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The 56-Year Philippine Inflation Cycle, December Headline and Core CPI Reinforce the Return to the Age of Inflation

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When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear—Thomas Sowell



In this issue



The 56-Year Philippine Inflation Cycle, December Headline and Core CPI Reinforce the Return to the Age of Inflation


I. Is the Worst Over? The Political Spin on Inflation


II. Will History Rhyme? How the GDP Responded to the 2008 CPI and Policy Rates


III. The Completion of the 56-Year Inflation Cycle


IV. The Age of Inflation: The Three Waves of a Subcycle


V. The Era of Disinflation.  Inflation and Disinflation’s Impact on the GDP and the Main Street


VI. Why Inflation is Embedded into the Financial and Economic System? 


VII. December Headline and Core CPI Reinforce the Return to the Age of Inflation


VIII. Demand Side Inflation: Near Record Public Spending, Historic Consumer and Financial Industry Bank Loans!



The 56-Year Philippine Inflation Cycle, December Headline and Core CPI Reinforce the Return to the Age of Inflation



Has inflation peaked?   Even if true, it should represent a temporary one.  The public appears to have forgotten the cyclical nature of inflation.



I. Is the Worst Over? The Political Spin on Inflation



Sure, past performance doesn’t guarantee future returns.  But the adage “history may not repeat itself, but it often rhymes” has epistemic value too. 



In finance, their vital difference stems from comparing the end itself, the periodical payoffs/rate of returns, and the means used to attain an end that resulted in a semblance of patterns in outcomes. 



Here is the thing.   Using historical accounts, how relevant are the mainstream’s optimistic prognostications of the economy and financial markets for 2023?



For instance, authorities recently declared that “the worst is over.”  But what is the basis for such an assertion?  Because recent activities represent the norm? 



Yet, when people reason from price/numerical changes, such declarations are likely prone to fallacies. 



Could their “economic” forecasts have tacitly been about political agenda? Or is the mainstream selling “politics” cloaked with economic parlance?



In doing so, authorities attempt to assuage the public by saying what the public wants to hear.   



In conjunction, “animal spirits” play a crucial backbone of their brand of economics.   They believe that with enhanced confidence, the public will open their wallets and spend.



But how effective is putting a political spin on economic issues?


II. Will History Rhyme? How the GDP Responded to the 2008 CPI and Policy Rates



To begin with, the Philippine government’s measure of inflation, the CPI, recently spiked to reach a 14-year high. Aside, BSP policy rates also rose to 2008 levels. 



Using history as a guide, how did the domestic economy react under similar conditions?



Figure 1


The 2008 CPI spike, aggravated by the contagion effects of the US-centered Great Recessionpulled lower the GDP in 2009. (Figure 1, upper window)



At the brink of a recession, authorities embarked on a combination of measures to ease credit through BSP rate cuts and implement the Economic Resiliency Plan or a fiscal bailout package worth Php 330 billion consisting of tax cuts and increased welfare and infrastructure spending. 



Back then, a critical ramification of the 1997 Asian Crisis was to cleanse the balance sheet of the private and public sectors.  As such, the stimulus resulted in a sharp rebound of the financial markets and the economy.



In contrast, current economic and financial conditions have become more fragile than in the years that led to the Great Recession.



Aside from domestic vulnerabilities, the global economy and financial markets have been reeling from intense disruptions caused by the overlapping and entwined amalgamation of critical forces, which includes:



-the spikes in inflation and the subsequent credit tightening measures by central banks that have popped unprecedented asset and credit bubbles,


-the kinetic war in Europe and the risks of expanding the theater of war in different places (Taiwan, Serbia-Kosovo, Azerbaijan-Armenia, Greece-Turkey, Iran and the Middle East, among others),


-expanded protectionism covering the economic, financial, and monetary spheres,  


-the intertemporal repercussions of supply-side dislocations and capital losses from the unprecedented responses to the pandemic and, 


-the realignment of spheres of influence by the competing global hegemons



In this line, the sagacious Zoltan Pozsar of Credit Suisse identifies ‘six’ tension points in the geopolitical sphere that should impact the global economy unfavorably.



I identified six fronts (meaning “hot wars”) in “macro-land” (a “cold place”) where Great Powers were going “at it” in 2022: the G7’s financial blockade of Russia, Russia’s energy blockade of the EU, the U.S.’s technology blockade of China, China’s naval blockade of Taiwan, the U.S.’s “blockade” of the EU’s EV sector with the Inflation Reduction Act, and China’s “pincer movement” around all of OPEC+ with the growing trend of invoicing oil and gas sales in renminbi. Those were six geopolitical events in one single year, that is, a geopolitical curveball to deal with every two months (Pozsar, 2023)



More aggravations could be the highlight of 2023.



The intensifying cumulative tensions have stretched the global economic uncertainty index to an unparalleled degree. (Figure 1, lower window)



As such, the global economy teeters with a recession, with a third of the global economy at risk, predicts the head of the IMF.



That is to say, the proverbial “Damocles sword” of stress and tensions hangs over the global financial markets and economy through multiple epicenters!



And considering the underlying fragilities of a debt-based global finance and economy, such magnifies the risks of contagions.



So, will the global shades of 2008 influence or affect the Philippine economy?



III. The Completion of the 56-Year Inflation Cycle



When it comes to the Philippine inflation cycle, the mainstream silence on this resembles a black hole.



Instead of “transitory,” inflation operates on several “waves” that can last for decades.  Its underlying “subcycles” represents a composite of its defining age.



For instance, as shown above, in the eon of disinflation, the Philippine CPI rose from 2003 and climaxed in 2008—representing a two-wave, five-year countercyclical dynamic. 


And that was only a sample.


Figure 2


In the context of the inflation cycle, the CPI has operated in two divergent eras during the last 56 years. (Figure 2, upper window)



The first is the inflation era of 1958 to 1986 (28 years).



The second is the disinflation age of 1987 to 2015 (28 years). 



As a side note, the term “disinflation” represents a smokescreen.  Yes, the rate of price increases slows, but it still strips the people of the purchasing power of their currency.  



And this represents the boiling frog syndrome:  A frog put into boiling water would jump out to try to save itself, whereas a frog placed into gradually heated cool water will be boiled alive.



Eerily, the “full” 56-year cycle represented an evenly split (28-year) period. 



IV. The Age of Inflation: The Three Waves of a Subcycle



If my crystal ball works, 2015 or 2016 could mark the turning point toward the second inflation era.



Why the inflection point of 2016? (Figure 2, lower pane)



The CPI began its upswing seeded from its crucial trough in 2015, wherein the CPI registered two months of deflation.



And subsequently, the energized momentum from 4Q 2019 (second wave) onwards prompted a breakout from its critical resistance levels.



Should the CPI break beyond the August 2008 high of 10.5%, it would reinforce the secular uptrend. 



Nevertheless, subcycles have defined the age of inflation.  And the underlying subcycles were characterized by three volatile “waves” of inflation. 



From an annual perspective, monthly volatilities interspersed the uptrend of the CPI from 1958-1986.



Figure 3


Three major subcycles have underpinned the age of inflation: 1958-1965, 1966-1975, and 1976-1986. (Figure 3, first two rows)



After reaching a “higher high,” each subcycle peaked and transitioned to a new phase.  



The end stage of the 1976-1986 subcycle culminated with a Balance of Payment (BoP) crisis.  This crisis sent the CPI into an upward spiral and the economy into a 2-year recession.



This cycle also featured the transition from the age of inflation to the era of disinflation.



If the present phase represents the second wave of the new subcycle, how low and how long will the pullback last before the third wave spike? (Figure 3, second to the top right window) 


V. The Era of Disinflation.  Inflation and Disinflation’s Impact on the GDP and the Main Street



On the other hand, the age of disinflation featured “lower highs” of the CPI, which climaxed with the 2003-2008 episode.



How did the two eras (inflation and disinflation) differ?



Strikingly, the 28 years of inflation produced a real GDP CAGR of 4.0473%, while the eon of disinflation had a CAGR of 4.4027%, for a paltry .3554% a year differential!  (Figure 3, last two rows)



And yet, a major financial crisis and an economic recession hampered the nation in the age of inflation.



But it is not about statistics.


Figure 4


-The age of inflation powered the USD peso on an uptrend until the present. (Figure 4, topmost pane)



-The age of inflation spawned a diaspora of many residents and begot human exports (labor migration) via OFWs. (Figure 4, second to the top pane)



VI. Why Inflation is Embedded in the Financial and Economic System? 



Please remember that the CPI, as a government-calculated number, is likely underreported.  



Besides, since there is no objective measure of utility, and where averaging different goods and services represents an apples-to-oranges calculation, the CPI is a misleading political rather than economic metric. Price controls and other changes in the statistical calculation (for example, rebasing) also add to the distortions of the CPI.



The bottom line is official policy embodies inflation through the monetary or demand-side framework.   



Proof? The anchor of the BSP monetary policy is “inflation targeting“—it is not to eradicate inflation but to “manage” it. 



Unfortunately, since 2015, the inflation genie just cracked out of its lamp.



There is more.  The global shift in the monetary regime from the gold exchange standard (Bretton Woods) to the fiat standard through the Nixon Shock (which repealed the convertibility of gold) has been instrumental in shaping policies that amplified the impact of inflation and disinflation here and elsewhere.



We are witnessing the belated effects of the seismic monetary experiments dealt with us by global central banks. 



As such, inflation will remain embedded in the political-economic system until forced by economics to unravel and prompt a policy reversal.  



In reaction to the recent inflation spikes, central banks resorted to global rate hikes (courtesy of Topdown charts) representing partial evidence of such policy turnabout.  Most of the global central banks have been tightening. (Figure 4, second to the lowest pane)



But given the path dependency of monetary policymakers, this gamut of actions is likely provisional. Once recessionary forces become apparent, the path-dependent action of global central banks is to resort to financial easing. But previous outcomes from these might not be the same today.



That said, it is natural to see a pullback in the CPI as part of the non-linearity of trends and in reaction to the central bank action signifying the partial withdrawal of monetary accommodation through tightening.  But again, this policy of backpedaling may not last.



Again, if I am correct that the Philippines has recidivated to the “inflation age,” then a retreat in the CPI (which signals the end of the second wave) will be followed by a “third wave” that will be marked by a “higher high.”  And that the likely terminal phase for the first subcycle will be anytime between 2024-2026.



Will history rhyme?



VII. December Headline and Core CPI Reinforce the Return to the Age of Inflation



Philippine authorities declared that the December CPI inched higher at 8.1%.



As usual, rising food, other food-related prices, and utility bills have signified the culprit.



Yet, perpetually fixating on the supply side, what we hear from the officialdom and media has mainly signified “noise.”  It is a pathetic attempt to divert the public’s attention from its authentic sources or the “signal.” 



On the face of it, for the mainstream, perhaps the slowdown in the CPI is not just to validate their predictions but also to vindicate incumbent policies.



More importantly, the underlying design must be the revival of the easy money regime to inflate the credit bubble economy, which facilitates invisible redistribution in favor of the bureaucracy and the elites.



Not just that.  For them, with the entrenched structural imbalances in the economic and financial system, there is too much at stake. And dependency translates to the desire for policy continuity.



In this context, instead of adaptability in confronting change, the mainstream adamantly wants “to fight the last war.” 



Despite the diversions to blame the public, the December CPI triggered another potential alarm.



Unlike the headline CPI, which remains distant from the milestone of August 2008, the CORE CPI (6.9%) has almost equaled its high of the same period (7.23%).  (Figure 4, lowest pane)



Strangely, despite the alleged supply-side aberrations, the BSP says that it is “ready to take all policy action necessary,” which implicitly means taking further restrictive measures on the demand side.



Right. Blame supply while taking measures on demand.



VIII. Demand Side Inflation: Near Record Public Spending, Historic Consumer and Financial Industry Bank Loans!



Figure 5


Aside from near record credit financed fiscal deficits (via public spending; figure 5, topmost pane), demand-side factors of inflation include “1) spillover effects of 2020 BSP’s historic injections to rescue the banking system, 2) the May 2022 election money, and 3) the substantial drawdown in bank savings. And the most conspicuous factor has been 4) the explosive growth in consumer borrowing from banks!” (Prudent Investor, 2022)



The streaking hot growth spike of salary loans persisted in December!  It jumped by 67.2%, its fourth consecutive month of over 50% growth. (Figure 5, second to the highest pane)



And while the media radiates a sense of delight over growing bank loans defying economic gravity, they forgot to mention that household credit, through record (peso & % share) credit card loans (up 26.5% in December), continues to outperform supply-side credit. (Figure 5, second to the lowest pane)



Aside from the mounting leverage of the household balance sheets intended to fill in the shrinking purchasing power of the peso, the interest rate cap on credit cards has ballooned the demand for it. (Prudent Investor, 2022) 



In turn, the household credit share of the aggregate banking loans continues to climb at the expense of the production loans.  And even from this perspective, “too much money chasing too few goods” have become evident. (Figure 5, lowest window)



And for good measure, the GDP has become increasingly dependent on liquidity growth or monetary inflation. 


Figure 6



Although the money supply growth rate has recently tempered, its share of the GDP remains close to the historic levels of 2022.  (Figure 6, top left window)



As it is, the GDP has become almost entirely reliant on credit expansion from the banking system and BSP.  (Figure 6, top right window)



So how can this not be structurally “inflationary?”



Likewise, rising prices of financial assets, which emit signs of monetary loosening, represent another factor that could abet the demand side of inflation.




The banking system’s loans to the financial sector have emerged as one of the biggest growth centers.   Its share of the total is adrift at all-time highs, boosted by a sharp upturn in growth fueled by the BSP’s unprecedented liquidity injections.  (Figure 6, second to the lowest pane)



Coinciding with the steep rebound of the PSEi 30 has been the recent rebound in bank loans to the sector since 2021. (Figure 6, lowest window)



Have these signified intra-industry margin trades to “push” asset prices as the stock market via the PSEi 30? 



Again, why shouldn’t there be a structural relapse to an era of inflation when authorities have become dependent on the printing press for its economic growth paradigm?



Again, to be sure, the CPI may see an interim peak sometime in 2023, but that would represent a countercyclical trend than a return to the era of disinflation.









Pozsar, Zoltan War and Peace Credit Suisse Economics, January 6, 2023



Prudent Investor, November CPI Spikes to 14-Year Highs! Inflating Away the Record Public Debt Levels! Consumer Leveraging Rockets! December 11, 2022



Prudent Investor, The BSP Extends Credit Card Interest Rate Cap Amidst Another “Aggressive” Hike in Policy Rates, November 20, 2022





This content provided courtesy of Prudent Investor Newsletter


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