When it comes to domestic or foreign policy problems, Rodrigo Duterte’s Philippines usually has efficient, if often brutal, solutions. The same appears to apply to the economy as well, because just when the country’s latest CPI print showed that the economy was overheating – which would force the central bank to hike rates, something it has long resisted – the country had a radical solution: change how CPI is calculated.
Overnight the Philippines reported that in February prices surged by 4.5% yoy, well above the central bank’s target range of 2% to 4% from 2018 to 2020. Core inflation also rose sharply to 4.4% yoy in February, from 3.9% yoy in January, with headline inflation momentum at 0.9% mom sa versus an already elevated 0.7% mom sa in January Rodrigo Duterte’s tax reform program pushes up prices of key consumer items.
Inflation was driven higher by continued pass-through of higher excise taxes on sweetened beverages and tobacco under the new tax reform package, an increase in food prices on weather-related disruptions, higher fuel prices and the weaker PHP.
In short: a clear recipe for a rate hike one would say. Yes… but not the local central bank: Bangko Sentral ng Pilipinas has resisted pressure to tighten monetary policy even though inflation is accelerating and the economy is now clearly overheating.
Which is why the proposed solution was as ingenious as it was simple: alongside the “old” CPI series, the country’s statistics office released a second CPI number which overhauled how inflation is measured. In a stroke of brilliance, the central banks switched from a 2006 to a 2012-base year, which meant that consumer prices rose only 3.9% in February from a year ago, and up from 3.4% in January, and well below the 4.5% print that the “old” print showed concurrently. More importantly, the 3.9% fell inside the bank’s 2-4% inflation target band, removing the pressure to tighten.
Many were stunned by the glaring data manipulation: “I don’t agree that the new base year, which is lower than the reading for the old base, should be a cause to make an excuse for a no rate hike scenario,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. “The reality is that the trajectory of inflation is going higher in both series.”
Yes, but not high enough, and not just yet. End result: the central bank bought at least a few more months of creeping inflation before it has to hike even though the majority of analysts expects it to raise the benchmark rate from a record-low 3% in March.
Meanwhile, the central bank is clearly unconcerned by the overheating economy, and is happy to keep the pedal to the metal: Governor Espenilla said the pick-up in inflation last month was in line with the central bank’s forecasts, and remains within the target for February and most likely in 2018 as well.
“Our forecast remains that inflation will decelerate back to well within target in 2019 whether based on 2006 or 2012 index,” he told Bloomberg. “Nonetheless, we will continue to closely monitor the developments and factor in all relevant data in our coming reviews of monetary policy stance.”
Well, yes: when you change the benchmark any time you don’t like the result, of course the result will be in line with the target. However, what it really does is demonstrate what a whimsically arbitrary – and manipulated – concept inflation, and its CPI measurement, truly is.