Philippine Core CPI Forged a New 22-year High! Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections

 

 

So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play.—Murray N. Rothbard

 

 

In this issue

 

Philippine Core CPI Forged a New 22-year High!  Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections

 

I. While the February CPI Slipped, Core Inflation Forged a New 22-year High! The Futility of the Inflation Task Force 

 

II. Rate Hikes Barely a Hurdle on the Insatiable Desire to Expand Deficit Spending

 

III. Defying Rate Hikes: Credit Card and Salary Loan Growth Sizzled Fueling Inflation as Bank Savings Stagnates

 

IV. Credit Card Debt Fueled Segments of Core Inflation; The Invisible Redistribution 

 

V. Peak Second Inflation Wave?  The Law of Demand: Has the BSP’s Rate Hikes Started to Impact Quantity of Loans?

 

 

Philippine Core CPI Forged a New 22-year High!  Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections

 

 

Philippine headline CPI barely changed in February, while Core CPI sprinted to a 22-year high!   But has this inflation cycle peaked?  Clues from banks and the BSP suggest it has.

 

I. While the February CPI Slipped, Core Inflation Forged a New 22-year High! The Futility of the Inflation Task Force 

 

 

The consensus appears to be celebrating the unexpected “easing” or “moderation” of the CPI.

 

 

GMA News, March 7: Inflation or the rate of increase in the prices of goods and services moderately slowed down in February, thanks to the slower movement in transportation and fuel costs, the Philippine Statistics Authority (PSA) reported on Tuesday. The headline inflation or the rate of increase in the prices of products and services in the country decelerated to a rate of 8.6% in February 2023. Year-to-date inflation print stood at 8.6%, according to the PSA chief.

 

 

However, insisting that this remains a supply-side phenomenon, authorities pushed to establish a “task force” to tackle inflation.

 

 

Inquirer.net, March 8: In a brief statement, Presidential Communications Secretary Cheloy Velicaria-Garafil said Mr. Marcos approved the proposals “in general.” Diokno said that among the measures was the establishment of an interagency committee to monitor prices, agricultural production, and food supply to help the government decide when is the right time to import. Secretary Arsenio Balisacan of the National Economic and Development Authority (Neda) noted that the creation of the high-level committee was urgent.

 

 

Figure 1

 

 

 

But while the 8.6% February CPI was lower than consensus expectations, it was slightly down from the 8.7% in January.

 

 

Most importantly, while addressing food inflation signified the objective of the proposed creation of the “task force,” the February non-food and non-energy 7.8% CORE CPI rocketed to a new 22-year high! (Figure 1, topmost chart)

 

 

It means that inflation has diffused beyond the corridors of food and energy! 

 

 

Further, though the CPI rate may decline, it doesn’t mean inflation is falling.   It pertains to the continuing erosion of the purchasing power of the peso but at a slower pace.   

 

 

From January 2012 through January 2023, the peso has shed 31% of its purchasing power.  (Figure 1, second to the highest window)

 

 

Hence, January 2023 peso, assuming its proximity to reality, is worth 69 cents of the 2012 peso.  Analogous to the boiling frog syndrome, the peso is gradually being burned at the people’s expense.  

 

 

And this is hardly good news for the average citizen.  It is good news for the government and the elite borrowers.

 

 

Nonetheless, have you noticed that “imported inflation” has vanished from the script of the consensus?

 

 

Why so? 

 

 

Because the prices of the “external” factors—oil and USD Php—have significantly declined!  Yet the headline and the core CPI remained stubbornly elevated. (Figure 1, second to the lowest and lowest charts)

 

 

This omission reveals the constant shifting of goalposts by authorities.

 

 

That’s not all. Let us not forget that there are distortions in the calculation of statistical inflation, which include price controls, base rates used, biases in conducting surveys, and others.  The context here translates to the understatement of the CPI.

 

 

Yet, while remaining reticent on demand, authorities have been implicitly signaling to the public that “greed” by unspecified private economic agents has signified the source of inflation.  That is, the government is “good,” while the private sector is “bad.” 

 

 

Hence, it is their duty to instill order in their constituencies through mandates and controls.  

 

 

Sad to see that even from the supply side, officials with economic backgrounds fail to comprehend that competition on itself should contain “greed.”

 

 

Bluntly, the task force will be assigned to implement centralized controls of the national supply chain.

 

 

The thing is, authorities assume that they possess what the great Friedrich von Hayek called “knowledge of the particular circumstances of time and place” in real-time covering the spectrum of all required food supplies to meet dynamic demand.

 

 

But they admit to reactionary impulses when stating that the intent of monitoring is “to help the government decide when is the right time to import.”  

 

 

So prices would still escalate before they respond, which also extrapolates to a time-consuming process.  And by the time they act, price pressures from feedback loops might have spread to the other sectors. 

 

 

The recent experience highlights this phenomenon. 

 

 

Yet, their assumptions have another critical flaw.  It omits the future—changing individual preferences, economic conditions, exchange rates, international food prices, availability of supplies, weather, and agricultural variable, among many other factors.

 

 

To ram this knowledge problem point home, their inability to know the shifting preferences and values of individuals, which shapes economic calculation that drives exchanges, highlights the vulnerability of central planners to policy errors.

 

 

Or whatever centralized task they are duty-bound to do is destined for failure.

 

 

The fact that they have kept the public in the dark about the contributions of demand tells us that their proposed policies intend to show the voting public that they are “doing something.” 

 

 

 

It stands to reason that the clamor for creating a task force to contain inflation is about public signaling to gain popular political support.

 

 

In any case, our role is to bridge this analytical void.  

 

 

II. Rate Hikes Barely a Hurdle on the Insatiable Desire to Expand Deficit Spending

 

 

Last week, we elaborated on how deficit spending fuels inflation. (Prudent Investor, 2023)

 

 

This week we are told of the planned ambitious deficit spending programs for 2023, including the Php 9 trillion in infrastructure spending projects. 

 

 

And then there is the Php 1,000 inflation subsidy or cash transfer program for the 9.3 million belonging to the “poorest of the poor.” 

 

 

Basically, such projects signify “throwing money” at different targeted political groups, which are popularly rationalized as meant “for the greater good.”  But this translates to expanding the deficit spending—all dependent on a cheap money regime.

 

 

Additionally, authorities appear to be exhausting their balance sheet capacity even when the GDP remains “hot.”   What happens when recessionary forces become apparent?  

 

 

Would authorities be forced to amplify their fiscal “stabilizers” even at the risk of blowing up street inflation?

 

 

Will the age of inflation become entrenched through such actions?

 

 

III. Defying Rate Hikes: Credit Card and Salary Loan Growth Sizzled Fueling Inflation as Bank Savings Stagnates

 

 

But there is more. 

 

Aside from deficit spending, increases in the money supply from bank credit expansion are likewise inflationary. 

 

 

Naturally, when increases in money supply through bank credit expansion—are unsupported by increases in production—this brings about economic imbalances.  Yes, inflation. 

 

 

Proof?

 

 

Figure 2

 

 

The rate of change in the lending of all banks (Universal-Commercial, Thrift, and Rural/Cooperative) have been congruent with the gyrations of the CPI. (Figure 2, highest window)

 

 

Total bank lending grew by 10.9% in January, down slightly from 11.3% a month ago.   In contrast, there was a sharp deceleration of bank lending of the Universal-Commercial banks (UC), which logged in at 10.21% in January from 13.54% in December.  

 

 

In short, the bank lending of the thrift and rural banks carried the torch of inflation last January.  And part of this borrow-spend phenomenon may have spilled over to February.

 

 

Interestingly, the % share of the credit card portfolio of the total banking system (UC, thrift and rural/cooperatives) stormed to a record high of 4.9% in January! (Figure 2, second to the highest chart)

 

 

This record upsurge also reflected the activities of the dominant Universal and Commercial banks, which pushed the % share of the credit cards to the aggregate UC lending to a milestone high of 5.2%! (Figure 2, second to the lowest pane)

 

 

Partly due to the interest rate cap and mainly because of the reduction in purchasing power of the peso, credit card expansion has transformed into a potent driver of price inflation.   

 

 

Credit cards have principally powered consumer lending—the latter’s share of bank lending has been soaring too!

 

 

The explosive growth of the salary loan portfolio of the UC banks, which soared by 67.05% in January, the second highest rate after November 2022, also supported credit card growth and general household loans (excluding real estate).  (Figure 2, lowest window)

 

 

 

Figure 3 

 

Source: http://prudentinvestornewsletters.blogspot.com/2023/03/philippine-core-cpi-forged-new-22-year.html