The world continues to experience the severe impacts of inflation. The abrupt oil price increases in the past months left companies without a choice but to raise their prices to cover the costs of production which are increasing as well. Effects of inflation were extreme as it severely affected the market and the purchasing power of consumers. However, even with the great efforts of the government of every nation, the economic situation continues to be uncontrolled. In fact, economists from US warns their government about another economic crisis that may happen for the succeeding months. In a survey led by Securities Industry and Financial Markets Association, 80% of US economists believes that stagflation might be experienced by their country while only 13% were firm that deflation will occur. Nonetheless, stagflation might be new for most of the people so unfamiliarity with the concept’s meaning is reasonable. The common terms we usually hear when we talk about economics are inflation and deflation. The current economic situation right now poses a long-term risk as believed by the US economists. In fact, at the end of July 2022, the Bureau of Economic Analysis in US marked the beginning of 21st century stagflation for the state. With this, will the Philippines or other nations’ economy follow the stagflation experienced by US in the upcoming months? Before answering this question, let us find out more about stagflation, how it starts, its impacts on the society, and the most recent stagflation that happened in the world.
What is Stagflation?
Stagflation is a term that collectively identifies and describes an economic situation exhibiting high inflation, high unemployment, and slow economic growth rate. This term came from two words, stagnation and inflation. Stagnation means little to no growth while inflation is the abrupt increase of commodity prices. This is considered as one of the most feared economic situations as policies made to lower inflation may lead to higher unemployment levels. According to the Phillips curve, inflation rate and unemployment rate have a stable and inverse relationship. In short, as inflation level continuous to elevate, unemployment rate decreases or vice versa.
What Causes Stagflation to Start?
Economists have no consensus on the specific causes how stagflation starts. However, there are two concepts which are generally agreed to be the root causes of stagflation. Here are the general root causes of stagflation.
- Supply Shock
This describes the sudden and unexpected changes on the supply of products or commodities. The unforeseen changes might be caused by some factors that disrupts the capacity to produce goods and services at given prices. Some of the common factors for supply shock are low manpower, shortage on raw materials, and inflation. When supply shock happens, the producers and consumers will face a sudden decline on available services and goods for production and consumption which affects produce imbalance on supply and demand. This was seen during this pandemic in which the protocols affected the number of labor and travel time of raw materials, so it resulted for lower stock levels with demands still on a uniform level.
- Poor Economic Policies
This may be considered the first line of defense of a nation’s economy. There are economic situations which are not preventable like in the case of drastic oil price increases brought by the war between Ukraine and Russia. In these moments, we will see the importance of the role of a nation’s economic policies. Yes, there are unforeseen changes that may take place in the global economy. However, the effects can be controlled through a good economic policy. One economic policy that is helpful in times of inflation is the suspension of taxes on certain good or services. Nevertheless, Biden’s administration still wants to raise the taxes of Americans despite its crucial role on controlling the impacts of inflation. In the Philippines, this was one of the proposed solutions of former Vice President Leni Robredo in 2018 regarding the unexpected jump in inflation of Department of Finance (DOF). Despite the inflation, both countries want to focus on garnering funds through taxes as it was believed to help in finishing government projects and aiding its citizens.
Common Impacts of Stagflation to the Society
In an inflationary environment, most of its effects are short-term. Stagflation begs to differ as it is a combination of inflation, stagnation, and higher unemployment rate. Imagine a society with lower currency value and lack of employment opportunities combined with low economic growth. It incapacitates companies and society’s purchasing power. With low economic growth, this situation is likely to continue for the upcoming months or even years which might risk the financial power of the society to sustain its living necessities.
- Higher Production Costs
In an environment experiencing inflation, this is common. Currently, increase in oil prices are abnormal. Knowing that oil is a raw material for production, transportation, and many activities, businesses must raise their prices to cover the additional costs incurred to acquire oil for their operations. With this, manufacturers have higher costs of production.
- Higher Commodity Pricing Equals Lower Value of Wages and Salary
This impact is more on the customer side. Since companies have higher production costs, their profit margins are affected if it is not raised. Companies have target profit margins, so it is inevitable for them to raise the prices of their commodities to cover their production costs without sacrificing their profits. As a result, consumers suffer with lower currency value of their wages or salaries. Their purchasing power is weakened which forces them to adjust their budgets to conform and continue surviving the inflation.
- Difficulty on Finding Employment
On a normal environment, unemployment rate and inflation are inversely related. This makes sense as when people experience inflation they strive to find for jobs. They become more flexible and are not selective on what job to take. What people worry on this type of economic crisis is their means to continue their survival. However, in a society experiencing stagflation, the inverse relationship of unemployment and inflation is disrupted. Alongside high inflation rate, unemployment level raises as well. With stagnated economy in the picture, it worsens the risk of higher unemployment rate.
The Infamous Stagflation in 1970s
What is happening in our economy is similar to how stagflation started in the 1970s. During those years, oil crisis happened because of the oil shipping embargo to United States and Israel’s European allies because of their support to Israel. With the oil embargo, a 300% increase on oil pricing happened. Unemployment rate increased as well because manufacturing jobs are being transferred to foreign countries to save on labor costs. With the extreme elevation of oil prices, commodity pricing quickly increased as well because oil is the most important raw material for production specifically for powering up machines and supplying electricity. It is also used for transportation. With this, for US companies to survive and avoid the soaring costs of operations in US, a lot of businesses decided to transfer its production to countries not affected by the oil shipping embargo. However, many economists believed that oil shipping embargo is not the main cause of stagflation during these years. It was also believed that the growth of money supply by the Federal Reserve played a huge role in the stagnation of the US economy. This might be an important factor as the president of the US ordered dollar devaluation and price and wage freeze to control the effects of inflation, but it was a failure because the economy became more stagnated as consumer confidence and spending critically reduced.
Will Philippines Experience Stagnation?
Almost all nations are affected by the inflation. Russia is known to be one biggest oil exporters in the world. With the war happening between Ukraine and Russia, it affected the supply chain of oil thus its pricing as well. If inflation gets uncontrolled again, there might be slow economic growth for countries which may worsen the situation. However, it is claimed by President Marcos Jr.’s economist that the Philippines is unlikely to experience stagflation. This was strengthened by the estimates of International Monetary Fund that Philippine economy will expand by 6.5% in 2022. Despite the growth, poverty is still in the scene because of the enormous and worldwide inflation currently experienced.
Although, economists believe that stagflation in Philippines should not be feared and is not likely to happen in these times because what is experienced right now is far from what happened in the 1970s. Inflation during those years are at 50% and the economic decline was at 14%. Right now, the economic decline is nowhere above 10%. However, we the Philippines must not be complacent on stagflation. Even though such may not happen in the Philippines, its neighboring countries are never an exception. If this happens, Filipinos will still be affected by this economic crisis which will impact their finances in the long run.
With this, the current administration must exert all its efforts to produce a compelling economic policy which will prevent the severe effects of the crisis. It must be noted that poverty is responsive and sensitive to economic crisis. If government fails to appropriately respond to these economic imbalances, the people will suffer. Remember that we are a third-world country hence most of the Filipinos are not capacitated to afford their daily necessities completely. If this continues, the long-term efforts to alleviate poverty will be put to waste as the currency value will not be enough to afford human needs like food, clothes, or saving up for an affordable house and lot. During this crisis, interest rates are too high, so availing bank loans for your needs would make your more vulnerable to the negative impacts of this economic downfall. In this scenario, Filipino resilience should be accompanied by a proper government support and policies as the governing body is the sole organization that has the power to control the effects of economic downfall. For Filipinos, a piece of advice is to do cost cutting and prepare for worse scenarios so the unfavorable impacts of the economic setbacks would not be easily felt.