Supply chains are interwoven and when problems occur they can feel linear at the time but each break in the chain creates multiple more outcomes so you have to get comfortable with small problems having exponential impacts—Ben White
In this issue
March CPI Declines as Pork Price Controls Suspended, Global Inflation Soars!
I. March CPI’s Decline: No Trend Moves in a Straight Line
II. Policy Failure: Meat Price Controls Suspended, Tariffs Cut to Pave Way for Imports as Global Food Price Soar!
III. Price Pressures from Supply Bottlenecks Spreads; Who To Believe: Markit or the PSA?
IV. Global Inflation To Exacerbate Domestic Price Pressures!
V. Inflation Tax: Negative Rates Hit Record! To Ward off Deflation, the BSP will Keep Infusing Liquidity
VI. Philippine Treasury markets: A Coming Hiatus in the CPI Surge? Rising Short-Term Rates Increases Bank and Financing Risks
March CPI Declines as Pork Price Controls Suspended, Global Inflation Soars!
From the Businessworld (April 7): INFLATION eased in March after five straight months of acceleration, as food prices increased at a slower pace, the government’s statistical agency reported on Tuesday. Preliminary data from the Philippine Statistics Authority (PSA) showed headline inflation at 4.5% in March, slowing from the year-on-year rate of 4.7% in February. However, this was still above the 2.5% recorded in March last year.
As previously discussed, the mounting risks of stagflation—an environment characterized by a stagnating economy, high unemployment rates and disruptive inflation—can be identified through six factors.
These are:
1. Momentum and Trend
2. The massive disruption of the division of labor and Say’s Law.
3. The BSP’s inflation tax.
4. The BSP’s policy of inflating asset bubbles.
5. Philippine Treasury markets have been saying inflation ahead!
6. Increased fragility of the banking system from High CPI.
Nota bene: This author does not believe in the accuracy of the CPI simply because averaging different goods as potatoes, cars, laptops, and Netflix subscription fees represent a ridiculous and impractical exercise, and thus, do not reflect a realistic demonstration of price changes experienced by individuals writ large (community). Furthermore, since the CPI is a political-economic sensitive number, as per the PSA, "it is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy", hence to advance the political-economic agenda of the incumbent such statistics are vulnerable to interventions.
I. March CPI’s Decline: No Trend Moves in a Straight Line
1. Momentum and Trend
Figure 1
There is barely an impact from the recent marginal pullback of the statistical inflation on its momentum and trend dynamics.
While it may be true that the pace of increase of the headline CPI “accelerated” in the last 5-months, the current CPI cycle has been rooted from its nadir in October 2019 or 17 months ago! (Figure 1, topmost pane)
And since the October 2019 bottom remains higher than the trough, marked by deflations in September-October 2015, the secular cycle of the CPI is over 6-years old!
The consensus has persistently peddled the word “transitory” to rationalize the elevated CPI. But the reality is exhibited by the trend and momentum of the National Government (NG) constructed inflation barometer.
What’s more, it is not just the food and energy, the CORE segment of the CPI index shares the same momentum and uptrend.
Also, the headline CPI at above 4% has occurred THREE times or in the last 8 years or since 2013.
Transitory, eh?
In any event, it is a paradox for the NG to put a positive spin on an index created, maintained, and published by them!
And it is not unreasonable to suggest that such figures, derived from surveys, understate the actual conditions considering such statistics influence interest rates, prices of financial assets, the peso, welfare payouts, labor contracts, and more.
And not only as a deflator for the calculation of the GDP but the CPI, according to the PSA, is also used “as basis to adjust wages in labor management contracts as well as pensions and retirement benefits”
That said, the CPI statistics have a subtle built-in political component.
II. Policy Failure: Meat Price Controls Suspended, Tariffs Cut to Pave Way for Imports as Global Food Price Soar!
2 The Massive Disruption Of The Division Of Labor And Say’s Law.
From the Inquirer (March 29): The current commodity price spikes in the Philippines are not the type caused by economic expansion but by supply problems which do not merit monetary response, according to the head of the Bangko Sentral ng Pilipinas (BSP). On Monday (March 29), BSP Governor Benjamin Diokno said the country is far from experiencing this phenomenon called “reflation”, since higher inflation seen in recent months were the result of a “transitory” mess in supply of a narrow range of agricultural products and an increase in oil prices worldwide.
Indeed, supply bottlenecks have been a crucial factor in the present elevation of the CPI. But what caused such supply disruptions?
To be sure, the African Swine Flu represents a pivotal force in the present reduction of pork supply. Further, natural calamities as the Taal volcano eruption in January 2020 and typhoons Rolly and Ulysses contributed to some dislocations.
But what about displacements from rigid mobility restrictions, price controls, and the selective bailouts underwritten by the NG on several sectors, partly financed by the BSP’s printing press?
Did the price controls on meat products work?
From the Inquirer (April 7): National Statistician Dennis Mapa said low supply kept pork prices high despite the government-imposed cap in Metro Manila. Pork prices climbed 50 percent year-on-year and inched up 1.8 percent month-on-month in the National Capital Region last March. Outside Metro Manila, pork prices rose 50 percent year-on-year while declining 1.6 percent month-on-month. Mapa said beef prices also increased 20 percent year-on-year in Metro Manila and by 14 percent in the provinces. Chicken prices likewise rose 12 percent year-on-year in NCR and by 13 percent in the provinces last month, Mapa added.
So the juggling of supplies resulted in the spreading of price pressures to the provinces, which came about as expected.
Nonetheless, high pork prices only shifted demand partially to other meat products leading to a general price increase in the segment, which again occurred as anticipated.
To solve the supply problem in the NCR, national authorities have been promising to send surplus stock from provinces in the South. But of course, doing so means that the same provinces will be at risk of incurring shortages. That’s because those surpluses are intended only for local demand.
…
And unless there are sufficient surpluses, price pressures are likely to diffuse into other agricultural products as excess demand corrode on its marginal surpluses.
In an implicit admission of the failure of price controls, authorities ceased its extension and instead implemented an SRP and cut tariff rates to accommodate more pork imports.
If price controls fizzled, then why the SRPs, if not designed for political signaling (must be seen as “doing something”)?
And what are the longer-term ramifications of the current disruptions in the supply network caused by such price controls?
And expecting temporary imports to solve current supply woes could be seen as wishful thinking.
Why? Because surging global food prices have been on a streak! (Figure 1, middle pane)
From UN’s Food and Agriculture Organization (April 8): Global food commodity prices rose in March, marking their tenth consecutive monthly increase, with quotations for vegetable oils and dairy products leading the rise, the Food and Agriculture Organization of the United Nations (FAO) reported today. The FAO Food Price Index, which tracks monthly changes in the international prices of commonly-traded food commodities, averaged 118.5 points in March, 2.1 percent higher than in February and reaching its highest level since June 2014…The FAO Meat Price Index also rose, by 2.3 percent from February, with imports by China and a surge in internal sales in Europe ahead of the Easter holiday celebration underpinning increasing poultry and pig meat quotations. Bovine meat prices remained steady, while ovine meat prices declined as dry weather in New Zealand led to farmers offloading animals.
Various pork prices have been spiraling upwards in the US too! (Figure 1, lowest pane)
Why? Because surging global food prices have been on a streak.
And if the surge in global food prices is sustained, augmenting domestic supply with affordable prices through the import channel will be reduced.
And while the last two years saw the acceleration of global food prices, such dynamics come in the light of long-term nominal (since the 1960s) and real (since 2000) trends.
III. Price Pressures from Supply Bottlenecks Spreads; Who To Believe: Markit or the PSA?
While the official narratives focus on food, pressure on street prices appears to be spreading to the other segments of the Philippine economy.
Figure 2
Well, that’s according to Markit’s PMI, which reported a dip in the manufacturing sector’s modest expansion last March.
But aside from the continued shedding of manpower, their report highlighted the risks of soaring input prices, which continued to dominate manufacturing dynamics.
From Markit (April 5): Price pressures continued to build in March, with reports of material shortages often mentioned. Firms consequently raised their charges, with the overall rate of output price inflation quickening to the strongest in over two years…Goods producers reported a marginal rise in new order volumes during March. That said, the rate of expansion softened from that seen in February and was weaker than the long-run average. Meanwhile, foreign client demand was especially subdued during the month as restrictions linked to the coronavirus disease 2019 (COVID-19) pandemic persisted in abroad markets. An overall rise in new work led Filipino manufacturers to increase their output, and at an accelerated pace. The rate of growth was moderate but was the joint-fastest since June 2019. Some firms noted efforts to stockpile finished goods amid expectations of greater demand in the months ahead. A number of companies were hampered by resignations during March, which led to the thirteenth consecutive month of contraction in employment. Encouragingly, the latest fall was the softest in the aforementioned sequence and only marginal. Firms were nevertheless still able to clear their backlogs of work, with the rate of depletion in outstanding business sharp overall. Supply chain pressures continued to build in March as lead times for inputs lengthened. Panellists continued to cite freight delays as driving the deterioration in vendor performance, with delivery times lengthening markedly. As such, firms sought to increase their inventory holdings to minimise future shortages due to delays. (Figure 2, upmost window)
The perception of growth described as modest expansion are instead manifestations of price inflation or the money illusion. Why the continued labor retrenchment if producers foresee the sustainability of progress?
And if the Markit survey is accurate, then the production rush has been intended to minimize shortages and protect eroding margins from further price increases than from normalization.
Strikingly, the PSA has an opposite view (March 31): “The Value of Production Index (VaPI) for manufacturing posted a downturn in February 2021 with an annual rate of -46.5 percent, from its previous month’s annual drop of -16.7 percent. The February 2021 figure was the fastest decline since October 2020. In February 2020, the annual decrease of VaPI was recorded at -2.6 percent… The Volume of Production Index (VoPI), likewise, continued to drop at an annual rate of -43.6 percent in February 2021. This decline was faster than the -12.0 percent decrease registered in the previous month. In contrast, the annual rate for VoPI in February 2020 increased by 0.4 percent.” (Figure 2, middle pane)
Input prices or the Producer Price Index deflated by 5.3% in February, its 23rd month, resonant with the length of the manufacturing recession.
Markit’s March data shares the same characters as its February report.
The difference between the reports of Markit and the PSA is stunning. It reminds us of the late US President John F. Kennedy’s comment on the divergent reports from his two advisers (Krulak-Mendell missions) on Vietnam:
"You two did visit the same country, didn't you?"
So who to believe, Markit or the PSA?
In the meantime, merchandise trade turned green last February, the first growth in 13-months. While import growth was close to flat, up by a paltry 2.7% after 20 months of decline, exports slipped by 2.3%, which resulted in a trade deficit of USD 2.293 million. (figure 2, lowest pane)
What has been the source for its exports, with production sharply down? Transshipments, or re-exports?
Since the supply-side, represented by manufacturing and imports, has stagnated for about 2 years, what has been the source for the local economy's provisions?
The PSA’s industrial production report does not jibe with its merchandise trade figures.
Nevertheless, neither growth of domestic output nor imports indicate sufficient supply.
And more instabilities on the production-distribution flows can be expected from the recent round of ECQs.
For instance this report from the CNN (April 10): Two key truckers' organizations in the country are calling on authorities to once again allow the unimpeded movement of cargo vehicles in lockdown areas, following the implementation of checkpoints. Heightened checks on cargo vehicles such as closed vans and trucks were imposed after a truck was caught loaded with passengers in between Camarines Sur and Quezon province last April 4. The incident drew a prompt response from the Transportation Department and the police. The Confederation of Truckers Association of the Philippines (CTAP) and the Inland Haulers and the Truckers Association (INHTA) said random spot checks may affect mobility and the way they do business.
IV. Global Inflation To Exacerbate Domestic Price Pressures!
Figure 3
Again, as global central banks infuse record amounts of liquidity, shelter-in-place policies worldwide have resulted in the buildup of shortages and price pressures.
From IHS Markit (April 8): Inflationary pressures have risen worldwide to the highest for at least a decade as a surge in demand is accompanied by widespread supply constraints in the provision of goods and services. The survey data point to a steep rise in consumer price inflation across the world in coming months, most notably in the US, where prices charged for consumer goods rose especially sharply. The input prices index from the JPMorgan Global Composite PMI, compiled by IHS Markit from its proprietary business surveys, rose to its highest since August 2008 in March, indicating by far the steepest rate of input cost inflation seen since the global financial crisis. Costs have now risen globally over the past ten months, having fallen sharply in April and May 2020 as demand collapsed amid the initial lockdowns due to the coronavirus disease 2019 (COVID-19) pandemic, with the rate of inflation rising markedly since the turn of the year. The increase in costs has fed through to the steepest increase in average selling prices for goods and services for over a decade, the recent rate of increase greatly exceeding anything seen since comparable data were first available in late-2009. (Figure 3)
That said, a sustained ramping up of real economy prices in the world will likely aggravate domestic price pressures mainly through the currency (lower peso) and merchandise trade (higher import costs and trade bigger deficits) channels.
This stirring excerpt from Bloomberg/Yahoo Finance news (April 6) showcases the above: Philippines Finance Secretary Carlos Dominguez said the government plans to sell dollar bonds before interest rates rise, and will look for new revenue sources and ways to wind down debt next year. “We will tap the U.S. bond market before rates skyrocket,” Dominguez said in an interview with Bloomberg Television’s Kathleen Hays on Tuesday. He didn’t provide more details on the debt plan. The Philippines plans to borrow a record 3 trillion pesos ($62 billion) from domestic and international sources this year, according to budget data presented to Congress in August. Last week, it raised 55 billion yen ($500 million) through a 3-year Samurai bond sale.
Does this look like something transitory?
That said, the next round of rapid price increases in the Philippines may be sparked even by a minor improvement in demand in the face of mounting supply dislocations.
V. Inflation Tax: Negative Rates Hit Record! To Ward off Deflation, the BSP will Keep Infusing Liquidity
3-4. The BSP’s Inflation Tax and The Policy Of Inflating Asset Bubbles
Figure 4
From the BSP (March 31): Preliminary data show that domestic liquidity (M3) rose by 9.4 percent year-on-year to about ₱14.0 trillion in February 2021. This was faster than the 8.9-percent (revised) growth in January. On a month-on-month seasonally-adjusted basis, M3 increased by 0.1 percent. Domestic claims expanded by 5.6 percent year-on-year in February from 4.9 percent (revised) in the previous month due mainly to the faster growth in net claims on the central government, even as bank lending to the private sector remained tepid. Net claims on the central government grew by 47.1 percent in February from 39.0 percent in January, owing partly to the sustained borrowings by the National Government.
From the BSP (March 31): Preliminary data show that outstanding loans of universal and commercial banks (U/KBs), net of reverse repurchase (RRP) placements with the BSP, fell by 2.7 percent year-on-year in February after declining by 2.5 percent (revised) in January. On a month-on-month seasonally-adjusted basis, outstanding universal and commercial bank loans, net of RRPs, increased by 0.2 percent.
The current round of higher CPI is a result of a transitory mess in supply, said the BSP Chief, and not from reflation.
The reflation referred to here is the demand boost on the economy from bank credit expansion.
But since bank credit is in deflationary territory, the BSP’s net claims on central government (QE) functions as the principal source of the money supply. (Figure 4, upmost pane)
Such demand slack from deflationary bank credit serves as justification for the BSP’s incumbent loose monetary stance.
While there may be some truth to such pretexts, the reality is that the BSP is using financial repression through the inflation tax to subsidize creditors by transferring resources from the saving public to them.
For instance, the negative spread between the PDS 1-year yield relative to the published CPI is at a record. (Figure 4, middle pane)
Money supply growth bounced in February from eight consecutive months of decline since peaking in May 2020. (Figure 4, lowest pane)
Two weeks ago I cited this ADB survey which stated that “the biggest share of households, or 85 percent of respondents, said they had experienced financial difficulties amid the pandemic.” The same survey noted that “the situation is also serious in the Philippines, with less than 30 percent having enough resources to cover necessary expenditures for more than a month.”
I also referred to the Senate hearing wherein more than 1,200 big companies appealed to the NG for a Php 625 billion bailout.
Ceteris paribus, or all things being equal, these forces have offset the historic Php 2 trillion injections of the BSP by contributing to the diminishment of money supply growth, thus, are deflationary.
A slowdown in money supply growth typically presages a decline in the CPI with a time lag.
But various risks in the banking system will be amplified by credit deflation, which will likely intensify liquidations and declines in collateral values, the pillar of bank lending.
Further, implicit subsidies to NG and the banking system channeled through the current Financial Repression policies will be overturned as real rates turn positive.
Because the BSP can't afford such risks, this is unlikely to happen.
Despite recent denials, the BSP can be expected to provide lifeline support to the financial system through more liquidity infusions, which will likely be justified as supporting public works or social welfare expenditures.
Nevertheless, because the two-week ECQ will likely dampen demand similar to last year, reinforcing forces of deflation, the CPI may continue to slow in April.
But again, while supply gridlocks remain a core issue, other factors like the ramping up of fiscal expenditures may fuel some demand growth in select sectors, which should keep the CPI elevated.
VI. Philippine Treasury markets: A Coming Hiatus in the CPI Surge? Rising Short-Term Rates Increases Bank and Financing Risks
Figure 5
5-6. Philippine Treasury markets as CPI Indicators, Fragility of the banking system from High CPI.
Following the footsteps of its US contemporary, domestic BVAL 10-year Treasury yields pulled back last week. (Figure 5, topmost pane)
The backpedaling of bond yields transpired as yields of BVAL Treasury bills moved up. Such divergence has led to a slight narrowing of spreads.
That said, the Treasury market appears to smell a downdraft in the CPI.
Nevertheless, because the widening of spreads remains on an uptrend, last week’s pullback can be deduced as a breather, a hiatus, or even transitory. (Figure 5, middle window)
And climbing yields of T-bills translates to costlier short-term/bridge financing, which if sustained, spells trouble to small and medium enterprises and heavily levered big companies.
And if borrowers are under stress, so are the lenders.
Yes, even as the CPI rates accelerated, Net NPLs have declined from December 2020 to January 2021. If credit delinquencies have indeed been easing, why has bank credit been shrinking?
Regulatory and operational reliefs may be responsible for the recent improvements. Also, it is not improbable for banks to be playing around with their balance sheets or cooking their books.
The BSP is about to publish the banking system’s updated Financial Statements next week.
We should have a better view of the impact of the CPI on the fragile state of the banking system.
In all, the deepening centralization of the domestic economy only exacerbates the risks of stagflation.
