because the price could go up even more.
Price controls amplify the risks of shortages. Yet there may be other reactions by the marketplace.
Violations of trade controls may become rampant as black markets could emerge. Instead of hikes on controlled items, price hikes may spread to other products that are loosely regulated. Corruption will likely flourish. The quantity sold may shrink (shrinkflation), and the quality of supplies sold may deteriorate (value deflation).
The point of the above is that the actual rate of price increases understates the official data. People respond to the inflationary environment in many ways, which statistics barely incorporate.
And another thing. While it may be in a bull market in the CPI, no trend goes in a straight line. Besides, authorities can produce CPI numbers from thin air.
II. Authorities are Losing Grip of the Inflation Narrative: The Ever-Shifting Goalposts
Authorities provided several alibis, masqueraded as forecasts, for the current inflation crisis.
First, inflation was supposed to have been "transitory."
Because of its prolonged stickiness, the inflation pretext morphed into an entirely "supply chain" dynamic.
Next, the narrative mutated into a "strong US dollar problem," or local price pressures were allegedly "imported."
Today, the meme transformed into the disruptive effects of typhoons on food supply.
Ultimately, "peak inflation" became the next shibboleth. In turn, such would prompt a BSP "pivot," fostering the return of easy money.
Interestingly, authorities barely explain to the public why they have to raise policy rates, except to justify it to prevent a "second-order" transmission or to close the interest rate gap or differentials with the US.
If inflation represents too much money chasing a few goods, why should supply gridlocks cause general price increases when money is supposedly stable?
The frequency of moving the goalpost to fit the desired political anecdotes has become the dominant consideration.
Amazing.
In any case, despite all the maneuverings, authorities appear to have lost control over the inflation narrative. Still, the public holds a deep faith in them.
Economics has transmogrified into political Orwellian doublespeak.
III. The Inflation Blackhole: Rocketing Growth in Consumer Credit, Back-to-Back Record Credit Card and Salary Loans!
Despite rising rates, the BSP reported that banks maintained their credit standards in Q3.
It takes a few months for changes in monetary policies to take effect. The BSP began raising rates only last June 2022, which is probably why credit standards remain unchanged.
Besides, mounting losses in investments and the shielding of credit impairments through the extension of various relief measures have compelled banks to rely on lending to boost their financial standings.
For one thing, price caps on credit cards have boosted their usage, revealing a back-to-back surge.
To be sure, escalating price pressures have prompted many households to lever up their balance sheet to maintain their present lifestyles.
Figure 2
Backed by credit cards and salary loans, universal and commercial banks' consumer credit surged by 20.54% in September.
Credit card growth soared on back-to-back records on speed and scale, up by 26.1% to Php 507.4 billion. (Figure 2, upmost window)
Some financing companies see a deeper immersion of consumers in "buy now, pay later" schemes. We suspect massive regrets on both parties later.
The BSP has yet to decide whether to lift credit card subsidies.
Strikingly, September sustained a blazing streak in the universal and commercial bank's salary loan growth, which vaulted by 56.8%! (Figure 2, middle pane)
The salary loan data excludes employer-funded or other sources of financing, such as informal lenders.
Because consumer loans have outpaced production credit, its share of the total remains on an uptrend against the latter. (Figure 2, lowest pane)
This asymmetric growth exhibits the shift of bank credit expansion towards consumption.
Figure 3
In general, the accelerating bank credit expansion has bolstered the CPI. Bank credit grew 13.02% in September.
Together with debt and inflation-financed public spending/deficit, these inflationary forces will also be a factor in the GDP. (To be released this week)
As an aside, with fiscal deficits drifting close to record highs, public debt, blamed on the weak peso, soared to a new record at Php 13.5 trillion in September!
In this way, the mainstream narrative holds that the supply side is responsible for the CPI.
Paradoxically, domestic demand has always been the explanation for the GDP.
The blatant disparity in the mainstream's storytelling represents the Overton window. Yet, the public revers this as the holy grail of truth.
IV. The Inflation Blackhole: Credit Financed Demand from the Supply Chains!
Figure 4
To be sure, inflation also emanates from the demand of the supply chains.
The manufacturing sector provides lucid evidence of such transmission.
Bank manufacturing loans have also been firing up the Producer Price Index (PPI). Loans zoomed by 16.22% in September, which energized the PPI index by 7.4%. (Figure 4, topmost pane)
The PPI and bank loans have been on an upward streak since the 2H of 2021.
The narrowing margin between the CPI and the PPI suggests the increasing passthrough of producers and intermediaries to the consumers. The other explanation is that the suppression of the CPI has led to margin compression. The recent spikes in the CPI have reduced this spread. (Figure 4, middle pane)
The evidence of demand-driven inflation from a private sector survey, the S&P Markit PMI, November 2: Favourable demand conditions, alongside ongoing strain from supply-chain pressures resulted in an increase in work outstanding during October. While the rate of accumulation was only fractional, it marked the second successive month of expansion in backlogs of work. On the price front, both average cost burdens and charges levied continued to rise at sharp rates during the latest survey period. Moreover, the pace of input price inflation regained momentum after easing to a 20-month low in September amid reports of higher energy and material costs and an unfavourable exchange rate. Despite input costs increasing at a quicker rate, firms raised their charges at a slightly slower pace. The respective seasonally adjusted index fell for the second month in a row, to signal the softest uptick in output charges since February
So, are the mounting imbalances between input and output prices starting to hurt profit margins?
And has rampaging inflation been plaguing the margins of the retail industry too?
Businessworld, November 2: SUPERMARKETS are dealing with higher operating costs as pandemic restrictions ease, with an industry official saying that the pickup in sales is sometimes not reflected in the resulting profits, especially for smaller stores. (italics added)
Yet, with manufacturing at the fourth spot, bank credit to the real estate industry, finance and trade sectors have taken charge in September (month-on-month; million pesos). (Figure 4, lowest window)
These sectors accounted for an estimated 52% share of the banking system's credit portfolio in September.
Alternatively, the same industries are the primary beneficiary of monetary injections from the banking system and signify the demand side of inflation from the supply chain.
V. Booming Credit Growth on the Backdrop of Diminishing Monetary Liquidity; PSEi 30 Propped Up by Bank Loans to the Financial Industry?
Rising price pressures have not only elicited the ramping up of balance sheets by both consumers and enterprises, but they appear to have also drawn down bank savings.
Figure 5
M2 savings barely grew (.5%) in September! Some have shifted to time deposits (+12.4%). (Figure 5, topmost pane)
But despite the substantial bank credit expansion, liquidity growth rates have dropped!
The slump in savings and deposit substitutes (money market transactions) brought down M3 growth to a mere 5%, a low reached in April 2012 or a ten-year low!
This data corroborates the low volume turnover of domestic financial assets (equity, treasury and FX markets).
Authorities will likely explain this as part of their sopping-up operations via trades of BSP securities.
We see this instead as a combination of camouflaging mark-to-market losses of bank investments and the unpublished growth in credit delinquency profiles. The monthly update of the Financial Statements of the banking system published by the BSP is due next week.
As a reminder, although published in aggregates, liquidity is not distributed evenly. Those with access to bank credit or BSP money issuances are the first beneficiaries.
Liquidity then shifts to the counterparties of their transactions. The gradational diffusion produces lagging effects on prices.
Inflation affects individuals or enterprises most who are farthest from the source of money creation. In effect, inflation redistributes wealth from the average citizenry to those sectors directly connected with the banks or the BSP.
For instance, the surge in bank lending to the financial industry may have incited a dead cat's bounce or an oversold rally of the PSEi 30. Financial institutions may have resorted to margin trades to prop the index. (Figure 5, middle pane)
In the face of low volume, this rally creates a perception of financial easing within the industry, defeating the purpose of the BSP hikes. Nonetheless, by taking on undue market risks, the balance sheet of these financial institutions deteriorates when the rally runs out, possibly placing depositors in harm's way.
In any case, the marked downshift in liquidity conditions should be a source of concern.
Although liquidity creation energized inflation through the direct beneficiaries of credit expansion, the plunge in the money supply growth rate has more than offset this.
Unknown to most, the sharp slowdown in liquidity conditions is symptomatic of the intensification of credit stress in the financial system.
The flattening of Treasury spreads has been pointing to such entropy. Treasury spreads have been flattening, as seen from the various maturities relative to the 10-year Treasuries. (Figure 5, lowest window)
VI. Why Higher Rates for Longer
So while authorities may be correct that "peak inflation" may occur eventually as ramifications of the sharp slowdown in liquidity, any signs of the imminence of economic and financial risks should prompt officials to re-launch another massive rescue package.
With the 2020 blueprint in mind, the main focus of these measures will most likely center on liquidity infusions, supported by relief programs on banks and record fiscal deficits through handouts, subsidies, and possible nationalizations.
In this case, the reprieve in inflation will only serve as a springboard or a combustion fuel that re-accelerates the uptrend in street inflation.
For instance, even in this early phase of the inflation crisis, authorities have already announced several rescue packages.
In forcing the blame of inflation on the supply side, the political path-dependent response has been to throw money to the public, purportedly targeted at the underprivileged or the most affected groups.
Inquirer.net, November 5: The government will continue providing fuel subsidies or discounts to transport workers, farmers and fisherfolk, and cash transfers to the poorest Filipinos to soften the blow from a 14-year high inflation rate, which could still rise before the year ends, officials said on Friday.
That's just the appetizer.
This addiction to free lunches only entrenches the roots of inflation through the accretion of socio-economic and political imbalances.
The authorities know it. But they bullheadedly refuse to alter course because of the various self-interested political agenda.
And in the current climate, the natural response to failures from previous interventionism is to demand MORE interventions!
That said, one should expect an expansion of political controls (trade, currency, price, capital, wage and income, mobility, and others) to a broader swath of the activities.
Stagflation rules!
