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Home Opinion Editorial

Stagflation

Manila StandardbyManila Standard
April 29, 2022, 12:35 am
in Editorial, Opinion
Reading Time: 2 mins read
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The global economy is facing complex market forces that are driving commodity prices higher and hindering efforts to reduce world poverty. The war in Ukraine has pushed oil prices to over $100 per barrel while the Omicron variant of the COVID-19 virus is punishing China’s economy, the world’s second-biggest, after an industrial lockdown.

The International Monetary Fund the other day gave out a “stagflationary” outlook on Asia, a reference to stagflation in which an economy is facing the twin threats of rising inflation and a stagnation of economic output.

Higher crude prices, aside from raising the cost of transportation, have translated into increased prices of food and electricity. Shipping companies are quick to adjust their freight rates to reflect the increased cost of fuel. The cost of commodities and other products loaded into ocean-going and inter-island vessels will surely increase and the higher prices will eventually be passed on to the consumers.

The resulting increase in the prices of fuel and commodities will create another vicious cycle. The overall inflation rate, driven by higher petroleum and food prices, will rise. This, in turn, will prompt central banks across the globe to increase interest rates in a bid to induce savings and curb consumer spending until prices stabilize.

The IMF as a result has reduced the growth forecast for Asia to 4.9 percent, due mainly to the slowdown in China that has created ripple effects on other closely-linked economies. The Fund also expects inflation in the region to rise 3.2 percent this year, a full point higher than seen in January.

The Bangko Sentral ng Pilipinas, meanwhile, has conceded that it may consider raising interest rates from the record-low 2 percent by June this year to prevent the inflation rate from rising further. The Philippine inflation rate, though, is relatively low compared with those in the developed countries. The inflation rate in the US, for instance, is around 8.5 percent.

Raising interest rates and giving the economy room to grow at the same time will require a balancing act from monetary authorities. The Philippines, perhaps, is nowhere close to stagflation because the economy is just starting to rebound after months of lockdowns. But its growth could be stunted if the economy remains partially reopened, instead of having a free rein.

Tags: Global economyOmicron variantRussiaUkraine
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