Inflation for July at 4.9%, the highest in nearly three years

Inflation is a self-fulfilling prophecy. If you believe that prices will rise in the near future, you will buy now before they actually do. Multiply this action by countless other economic actors, and you will have artificially shifted the aggregate demand curve rightward by simply moving or “advancing” purchases across time. The end result is higher prices, and, therefore, inflation.

It is to guard against precisely this development that the governor of the central bank consistently, at the risk of not being taken seriously, assures literally everyone he meets and talks to, that his institution will vigorously fight inflation as soon as he detects the merest hint of it.

So it was that on the morning of the 28th of May, 2014, BSP Governor Amando Tetangco Jr. arrived to deliver the opening remarks at the first Philippine Retail Investment Conference organized by the CFA Society of the Philippines. Governor Tetangco has received numerous awards in his career, among them “Central Banker of the Year for Asia-Pacific” in 2012, given by The Banker; 2012 Emerging Markets Central Bank Governor for Asia, given by Euromoney magazine; and an “A” rating from Global Finance magazine, again for 2012. These internationally reputable magazines have cited his “considerable skill” in managing the monetary policy of the Philippines, and it is no mystery: his task consists of emphasizing and repeating to the public that the central bank – under his direction – will never allow inflation to run out of control.

He began by noting the remarkable economic growth exhibited by the Philippines over the past 2 years, averaging 7 percent and never going below 6 percent in a quarter. This growth, he said, is “underpinned by solid anchors” of “low and stable inflation due to credible monetary policy and a sound banking system maintained through responsive regulation,” even  if the man in charge of managing monetary policy and maintaining the soundness of the banking system does say so himself.

But, the Governor said, this rosy economic picture is threatened by the prospect of higher inflation, already visible in the horizon that morning at the end of May. After a volatile 2013 during which bond yields at first fell due to impressive headline GDP growth and then soared due to Fed tapering concerns, there was a noticeable jump in the 20-year and 10-year PDST-F rates from November 2013 to January 2014 on the back of inflationary concerns. Worse than the rise in government-bond yields is that inflation rose even higher: in the month of December 2013, the year-on-year increase in the consumer price index was 4.1%, but the 10-year PDST-F average for that month was only 3.7% and at year end was only 3.8038% (see chart).

What is tipped to cause this staggering negative return? The BSP Governor could point to only one thing, and that is the “potential increases in power rates and higher food prices resulting from an expected El Niño episode in the second half of 2014.” By August, the news was out that the prior month’s inflation was the highest since October 2011. The inflation rate for July 2014 clocked in at 4.9%, near the top end of the BSP’s own estimates, and confirmed the Governor’s diagnosis of elevated “food and non-alcoholic beverages index” prices.

The likeliest cause of these price rises is a fascinating admixture of bureaucratic corruption and economic mismanagement ... and will be explored in the next post.