What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless—Ludwig von Mises
II. Following the Money: The Balance-Sheet Origins of Inflation
IIA. Why This Matters: From External Discipline to Domestic Bailout
IIB. Following the Credit: Electricity and the New Transmission of Liquidity
IIC. When Balance Sheets Become Policy: From Liquidity to Prices
III. Oil Relief, Monetary Inflation, and the Return of Deferred Prices
IIIA. Administrative Suppression Is Not Price Stability
IIIB. The Poor Continue Paying the Highest Inflation Tax
IIIC. Benchmarkism and the Illusion of Labor Absorption
IIID. Wage Mandates and the Intervention Spiral
IV. Conclusion: Inflation Before Prices
Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation
Why Consumer Prices Reveal the Consequences, Not the Beginning, of the Process
I. Preamble: Interconnectedness of All Economic Phenomena
Economic commentary often treats macroeconomic releases as though they describe separate realities. Bank lending is analyzed independently of inflation. Labor market statistics are discussed apart from monetary policy. Wage adjustments are framed as social policy, while electricity is relegated to industry news. Each release receives its own headline, its own narrative, and then quickly disappears into the next news cycle.
Yet the economy functions as an interconnected process rather than a collection of isolated indicators.
As Ludwig von Mises observed, economics "does not allow of any breaking up into special branches." It is concerned with "the interconnectedness of all phenomena of acting and economizing." Economic facts condition one another, and each problem can only be properly understood within a broader system that assigns its due place to every aspect of human action and economic choice.
Money created through the banking system finances specific borrowers. Credit helps determine which investment projects become financially viable, influencing the allocation of resources, production costs, employment, asset prices, and eventually consumer prices. Monetary developments therefore propagate through the economy sequentially rather than simultaneously.
The political environment further shapes this process by influencing the prevailing model of economic development. Governments frequently respond to the unintended consequences of earlier interventions with additional interventions. Each successive policy alters incentives, redirects capital toward politically favored sectors, and generates new distortions that invite further intervention, progressively reducing the economy's capacity to adjust through market processes.
These developments are not isolated events. They represent successive stages of the same underlying process.
The Philippine economy today provides an instructive example.
- The BSP's May 2026 universal-commercial banking statistics showed another acceleration in money and credit growth.
- The June CPI inflation report simultaneously revealed softer headline inflation but broader underlying price pressures.
- The May labor report appeared to indicate slightly ‘improving’ employment conditions even as business investment remained subdued.
- Meanwhile, Metro Manila received its ‘historic’ mandated wage increase in years, justified as protection against the rising cost of living.
Conventional narratives frame these developments as isolated economic events. In reality, they form an interconnected process that reflects the deepening consequences of balance-sheet expansion, politically driven credit allocation, and successive policy interventions.
The sequence matters because inflation does not begin at supermarket shelves, gasoline stations, or electricity bills. Nor does it begin with the consumer price index. By the time consumer prices visibly accelerate, the underlying monetary and financial adjustments have often been unfolding for a period. Markets respond to underlying conditions. What is seen as inflation is, therefore, a symptom.
The process begins elsewhere.
It begins with the expansion of balance sheets.
II. Following the Money: The Balance-Sheet Origins of Inflation
One of the recurring shortcomings of contemporary macroeconomic analysis is its tendency to treat inflation primarily as a phenomenon of price changes.
Policymakers, talking heads, and financial markets closely monitor consumer price indices because they are readily observable, politically salient, and easily communicated. Rising food prices, higher electricity bills, and more expensive transportation become the visible face of inflation.
Because consumer prices are both politically sensitive and immediately observable, inflation is also commonly framed as a problem originating in markets rather than in monetary or policy decisions. The mechanical focus is on the supply side. Thus, the resulting narrative emphasizes shortages, speculation, supply-chain disruptions, hoarding or price gouging, encouraging corrective political interventions, while the monetary and administrative policies that altered purchasing power and resource allocation receive comparatively little or no scrutiny at all.
Yet the price changes captured by official statistics describe only one observable manifestation of a much broader monetary and financial process.
Consumer price indices summarize exchange ratios over a given period; they do not reveal how the purchasing power underlying those transactions was created, allocated, and transmitted throughout the economy.
Before consumer price indices register sustained inflation, balance sheets have often been expanding for months. Before households pay more at the grocery, someone must first acquire additional purchasing power. Before firms bid more aggressively for labor, raw materials, or imported inputs, someone must first obtain financing that enables such spending.
Within the financial system, the interaction of savings, credit creation, monetary policy, and bank intermediation determines how purchasing power is created, allocated, and transmitted throughout the economy.
These financial adjustments reshape resource allocation, investment decisions, production structures, and distribution, eventually influencing employment, incomes, spending patterns, and consumer prices.
Periods of monetary accommodation magnify the imbalances (excess leverage, credit concentration, politically directed finance, sectoral distortions) that developed in the process.
Monetary conditions have evolved through successive phases rather than discrete episodes. The BSP's earlier pandemic-era monetary expansion was followed by a period of policy tightening to contain rising inflation. Beginning in the second half of 2024, however, the BSP gradually shifted toward monetary accommodation through successive reductions in policy rates and reserve requirements. Rather than immediately accelerating consumer prices, these measures first affected the financial system by lowering funding costs, intensifying the expansion of banks' capacity to extend credit, increasing system-wide liquidity, and encouraging further balance-sheet expansion.
These changes in monetary and credit conditions propagated or diffused gradually through the economy. As new purchasing power entered through bank lending and other financial channels, it influenced financing decisions, resource allocation, investment activity, and "aggregate demand" before becoming fully reflected in consumer price measures.
The BSP's May 2026 Depository Corporations Survey (DCS) illustrates this transmission process.
Broad money continued to accelerate for a fourth consecutive month.
Figure 1
M3 expanded by 12.8 % year-on-year, following growth of 10.3 % in February, 12.1 %in March, and 12.2 %in April. (Figure 1, topmost pane)
While the various monetary aggregates have not followed identical trajectories over recent years, the May data point to increasingly broad-based liquidity conditions.
- Cash in circulation, which had recently trailed the other aggregates in growth, rebounded.
- M1’s growth trend remained robust, sustaining the momentum from its earlier expansion in 2023.
- M2 and M3 growth accelerated in Q2 2025, showing that monetary expansion had become more widely distributed across the financial system rather than concentrated in a single aggregate.
The significance of these figures lies not merely in their magnitude but in what they reveal about the sources of liquidity.
The current acceleration in liquidity growth echoes the BSP’s pandemic‑era response. And while the DCS shows that domestic credit remained the principal driver of monetary expansion, the transmission channel has shifted.
Banks net claims on central government (NCoCG) rose 16.2% to Php 6.4 trillion. (Figure 1, middle image)
Claims on the public non‑financial sector accelerated even more rapidly, surging 41.2%, coinciding with the DOF’s proposed record remittances of GOCCs to the national government. Are banks financing the GOCC remittances?
Lending to the private sector also strengthened to 13.2%, though at a more moderate pace.
The banks’ net claims share of domestic claims stood at 27.1% in May 2026, slightly down from the record 27.6% in May 2024, while claims on the private sector reached 64.23%, sharply lower despite recovering from its interim trough in Q4 2023. Since the pre‑pandemic year 2019, bank net claims on the central government have taken an increasingly larger share of domestic claims—a clear sign that liquidity creation now stems primarily from bank financing of the government. (Figure 1, lowest diagram)
Figure 2
In the meantime, BSP’s net claim on central government (NCoCG) growth doubled in May to Php 662.6 billion, though it remains below pandemic levels. (Figure 2, topmost window)
In sum, these developments suggest that the recent acceleration in monetary growth has been driven primarily by continued domestic balance-sheet expansion by banks and the government-BSP complex rather than by external sources of liquidity.
Although the current expansion differs from the pandemic response in both scale and transmission mechanism, its underlying balance-sheet logic is strikingly similar. Liquidity is once again being created through coordinated expansion of public and banking-sector balance sheets—not primarily to finance new productive activity, but to sustain an increasingly leveraged economic structure.
Unlike 2020, the current process operates largely through the routine mechanisms of government finance, central-bank operations, and bank credit rather than emergency facilities.
Nevertheless, the recurring liquidity injections exhibit the characteristics of a quasi-bailout whose monetary consequences gradually diffuse through the economy before becoming visible in consumer prices.
IIA. Why This Matters: From External Discipline to Domestic Bailout
For many years, discussions of Philippine liquidity focused primarily on external sources of monetary expansion—remittances, export earnings, business process outsourcing receipts, tourism revenues, foreign portfolio flows, foreign direct investment, and movements in the country's international reserves.
These external inflows undoubtedly influence domestic liquidity conditions. Historically, the accumulation of foreign exchange reserves also imposed an important discipline on domestic monetary expansion, as the BSP's balance sheet remained closely linked to developments in the external sector.
Over time, however, the growing financing requirements of the domestic economy increasingly shifted the source of monetary accommodation inward.
Ever since the 1997 Asian crisis, the BSP built up foreign reserves, which held nearly fixed at ~86–87% of assets from 2012 to 2018, culminating in 2019. Pandemic injections of $2.3 trillion cut that share to ~72%, as historic liquidity infusions raised domestic securities to nearly 20% — exposing peso fragility. (Figure 2, middle graph)
While BSP has since reduced its domestic securities share and rebuilt reserves, banks now carry the burden of financing sovereign liabilities.
As an aside, strangely, the BSP has yet to publish its monthly updates for 2026
Consequently, this reinforced the larger role of domestic credit creation in expanding liquidity — a greater reliance on internally generated purchasing power rather than external inflows.
Equally revealing are developments on the liability side of the banking system.
Deposit substitutes—including money-market borrowings, promissory notes, and commercial paper—accelerated sharply. After expanding by just over 10 % year-on-year in February, their growth surged to nearly 74 % in April before approaching 95 % in May. Wholesale funding has therefore become an increasingly important source of financing for continued balance-sheet expansion. (Figure 2, lowest chart)
The changing composition of bank liabilities provides important clues about conditions within the financial system. Rather than merely reflecting a preference for alternative funding structures, the growing reliance on wholesale liabilities suggests that banks theoretically are adapting to funding, regulatory, and balance-sheet constraints while sustaining asset growth. It also reflects the increasingly important role of market-based financing in supporting credit creation when traditional deposit growth alone becomes insufficient.
That evolution carries important implications.
Conventional narratives often portray banks as simple intermediaries that collect household savings before lending those funds to borrowers. Modern banking systems operate differently. Through credit expansion, bank lending simultaneously creates deposits, expanding both assets and liabilities on bank balance sheets.
The composition of those balance sheets, however, is equally important. As a growing share of bank assets becomes concentrated in public-sector claims and other policy-influenced lending, while portions of private-sector credit remain constrained by weaker credit quality and elevated non-performing loans, the organic growth of deposits becomes less sufficient to sustain continued balance-sheet expansion. The sharp increase in wholesale liabilities therefore appears less a voluntary shift in funding strategy than an institutional response to mounting balance-sheet pressures, with banks increasingly relying on market-based funding to support continued liquidity creation.
Understanding this mechanism fundamentally changes how monetary statistics should be interpreted.
Liquidity is not merely a passive consequence of economic activity. It is created through identifiable balance-sheet transactions that determine who first receives newly created purchasing power, under what conditions, and for what purposes.
This is where aggregate monetary statistics become insufficient.
Headline M3 describes the resulting expansion of liquidity. It does not reveal how that liquidity was created, through whose balance sheet it entered the economy, or which borrowers received the newly created purchasing power.
Money does not enter the economy uniformly. New purchasing power enters through specific borrowers, particular industries, and identifiable financial channels before gradually spreading throughout the broader economy. Those early recipients acquire the ability to bid for labor, raw materials, imported inputs, financial assets, and productive resources before the nominal incomes of later recipients adjust. Relative prices therefore begin changing well before those adjustments become visible in aggregate price indices.
Price changes themselves reflect the interaction of supply and demand. Without additional money or credit to finance higher spending, stronger demand in one part of the economy generally requires weaker demand elsewhere. Generalized inflation therefore requires an expansion of purchasing power beyond the mere redistribution of existing income and savings. Even supply shocks initially alter relative prices; they become broader and more persistent only when accommodated by monetary expansion.
As the late Nobel Laureate economist Milton Friedman reminded us: inflation is always and everywhere a monetary phenomenon — produced only by a more rapid increase in the quantity of money than in output.
This is why some industries expand more rapidly than others. Certain asset prices appreciate long before consumer prices accelerate. Input costs often rise months before those increases appear in finished goods. The process is neither instantaneous nor evenly distributed. It unfolds according to the channels through which money and credit enter the economy.
The balance sheet therefore provides the first map of inflation's transmission.
If the Depository Corporations Survey explains how liquidity is created, the BSP's lending statistics reveal where that newly created purchasing power is increasingly being directed.
That question is particularly revealing in the current Philippine context.
Aggregate lending growth accelerated during May. Yet the headline figure conceals a more important structural development. The composition of credit—not merely its quantity—provides the more meaningful signal.
Among all sectors of the economy, one has emerged as the largest destination for new bank financing.
The electricity sector.
IIB. Following the Credit: Electricity and the New Transmission of Liquidity
If the Depository Corporations Survey (DCS) reveals the expansion of monetary and banking-system balance sheets, the BSP's Universal and Commercial (U/C) Bank Lending data reveals how newly created purchasing power is allocated across sectors of the economy. Together, the two datasets provide complementary views of the same process: one identifies the expansion of liquidity within the financial system, while the other shows where credit creation is concentrated.
The May lending report continued to show a rapid pace of credit expansion. Total outstanding loans of universal and commercial banks accelerated from 11.84 %year-on-year growth in April to 12.62 %in May, extending the recovery in bank lending that followed the BSP's shift toward monetary easing.
On the surface, these figures suggested improving financial conditions and stronger economic activity.
Aggregate lending growth, however, reveals only the quantity of credit creation. The more important question is where that credit is being allocated.
Figure 3
Consumer lending, which had been one of the principal drivers of post-pandemic credit expansion, continued to decelerate gradually while remaining elevated. Consumer loans slowed from 19.58 %to 19.03 percent, while credit-card lending eased slightly from 26.57 %to 26.30 percent. (Figure 3, topmost visual)
Household borrowing therefore remained strong, but it was no longer the dominant source of credit expansion.
Production lending moved in the opposite direction.
Loans to production activities accelerated from 10.70 %to 11.67 percent, suggesting that banks were directing a larger share of new lending toward business-related activities rather than household consumption. Under normal conditions, such a shift would generally be interpreted as favorable, as productive investment should expand capacity, increase output, and support long-term economic growth.
The sectoral composition of production lending, however, reveals a more complex picture.
Among major industries, electricity, gas, steam, and air-conditioning supply recorded the strongest expansion by a wide margin. Outstanding loans to the sector increased by 31.65 % year-on-year, accelerating from 25.83 %in April. (Figure 3, middle image)
More significantly, electricity accounted for the largest absolute increase in bank lending among all industries, adding approximately Php133.3 billion in a single month and roughly Php539.2 billion over the preceding twelve months.
As a result, the sector's share of total universal and commercial bank loans increased from 12.2 %in May 2025 to 14.5 %by May 2026, reaching its highest level since the BSP began publishing the current series!
This is not simply another industry experiencing rapid credit growth.
It represents a significant reallocation of the banking system's balance sheet.
Balance sheets often reveal structural changes before those changes become visible in national income statistics. Financing patterns, investment decisions, and credit allocation frequently adjust before their consequences appear in GDP, employment, or consumer-price data. Following the money therefore requires examining not only how much credit is created, but also which sectors receive that credit.
This pattern also reflects broader developments within the Philippine electricity sector.
Our previous analysis examined how mounting financial pressures within the industry were increasingly addressed through institutional restructuring, financing arrangements, and regulatory adjustments rather than through explicit fiscal appropriations. A series of developments pointed in the same direction: the SMC–Aboitiz Equity Ventures–Meralco (Chromite) Batangas LNG deal, Prime Infrastructure's acquisition of First Gen, the suspension of real-property taxes (RPTs) on power assets, and the introduction of the Government Energy Auction Allowance (GEA-ALL) on top of the existing FIT-ALL mechanism. Although different in form, these measures reflected a broader effort to maintain the financial viability of a strategically important sector while limiting reliance on direct fiscal support.
The important observation is that the banking system has become an increasingly important channel through which financing reaches the electricity sector. Given that electricity-sector output has remained weak despite rapid credit expansion, the increase in lending raises questions beyond simple investment financing. Electricity GDP has stagnated since Q2 2025 (Figure 3, lowest graph)
This reflects a quasi‑bailout scheme channeled through refinancing requirements, balance‑sheet restructuring, and regulatory incentives.
Government‑affiliated private sector balance sheets absorb pressures that would otherwise appear on public accounts. Rather than showing up as fiscal expenditure, burdens are transferred via corporate restructuring and commercial banks, facilitated by regulatory adjustments. The cost does not disappear; it migrates across balance sheets, masking fragility under the guise of restraint.
In this environment, the boundary between monetary policy, industrial policy, and financial-sector policy becomes increasingly difficult to separate.
Credit allocation does not require formal central planning to influence economic outcomes. Once liquidity expands within the banking system, institutions respond to incentives, regulations, collateral conditions, risk assessments, and political priorities. The resulting allocation of credit reflects not only private lending decisions but also the broader institutional environment in which those decisions occur.
This is why following the money requires following the balance sheet rather than the budget alone.
The modern transmission of policy increasingly operates through credit markets.
IIC. When Balance Sheets Become Policy: From Liquidity to Prices
The significance of electricity lending extends beyond a single industry. It illustrates a broader feature of modern monetary transmission: the effects of monetary accommodation depend not only on the quantity of liquidity created, but also on where newly created purchasing power is allocated.
The May DCS and lending reports reveal two dimensions of the same process. The DCS shows the continued expansion of liquidity through domestic credit creation, while lending data reveal how that purchasing power is distributed across sectors. Credit directed toward different uses—financial assets, real estate, consumption, infrastructure, utilities, or government financing—produces different effects on investment decisions, resource allocation, and relative prices.
The transmission from monetary expansion to consumer prices is therefore neither immediate nor uniform. Newly created purchasing power enters the economy through specific financial channels, affecting particular borrowers and sectors before broader price effects emerge.
The May balance-sheet and lending data indicate that these earlier stages of the process remain active. Liquidity continues expanding, domestic credit remains the principal source of monetary growth, and bank lending increasingly reflects sectoral concentrations, including electricity.
June's inflation report should therefore not be interpreted as an isolated movement in consumer prices. It represents a later stage of a monetary and credit process already visible within the financial system.
The balance sheet reveals where the process begins. Consumer prices reveal where it eventually appears.
The significance of electricity lending extends beyond a single industry. It illustrates a broader feature of modern monetary transmission: the effects of monetary accommodation depend not only on the quantity of liquidity created, but also on where newly created purchasing power is allocated.
III. Oil Relief, Monetary Inflation, and the Return of Deferred Prices
Having followed the creation of liquidity through the banking system and traced its allocation across the economy's balance sheets, the analysis now moves to where these monetary processes become most visible: consumer prices.
June's inflation report was widely interpreted as evidence that inflationary pressures were easing. Headline consumer price inflation declined from 6.8 %in May to 6.4 percent in June, reinforcing the view that price pressures were gradually moderating and that recent policy measures were beginning to stabilize conditions.
The underlying picture, however, was more complex.
Figure 4
The decline in headline inflation was driven primarily by a factor external to domestic monetary conditions: the sharp reduction in global oil prices. West Texas Intermediate crude declined by more than 23 % during June, easing one of the most significant cost pressures affecting households and businesses. (Figure 4, topmost window)
Transport inflation correspondingly slowed from 16.2 %to 12.8 percent, contributing substantially to the moderation in the overall index. (Figure 4, middle image)
Had inflation been primarily a fuel-price phenomenon, the decline in headline inflation would have represented a broader improvement.
The underlying data suggest otherwise.
Core inflation accelerated from 4.1% to 4.4%, indicating that price pressures were becoming more broadly distributed beyond volatile food and energy components. The breadth of monthly price movements also remained significant: only three of the thirteen major CPI divisions recorded declines, while eight increased and two remained unchanged.
The decline in headline inflation therefore reflected the offsetting effect of a major temporary component rather than a broad reversal of inflationary pressures. Lower oil prices reduced one important source of cost pressure, but they did not eliminate the monetary and credit conditions that had already influenced other parts of the economy.
As established in Part I, monetary expansion does not affect all prices simultaneously. Newly created purchasing power enters through specific financial channels, influencing particular borrowers, industries, and production decisions before broader consumer-price effects emerge.
June's CPI data should therefore not be interpreted as contradicting the monetary process. They illustrate its continuing transmission.
The BSP's monetary data reinforce this interpretation. Broad money expanded by 12.8% in May, marking the fourth consecutive month of double-digit M3 growth. (Figure 4, lowest chart)
Such expansion does not mechanically determine a precise monthly inflation outcome; monetary transmission operates through time and through changing economic structures. However, sustained liquidity growth provides the financial conditions through which localized price pressures can become more broadly embedded.
This distinction is essential because supply conditions and monetary conditions operate differently.
Supply disruptions can alter relative prices. Higher oil prices increase transportation costs. Poor harvests reduce agricultural supply. Geopolitical conflicts and supply-chain disruptions affect specific markets.
But relative-price changes alone do not create sustained economy-wide inflation. Without additional purchasing power, higher spending in one category must generally reduce spending elsewhere. A rise in one set of prices is offset by weaker demand in another.
Generalized inflation requires a mechanism that allows nominal spending to expand across multiple sectors simultaneously.
That mechanism is provided by monetary and credit expansion.
The balance sheets examined in Part II explain how that purchasing power entered the economy.
The CPI data reveal where those monetary effects are becoming visible.
IIIA. Administrative Suppression Is Not Price Stability
June's inflation data also illustrate a recurring feature of price management: suppressing visible price increases does not necessarily resolve the conditions producing them.
When politically sensitive prices rise, policymakers often respond by attempting to manage the observed price outcome directly through administrative measures, subsidies, regulatory interventions, or temporary restrictions. Such measures may provide short-term relief, but they do not eliminate the underlying economic pressures affecting supply, costs, and incentives.
Rice provides one example.
Figure 5
Despite the continued implementation of the Maximum Suggested Retail Price (MSRP), import liberalization measures, 20 pesos rice rollouts and further policy interventions affecting rice markets, rice inflation remained elevated at close to 15 %in June, only marginally lower than May's 15.6 percent. (Figure 5, upper diagram)
The persistence of high rice inflation demonstrates the limits of administrative measures as a substitute for resolving underlying supply and cost pressures. A controlled price may temporarily alter the reported price path, but it cannot by itself change the economic conditions determining production, distribution, and availability.
The irony is, despite this, authorities still propose to extend price caps!
Electricity provides another important illustration.
During June, Wholesale Electricity Spot Market (WESM) prices increased by approximately 23 percent, with particularly sharp movements in the Visayas. The development attracted limited public attention despite its potential implications for future consumer prices.
Earlier in the year, authorities temporarily suspended aspects of WESM pricing under Executive Order No. 110 before subsequently restoring market-based pricing mechanisms. The objective was understandable: electricity prices had become politically sensitive, and temporary intervention offered immediate relief.
However, prices perform a crucial and indispensable economic function. They transmit information about scarcity, and costs necessary for economic calculation. Administrative intervention can delay that information from appearing in observed prices, but it cannot eliminate the underlying pressures that generated it.
When market pricing resumes, adjustments may reflect not only current conditions but also costs that accumulated during the period of suppression. What appears to be a sudden price increase may therefore represent deferred price discovery rather than a newly emerging problem.
The same principle applies beyond electricity. Temporary relief measures introduced during the earlier oil-price shock have since been reversed, restoring excise-tax collections while households continue facing elevated living costs. The sequence demonstrates a recurring policy tension: measures that to supposedly protect consumer gives way to other political priorities.
Administrative intervention can influence the timing of price adjustments.
It cannot permanently remove the economic forces requiring those adjustments.
When underlying pressures are postponed rather than resolved, inflation does not disappear. Its transmission is merely delayed, redistributed, or redirected through other channels.
IIIB. The Poor Continue Paying the Highest Inflation Tax
Headline inflation also conceals an important distributional reality.
Aggregate price indices describe an average household. No household is actually average.
The BSP and the Philippine Statistics Authority recognize this distinction by publishing separate inflation measures for the Bottom 30 %of income households. These statistics often provide a clearer picture of inflation's social consequences because lower-income households devote a larger share of their budgets to essential goods.
June's data offered little relief.
Although the gap between Bottom-30 food inflation and headline food inflation narrowed slightly—from 8.5 percentage points in May to 7.9 percentage points in June—it remained historically elevated or significantly above the inflation spike of 2023. (Figure 4, lower graph)
This difference matters because persistent inflation does not affect all households equally.
Higher‑income households generally possess greater ability to adjust through changes in consumption patterns, sustained reductions in savings, or by using accumulated assets to defend against erosion of purchasing power — for example, buying USD or other inflation‑hedging instruments.
Lower-income households have far fewer margins of adjustment.
They continue purchasing the same essential goods—rice, food, electricity, and transportation—but those costs represent a much larger share of their available income. Inflation therefore reduces not only purchasing power but also household flexibility and resilience.
This perspective exposes inflation’s role as inequality’s engine: a regressive tax that punishes the poor while averages mask fragility.
This distinction is also important when interpreting broader economic classifications and averages. Improvements in aggregate indicators may reflect selective progress, but they do not necessarily capture how households experience changing prices in their daily lives.
Statistical averages summarize outcomes.
Ironically, the data defies the conditions that brought upon the upper middle-income country (UMIC) status upgrade.
That asymmetry becomes even clearer when moving beyond prices and examining the labor market, where businesses must decide whether rising costs can still be absorbed or whether they must adjust employment, investment, and production decisions.
That said, selective liquidity injections and quasi-bailout dynamics operate as an inflation tax. The redistribution occurs through the unequal transmission of newly created purchasing power: early recipients benefit before prices fully adjust, while households with the least ability to hedge against inflation absorb the greatest loss of purchasing power. Monetary accommodation therefore functions as a regressive transfer mechanism, amplifying inequality and social pressures.
IIIC. Benchmarkism and the Illusion of Labor Absorption
The June inflation report reveals where the transmission of monetary expansion becomes visible. The May labor report, by contrast, reveals where its longer-term consequences begin to emerge.
Official commentary described the May labor statistics as evidence of improving "labor absorption." The phrase itself is revealing. It suggests that employment expands mechanically once workers become available, as though the economy simply absorbs labor whenever conditions permit.
The reality is different.
Employment is not an autonomous variable. In a market economy, labor demand is derived demand. Firms do not hire merely because workers are seeking employment. They hire because entrepreneurs, operating under uncertainty, expect that committing resources to expand the enterprise will generate future returns.
Employment therefore represents the outcome of prior investment decisions.
Structural capital includes not only physical assets and financial resources, but also the organizational, technological, managerial, and human capital that allow labor to become productive. Workers become more valuable when combined with the complementary capital, processes, and institutions that enable production to occur efficiently.
A labor market can therefore improve through two very different mechanisms.
The first involves firms utilizing existing deployed capital: filling vacancies, extending working hours, increasing production within current facilities, or replacing workers who have exited.
The second involves entrepreneurs committing new capital to expand the productive structure itself: entering new markets, building additional facilities, acquiring new capabilities, and creating new organizational capacity.
It is the second process that represents the creation of additional productive capacity and therefore determines the economy's longer-term ability to generate sustainable employment growth.
Labor statistics, however, cannot fully distinguish between these outcomes. A reduction in unemployment or underemployment may indicate improved labor utilization, but it does not necessarily reveal whether firms are undertaking the deeper capital commitments required for sustained economic expansion.
The broader investment environment provides a more cautious picture.
Figure 6
Foreign direct investment (FDI) has weakened substantially reaching a decade-low level in April. (Figure 6, topmost pane)
While the recent Iran war oil shock may have contributed to this, the broader decline in foreign exposure since 2022 suggests increasing caution among investors considering long-term commitments.
This pattern is notable given the investment pledges announced during official engagements with geopolitical partners. Announced intentions do not automatically translate into deployed capital. Actual investment decisions ultimately depend on expected returns and hurdle rates, underwritten by institutional conditions, policy stability, and the perceived risks facing capital commitments.
The divergence between household and business sentiment reflects a similar tension.
BSP surveys indicate that consumers remain concerned about rising food prices, declining purchasing power, and persistent inflation pressures. Large formal enterprises, by contrast, maintain comparatively stronger expectations regarding sales and operating conditions. (Figure 6, middle left and right images)
This divergence partly reflects differences in economic position. Large firms generally have greater access to credit, capital markets, export revenues, diversified income streams, and pricing power. Their outlook may therefore reflect stronger balance-sheet capacity or even narrative management aimed at securing financial interests, rather than broad-based improvements in the economy.
Even within business surveys, the signals are mixed. Firms may express confidence regarding near-term operations while remaining cautious about major expansion decisions. Ultimately, investment outcomes—not surveys—determine whether optimism translates into productive capacity.
The labor statistics themselves also present a more complex picture than headline indicators suggest.
Compared with April, labor-force participation and unemployment marginally increased
Compared with May of the previous year, however, employment and labor-force participation remained weaker.
More importantly, under present high inflation conditions, labor‑market softness reflects entrenched financing costs, balance‑sheet strain, policy uncertainty, volatile prices, and compressed margins. (Figure 6, lowest chart)
Unlike the post‑pandemic reopening inflation spike, when BSP’s unprecedented injections and fiscal support temporarily fueled pent‑up demand, today’s environment discourages irreversible capital commitments. Employment gains in agriculture, construction, and accommodation may be seasonal or policy‑driven, not evidence of durable expansion.
These conditions do not naturally encourage the irreversible commitments associated with expanding structural capital.
The sectoral composition of employment gains reinforces this caution.
Agriculture recorded the largest employment increase despite recurring weather disruptions and elevated input costs. Construction also expanded, although some of its momentum may reflect continued government infrastructure activity rather than broad-based private investment. Accommodation and food services improved despite tourism in recession in 2025, as well as earlier reported contractions in Baguio, Boracay, Hundred Islands and East Visayas.
Such movements may represent temporary adjustments, seasonal effects, or sector-specific developments.
They do not, by themselves, demonstrate a generalized expansion of productive capacity.
The labor data is another manifestation of benchmarkism.
Employment, unemployment, and underemployment are valuable indicators. They measure observable outcomes, but they reveal little about the entrepreneurial processes that generate those outcomes.
They tell us how many people currently have jobs.
They tell us far less about whether entrepreneurs are committing scarce capital to create the productive capacity required for future employment.
That unseen process ultimately determines whether current labor conditions represent a durable expansion or merely a temporary improvement within a constrained economic structure.
IIID. Wage Mandates and the Intervention Spiral
Against this backdrop, the Metro Manila wage board approved a historic Php85 per day increase in mandated wages, the largest adjustment in years. The measure was presented as a response to rising living costs and as protection against inflation.
The political appeal is understandable.
The economic challenge is that higher mandated wages do not restore lost purchasing power. They redistribute the burden of reduced real income among employers, consumers, investors, taxpayers, and workers themselves.
The cost does not disappear because it is mandated.
Businesses facing higher labor costs must adjust through some combination of lower margins, higher prices, reduced hiring, delayed investment, automation, or restructuring. The ability to absorb these costs differs significantly across firms.
Large corporations with stronger balance sheets, broader revenue sources, easier access to financing, and greater pricing power may adapt more easily.
Many MSMEs face a different reality. Operating with thinner margins, limited access to financing, and fewer opportunities to pass costs forward, smaller firms are generally less capable of absorbing mandated increases in labor costs.
The effects of such policies are therefore not distributed evenly across the economy. Larger enterprises with stronger balance sheets, greater access to capital markets, established supply chains, and greater pricing power are better positioned to adjust. For smaller competitors and potential new entrants, however, higher compliance costs can become additional barriers to expansion.
This creates an unintended asymmetry. Policies introduced in the name of protecting workers strengthens the position of established firms by increasing the cost of competition, while reducing opportunities for smaller enterprises to grow, train new workers, and create new employment capacity. This creates an implicit protective moat for conglomerates, raising barriers to entry and reinforcing concentration under the guise of worker protection.
The consequences extend beyond immediate hiring decisions. Firms may respond by reducing entry-level opportunities, favoring experienced workers over new graduates, limiting employee benefits, postponing expansion, increasing automation where feasible, or remaining informal. These adjustments reduce the economy's capacity to develop skills, accumulate enterprise capital, and expand productive output.
When such interventions occur within an environment of monetary accommodation and expanding liquidity, the adjustment process becomes even more complex. Higher business costs can contribute to higher prices, while weaker investment incentives constrain future supply growth. The result is not simply a labor-market adjustment, but a mechanism through which inflationary pressures and weaker productive capacity can reinforce one another—stagflation.
Over time, successive interventions can generate a cumulative process in which attempts to offset earlier distortions create new distortions requiring further intervention.
Mandated wage hikes redistribute costs but do not restore purchasing power. Larger firms adapt; MSMEs struggle. The result is an implicit moat for conglomerates, raising barriers to competition. Within monetary accommodation, higher costs feed inflation while weaker investment erodes capacity — stagflation in motion. Successive interventions spiral into quasi‑bailouts, entrenching centralization, weakening feedback, and deepening rent‑seeking fragility.
IV. Conclusion: Inflation Before Prices
As Ludwig von Mises observed, what is commonly called inflation today is more accurately the consequence of inflation rather than inflation itself. The persistent tendency to equate inflation with rising consumer prices shifts attention away from the monetary and financial processes that precede those price movements.
The Philippine experience illustrates why that distinction matters.
Balance sheets reveal where purchasing power is created. Bank lending reveals where newly created purchasing power is initially directed. Credit allocation influences investment decisions, resource allocation, relative prices, and production structures long before those adjustments become visible in consumer price statistics.
By the time inflation appears in the Consumer Price Index, the underlying monetary process has often been unfolding for months.
Yet the process does not end with liquidity creation. The destination of that liquidity matters. When monetary expansion increasingly operates through the financing of existing financial pressures, politically significant sectors, or heavily leveraged structures, liquidity creation can function as a form of quasi-bailout—shifting adjustment costs across balance sheets rather than allowing those pressures to be fully resolved through market processes.
The consequence is not merely higher prices.
It is a gradual weakening of the economy's capacity to adjust. Resources are redirected toward sustaining existing structures rather than expanding productive capacity. Price signals are delayed through administrative interventions. Labor statistics improve without necessarily reflecting stronger capital formation. Businesses face rising costs while investment incentives weaken.
These developments represent different stages of the same underlying process.
The BSP's balance-sheet and lending data therefore provide more than a snapshot of current financial conditions. They reveal the evolving structure through which liquidity is created, transmitted, allocated, and ultimately reflected in economic outcomes. June's inflation report, the widening divergence between headline and core inflation, the burden borne by lower-income households, the changing character of employment, and the growing reliance on successive interventions are not isolated developments. They are manifestations of a broader balance-sheet process.
Understanding inflation therefore requires looking beyond benchmark statistics. Consumer prices summarize observable outcomes. They do not explain how those outcomes came into being.
Following inflation means following the money.
It means following balance sheets before price indices, credit allocation before consumer spending, and institutional incentives before policy outcomes.
Only by understanding that sequence can we understand not only why prices rise, but also why repeated attempts to suppress adjustment can transform monetary accommodation into a self-reinforcing process of weaker investment, distorted allocation, and ultimately stagflation.
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References: (last 3)
Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings
Stagflation Part 9: The Good News Mirage — Statistical Stability Amid Structural Fragility
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