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Experts list what to track, tools to keep ready as ‘S’ word follows inflation data

Date Published: 
February 8, 2021
Experts list what to track, tools to keep ready as ‘S’ word follows inflation data

WITH the economy still in recession and millions still looking for jobs, the recent spike in inflation in January sounded off alarm bells for what could be a very bad economic omen: stagflation.

However, local economists interviewed by the BusinessMirror disagree with this saying that without runaway inflation, or inflation rates of above 50 percent, there could be no stagflation.

Still, most experts interviewed agreed on the need to track the risks that could fan more inflation upticks this year, including global oil markets.

They also pulled out possible tool kits for the government, stressing the need to move fast on the vaccine rollout in order to hasten economic recovery but pouring in more assistance to hard-hit sectors.

The Bangko Sentral ng Pilipinas (BSP) earlier dismissed the 4.2-percent inflation in January, despite being a two-year high, as temporary. While economists agreed with the Central Bank, they said this did not mean the economy is now in the clear.

“Inflation is considered runaway in stagflation [which] means difficult to control. In our case, I don’t think we can call our situation stagflation,” Ateneo Center for Economic Research and Development (Acerd) Director Alvin P. Ang told the BusinessMirror.

“The current inflation pressure is supply-driven since demand is subdued. So hopefully, if you are able to address the agricultural chokes, you can tame it [inflation],” he added.

Unionbank Chief Economist Ruben Carlo Asuncion also thinks it’s too early to say the economy is experiencing “stagflation.”

Asuncion said the inflation spike was caused by domestic food supply challenges that “can be addressed quickly by decisive and proper policies.”

National Economic and Development Authority (Neda) Undersecretary for Policy and Planning Rosemarie G. Edillon said she would “side with BSP” on not characterizing the situation as stagflation, “because the inflation numbers during stagflation would have to be in the high double digits. We’re nowhere there. This would be in the early 80s.”

Foundation for Economic Freedom President Calixto V. Chikiamco held the same view as the BSP and the economists.

Chikiamco also blamed the inflation spike on the price shocks emanating from the 2020 last-quarter typhoons and the African Swine Fever (ASF), which affected pork production.

Oil, too

DE La Salle University economist Maria Ella Oplas listed another factor: oil prices, noting that the international oil market was affected by developments in the United States.

Last week, CNN reported that the US government “imposed a 60-day suspension of new oil and gas leasing and drilling permits on federal lands.” US President Joe Biden also ordered a moratorium on new oil and gas leases.

A Bloomberg report on Sunday said “Brent crude prices are testing [the] $60 a barrel, a level not seen in more than a year.”

“We do not have control over oil prices and the result of the typhoons on our goods. The situation in the international oil market is a scary thing that we have to watch out for. If we don’t do anything about it, that will become a big problem. That will lead to more affected industries and higher prices,” Oplas said, partly in Filipino.

However, former Philippine Economic Society President and BPI Lead Economist Emilio S. Neri Jr. told BusinessMirror the economy may already be showing signs of mild stagnation.

Neri said the era of high double-digit inflation may have already ended in the 1970s and 1980s when inflation targeting was not yet being done by the BSP.

He added however that, as Oplas flagged, oil prices could increase inflation in the coming months. Neri expects oil prices to increase by 200 percent in April 2021 compared to April 2020.

Neri added that prices could remain elevated because ASF is not going away any time soon. Also, damage from the lockdowns may keep various services expensive as they try to eke out modest profits.

These services include transportation, still suffering from the sharp decline in the number of passengers.

“Stagflation is just a combination of economic stagnation—negative GDP change—and rising prices. Last time I looked, we had both,” Neri said.

“If we see lower inflation in the second half of 2021, then we can say we are out of stagflation. I guess what matters is how it affects the ordinary Pinoy—job opportunities are scarce and cost of living is higher—their economic conditions have deteriorated,” Neri said.

Quimbo, Salceda: Not there yet, but . . .

Meanwhile, two of the most vocal economists in the House of Representatives agreed with the view that the country “is not there [stagflation] yet” but advised the government to act fast using the “inflation tool kit” to save the economy.

House Economic Recovery Cluster chairperson Stella Luz Quimbo of Marikina and Joey Sarte Salceda of Albay both agreed that”stagflation” or the stagnant economic output and the rising inflation can be avoided with quick but right government actions focusing on the agriculture sector.

“Stagflation arises when we have both stagnation [economic contraction and unemployment] and inflation. PSA reported a 9.5-percent GDP contraction for 2020 and 4.2 percent inflation for the month of January, up from 3.5 percent in December. Perhaps BSP [Bangko Sentral ng Pilipinas] considers only inflation well above 4 percent as a “problem” given that the inflation target is 2 to 4 percent for 2021 to 2022,” said Quimbo, who was the first to warn about the possibility of stagflation.

“But what economists like myself are seeing is that a relative price shock in an important sector such as food can spill over into other sectors and become a problem of general inflation,” Quimbo told BusinessMirror.

According to Quimbo, the driver of food inflation is not transitory and it is brought about by supply shocks such as African swine fever and typhoons as well as chronic problems that have always threatened local supply, especially unfair pricing at the farm-gate level by traders, and rampant smuggling because of poor enforcement and excessive tariff levels.

For Salceda, “It’s a problem for economic policymakers because the usual levers of fiscal and monetary policy have tradeoffs. For example, if we lower interest rates to enable growth, we also help accelerate price increases. If you have these three problems happening in scale all at the same time, you are in a bind as a policymaker,” he said.


Former Socioeconomic Planning Secretary Dante B. Canlas explained the term stagflation was coined when, in the 1970s, the US was trying to get the economy out of high unemployment using “expansionary macroeconomic policies.” The attempt backfired since it did not lead to economic recovery but to inflation.

He said the US experience led to a “re-examination of the standard ‘Phillips Curve’ among academic economists.” Stagflation goes against the Phillips Curve.

The Phillips Curve, created by New Zealand-born economist Bill Phillips in the 1950s, illustrated an inverse relationship between inflation and unemployment.

This meant that when inflation is high, unemployment is low and when inflation is low, unemployment is high. This assumed that when more people are employed, there is greater demand for goods, thus, higher prices; and when few are employed, demand is dampened and prices remain low.

“In the US context, the economy eventually got out of the so-called stagnation, but the traditional approach to business cycles based on the Phillips Curve has undergone modifications and extensions. The US experience ushered in new theories about business cycles, both real and monetary. Many business-cycle models today incorporate, for instance, rational expectations,” Canlas explained.

1973 oil shock

Chikiamco said stagflation occurred after the 1973 oil price shock. However, he said the world recovered through tight money policy coupled with deregulation.

Ang said the last time the Philippines experienced significantly high inflation while it was in recession was during the 1983-1985 crisis.

At that time, inflation was above 40 percent and peaked at 63 percent in September 1984.

Edillon clarified that in 1984, average inflation rate was 50.3 percent while GDP growth contracted 7 percent. In 1985, inflation rate was at 23.1 percent while GDP declined 6.9 percent.

“There were a lot of crises at the time; we were able to recover by instituting a number of radical political and economic reforms. I would say the most important economic reform was creating an independent monetary authority,” Edillon told BusinessMirror.

Canlas, however, said the country’s economic history after World War II did not show any episode of stagflation.

In an e-mail to the BusinessMirror, Canlas said the 1984-1985 recession lasted for only two years and was the worst, with a cumulative 11-percent decline in real GDP.

Other instances when GDP contracted after 1985—the aftermath of the 1990 earthquake, the 1997 Asian Financial Crisis, and the 2008 Global Financial Crisis—were “all shallow” and would not be classified as stagflation.

“In the Philippines, policymakers must consider the unique features of the current contraction. What is feared is secular stagnation, an absence of an economic recovery across time,” Canlas said.

“The current funk stems from an absence of confidence on the part of market agents that the Covid-19 pandemic will be contained anytime soon. A delayed government vaccination plan is not helping at all,” he explained.

Wage hike, subsidy—Ibon

With high inflation, Ibon Foundation Inc. recommended that the government implement a wage increase and provide cash subsidies.

Ibon said these will not only help Filipinos cope with high prices but also stimulate the Philippine economy. It recommends a subsidy of P10,000 per month for the poorest 75 percent or about 18 million families or P540 billion for three months.

Currently, Ibon said, the real value of the P537 NCR minimum wage is just P434 as of December 2020 and is not keeping up with the rising cost of living, said the group.

“New cash subsidies and a wage hike are imperative in spurring household spending. Alongside building domestic capacity to combat the pandemic and boosting small businesses and agriculture, these will be crucial in enlivening the economy and even in tempering inflation,” Ibon said.

However, for economists such as Oplas, the primary antidote to the country’s economic ills is to start opening up the economy, starting with a fast vaccine rollout.

Allowing businesses to open, as recommended by Neda and the rest of the economic team, would lead to millions getting employed. This will drive household spending and boost the economy.

Oplas added the BSP should also consider venturing into expansionary monetary policy, including lowering the reserve requirement to encourage economic activities.

Price cap not proper

Canlas said, however, that the recent decision to place a price ceiling on selected pork and chicken products “is not the proper policy since doing so causes those food items to supply cutbacks by producers.”

Rep. Quimbo thinks similarly. “Unfortunately, the proposed price freeze is too simplistic and ineffective. It will only further exacerbate the shortage of supply by discouraging local suppliers,” Quimbo said.

“[The] best way to get out of stagflation is appropriate coordination of fiscal and monetary policies. Price controls may help to keep general prices stable, but may not be enough to address run away prices,” Asuncion said.

“Supply issues should also be addressed. A good example was when rice prices in 2018 started to rise and was addressed with policies to address its prices,” he added.

Ultimately, Ang said, only a combination of solutions are suited to problems like stagflation and the recession.

One solution cannot be used to combat several obstacles such as low absorptive capacity; digital governance gaps; and the continuing lack of confidence in the economy.

The government, he said, was correct in passing the Bayanihan 1 and 2, as these primed the economy, a badly needed move at this time.

“The solutions are not one time. They need a combination of short-term and medium-term policies for both fiscal and monetary sides,” Ang said.

Last Friday, expensive food, particularly pork products, caused the country’s inflation rate to post a two-year high in January, the Philippine Statistics Authority (PSA) reported, but the Central Bank eased fears that it was teetering on stagflation.

On Sunday, Salceda said: “[However] I don’t think we’re in a stagflation just yet. You have to remember that low growth in the country is not due to some cyclical reason or some commodity shock, but because of Covid-19 alone. We have to accelerate the vaccine rollout for sure so we can return to more normal levels of output,” he added.

Tool kit

Both Salceda and Quimbo said the government should spend more, especially  for cash aid to farmers, hog raisers, and livestock producers so that supply shocks are addressed. The Department of Agriculture’s flagship project Plant, Plant, Plant should also be implemented quickly.

“One government program that could address these three problems all at the same time is the rapid implementation of “Plant, Plant, Plant.” You will remember that last month, I already warned the government that prices may hit us hard, so we have to invest in food supply. Investments in agriculture create jobs, improve output, and lower price pressures. It is one of those rare economic instruments that achieves all three,” said Salceda.

“I would remind them [government officials], however, that aggregate numbers do not always reflect the extent of misery of those whose means fall below the average. While good aggregate numbers work in business, we in policymaking have a responsibility to protect those whose misery the numbers may obscure. Inflation, unemployment, and low growth definitely hit the poor harder, so we must always take not the aggregate or average view, but the view of the vulnerable,” Salceda added.

Written By: 
Cai Ordinario and Jovee Marie de la Cruz
PES in the News