Philippine Markets Newsletter

PH Monday Macro: Look at core inflation, not headline inflation

April 3, 2023

From news outlets to politicians and consumers, inflation has persistently been the hot topic these days. The “inflation” word is thrown out in arguments and casual conversations. However, it may be confusing when people talk about the rate because there are two measurements for it.

Today we will talk about the two qualifications and why one is better than the other.

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The Monday Macro Report
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There are two types of inflation rate that is released every month by the central bank: headline and core. Headline inflation is the measurement of all drivers of inflation, while core inflation includes all factors that determine inflation except for volatile components such as food and energy.

Headline inflation can sometimes mislead investors because some high beta commodities movements usually are relatively short-lived. This may mislead investors on the true trajectory of inflation. A great example would be the inflation direction back in 2015.

The chart above shows that headline inflation plummeted into negative territory in 2015. The low inflation environment in that year was attributed to the continuous low oil prices.

In addition, food inflation was also declining as there was sufficient supply for sub-items such as bread, fish, fruits, and rice. Such an outcome raised concerns among investors and economists, pondering if the low inflation environment would lead to economic contraction.

While headline inflation indicated that inflation is decreasing and may lead to low or no economic growth, core inflation gave a more accurate insight into the trend. If we look at the core inflation trend in 2015, detaching the oil and food variables from the equation, we saw a moderate inflation downtick that was in the 2% to 4% inflation target range of the Bangko Sentral ng Pilipinas (BSP).

Similarly, when overall inflation started to rise back in June 2022, a few months later, the August headline inflation eased while core inflation grew. News outlets reported the figures, leading people to wonder if inflation had already peaked. However, the succeeding months proved the narrative wrong. Core inflation suggested that inflation was still on an upward trend, and it was correct.

Moreover, these cases of different signals from the two inflation quantifications are why core inflation gives us a more accurate insight. Removing such buoyant constituents gives us a better understanding of the holistic trend.

Today, the core inflation rate for February is well above the average ticking at 7.8%, which is well above the data set’s year-over-year average core inflation of around 3%.

There are countless macro and microeconomic pressures that push the inflation rate. This is why the Philippine Statistics Authority (PSA) categorizes inflation contributors into 13 commodity groups, namely: food, alcoholic beverages & tobacco, clothing, housing & energy, household equipment, health, transport, information & communication, recreation & sport, education services, restaurants & accommodation, financial services, and personal care & miscellaneous goods & services.

In identifying the most significant contributor, it is challenging to pinpoint the sole driver of the inflation figure. This is because, in the month-over-month inflation growth per sector, an anomaly can occur as a drastic increase or decrease may only be for one period.

When we average the rate of change from June to December of the 2022 fiscal year and remove peculiarities, the constant categories that have been growing are restaurants & accommodation, recreation & sport, and household equipment, which the average period record at 14.3%, 12.63%, and 9.88%, respectively. The inflation enlargement per industry is one of the outcomes of the monetary policy set by the central bank.

Nevertheless, core inflation gives us a more accurate insight into inflation trends by separating the elements with sharp fluctuations to filter transitory price movements. For the following report, we will dive into one of the tools the BSP utilizes that causes such elevated inflation. Stay tuned!

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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