What You Need to Know About the Recent “Stagflation”

The country is currently facing stagflation, a combination of a stagnant economy and higher inflation. Here’s why.

If you have been to the market lately, whether it’s your neighborhood palengke or a trusty grocery mart, you may have noticed the rise in prices for common goods like meat and vegetables. In some areas, the price of pork can set you back by around PHP 400 — an about 60 percent increase from its price in mid-2020. Siling labuyo, a staple ingredient in many Filipino households, is priced at around a thousand pesos per kilo. Other meat products and fresh produce are also seeing an increase in prices. This can be felt by everyone, but most especially by Filipinos who have limited budgets for market runs.

In economic terms, this is a phenomenon referred to as inflation, or the rise in prices of consumer goods. And because the recent inflation is on top of a continuous decline of the country’s gross domestic product (GDP), economists refer to this phenomenon as “stagflation.”

In 2020, the country experienced its worst negative economic growth with a 9.5 percent contraction — a figure unseen since the Second World War. Add to this, we are also experiencing record-breaking unemployment rates, severe hunger, and little to no financial aid coming from the government. The inflation rate for June, which is at 4.2 percent, has breached the 2 to 4 percent increase projection of the government. Economists believe that without effective mitigating measures, the GDP can further contract and inflation will continue to soar.

Though this is not the first time the country has experienced stagflation, the factors behind it this year are unique and felt deeper due to the consequences of the COVID-19 pandemic. It is also important to note that, although both the decline in the economy and the hike in prices can occur naturally even in countries with the best economic policymakers, what is happening in the Philippines could have been averted or, at least, minimized had there been sounder policies in place.

First of these factors is the abysmal response of the government to the pandemic. The toll on all sectors of the economy was quantified by the rising joblessness, closure of small and medium enterprises, and, ultimately, the deep recession reflected by the 9.5 percent overall negative growth of the country’s GDP. The poor performance of the Duterte administration against the pandemic ran afoul with the best practices exhibited by countries such as Australia, South Korea, Vietnam, and Thailand, among others. The insistence to ease quarantine restrictions, even at the uptick of COVID-19 cases, also added to economic contractions. Although there was a slight improvement in the third quarter of 2020, the downward growth of the country’s economy was not abated, and the country now has the worst economic status in the Southeast Asian region.

Through the Bayanihan to Heal as One Act, the government was also able to roll out funds straight to the people through cash aids. Through these, Filipinos were able to tide through the first months of the quarantine as they were equipped with some purchasing power. But with the Bayanihan to Recover as One Act or Bayanihan 2, the utilization of emergency funds became much slower and less transparent.

Lawmaker and economist Stella Quimbo opines that had the government been faster in utilizing the allocations of Bayanihan 2, an additional PHP 252 billion or over 1.3 percent could have been added to the country’s GDP. But as it stands, at least on latest figures, around PHP 160 billion still has not been distributed to their respective allocations.

The inflation, on the other hand, has been largely due to the shortage in supply of food items. Due to the African Swine Fever (ASF), an epidemic that kills pigs, prices of pork meat has soared. According to the Department of Agriculture, at least 430,000 pigs have been culled. In another estimate from SciDev.Net, the figures could be as high as 4.7 million — over a third of the country’s hog population. This has also affected other meat products (chicken, beef, fish) as consumers scramble to find alternatives.

Monique Eloit, director general of the World Organisation for Animal Health, says that these losses contribute greatly to further the hardship experienced by livestock-breeding families and, in turn, the millions of Filipinos whose diet includes pork products.

The shortage on vegetables, meanwhile, are “long-standing,” Punongbayan writes, and are caused primarily “by, say, the chronic lack of post-harvest facilities (like those for cold-storage) as well as poor coordination of crop planting and harvesting.” For a largely agricultural country, infrastructures and technology required by farmers in order to deliver seem unable to match their needs.

The supply shock from food supplies, then, has driven the inflation we are currently experiencing. And unless these fallouts are addressed, a full-year inflation can be expected. Even the imposition of price ceilings on pork and chicken will not solve the core problem that is ASF. Low prices only provide a transitory salve. In fact, some sellers in Metro Manila have opted out of their businesses to avoid losses, which trickles down to regular consumers who are pinched to choose between finding other protein-source alternatives or not including any meat altogether. With a pandemic that has robbed Filipinos of their livelihoods and stable income, soaring prices of food further adds to the burden they carry.

As for possible solutions, both Quimbo and Punongbayan believe that there is still an urgent need for more government spending — a rather intuitive response — in order to provide assistance to farmers and livestock producers. In this way, the supply shock can be addressed. But this only solves the first part of the equation.

“The current situation is a difficult balancing act for the Department of Agriculture,” the University of the Philippines’ Los Baños’ Department of Agriculture and Applied Economics (UPLB DAAE) said in a statement. “On one hand, it must provide support to farmers and other agriculture stakeholders while at the other end look after consumers’ welfare.”

While higher prices of agricultural products will be beneficial for producers, consumers prefer lower prices. So what should be done?

ASF is a difficult epidemiological problem to deal with as it is a disease that has no available vaccine yet, is evolving and mutating continuously, and is already prevalent in the country after the government failed to contain it. But UPLB DAAE points out an obvious long-term recourse, which is to leverage the country’s archipelagic nature and mitigate the spread of the ASF as a pandemic. As for more immediate solutions, the department suggests that increasing the supply of chicken, a meat substitute, can help Filipinos. Other solutions, including price caps, focusing on ASF-free areas as chief producers and the lowering of import tax (or tariffs) are also viable options, but these have consequences that short-sighted policymakers may not be able to deduce.

Punongbayan and Quimbo also agree that in the face of a stagnant economy and high inflation rate, one solution is to give people some cash.

“When you’ve lost your job and suffered a staggering loss of income,” Punongbayan writes, “the last thing you need is a price acceleration that further diminishes the purchasing power of the little money you have left.”

Increasing this purchasing power, especially for poverty-stricken segments of our society, would do good not only to the families affected but also to the overall circulation of money in our economy. However, whether the government will heed these recommendations when they’ve explicitly expressed abandonment of further cash aids is yet to be seen.

With two public health crises at hand (ASF and COVID-19), any monetary help extended to Filipinos can alleviate their situation. Until then, a word of advice: Brace yourself and demand for better leadership in 2022.

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