Global stagflation amidst Pandemic

Stagflation which is the amalgamation of two words; stagnation and inflation is an important portmanteau in economic literature. You take stag from the word stagnation and flation from inflation to make the word stagflation. Thus, stagflation is an economic situation when stagnation tag along with inflation. This condition is contrary to J.M. Keynes’ conviction that growth can be spurred with activation of effective demand and as a consequence, the economy may experience the fever of inflation. Keynes’s philosophy worked in the aftermath of the Great Depression of 1930. The United States economy’s gained momentum in growth with the New Deal during the 32nd President Franklin D. Roosevelt encapsulated in “3R”; relief for the unemployed, recovery of the economy to the normal level, and reform of the financial system to prevent a repeat of depression. The world experienced stagflation in the late seventies with the first oil embargo after the 1973 Arab-Israeli war. Developed countries during the Great Recession [ 2008-2010] resorted to Quantitative Easing [QE] as a monetary policy tool to revive the economy.

Covid pandemic is now in a decaying state. The world economy is recovering from the prolonged onslaught of a chameleon with medications spanning from vaccines to monoclonal antibodies and experimental drugs by the pharmaceutical giant Merck. However, the world economy is inheriting two vices in its trail; the worldwide stagnating economy and the creeping inflation being fueled by the supply chain’s debility and churning. The spike in US and eurozone inflation appears to be with a flouting elixir that defies any bent. The annual increase in US inflation was the largest since 1991. The personal consumption expenditures price change rose 0.4 per cent from a month earlier and 4.3 per cent from a year earlier. The median estimate in a Bloomberg survey of economists called for a 0.7 per cent month-over-month increase in total spending and a 0.3 per cent rise in the price index. Eurozone inflation accelerated to 3.4 per cent year-on-year in September reaching a 13 year high. The Eurostat, the statistical arm of the European Union, states that the yearly inflation has exceeded the three per cent threshold level in August 2021.

Energy prices with an increase of 17.4 per cent is the leading factor followed by food and alcohol and service prices with an increase of 2.1 per cent and 1.7 per cent respectively. Currently, commodity prices such as gas, coal, oil, and electricity are all hitting record highs pushing the Bloomberg Commodity Spot Index to its highest level in a year. Meanwhile, food prices are surging, too, with a UN index up 33% over the past 12 months. It is estimated that a 20% increase in commodity price implies a transfer worth at least $550 billion from consumers to producers with serious implications in production cost especially for import-dependent countries such as China, India, and Europe. Many European countries are in the throes of rising electricity and natural gas prices “ triggered by post-lockdown demand surge and lower inventories leftover from the previous season.”

It is apprehended that the inflation may be persistent due to two channels; the higher mark up of producers may end up in higher prices as producers are eager to shift higher production costs to consumers due to bottlenecks in the supply chain. Secondly, the mismatch in the labor market between the lack of skilled workers and still high unemployment rates compounded by supply chain frictions could give rise to higher wages. “We’re seeing all of this inflation,” and “Ultimately how does that get resolved? Part of the way it could get resolved is through demand destruction.” Obviously, that could be suicidal for long-term recovery as demand destruction could propel the economy to a nosedive position from where the recovery could be next to impossible.

The concomitant global supply chain problems and commodity price surge is now a major concern of the world’s top central bankers. The global supply chain now experiences the worst of tariff increases, over 290 per cent. A panel discussion among the top four central bankers; Federal Reserve Chair, President of the European Central Bank, Governor of the Bank of England, and Head of the Bank of Japan emphasized different issues pertaining to the loopholes and twists in supply chain management and the efficacy of the twin monetary policy objectives; price stability and maximum employment in post endemic period. “ It is also frustrating to see the bottlenecks and supply chain problems not getting better-in fact at the margin, apparently getting a little bit worse.” The issue of uncertainty in supply chain management figured prominently in the discussion. Probable causes of uncertainty are embedded in the erratic housing index, structural transformations in labor markets, and food and fuel prices. The concern is that a more enduring price increase will feed into demand for higher pay, tipping the economy into a wage-price spiral.

Monetary policy cannot solve supply-side shocks and the focus should be on the potential second-round effects from those shortages. Accommodative monetary policy and fiscal stimulus during the pandemic already fueled an inflationary spiral in the economy in the aftermath of supply chain rigidities. “The shocks that we are seeing are restricting supply in the economy relative to the recovery of demand.”

The growth scenario during 2020 was frustrating irrespective of the developed and the developing world. The global economy experienced negative growth of 3.2 per cent: a negative 4.6 per cent for the developed world and a negative 2.1 per cent for the developing countries. The year 2021 witnessed modest growth of 5.6 per cent but the projection for 2022 would remain below 2 per cent below pre-pandemic projects subject to significant downside risks. The difficult task in this challenge to the path of recovery is a delicate balancing of price stability and fiscal sustainability. “As the recovery becomes more entrenched, policymakers also need to continue efforts toward promoting growth-enhancing reforms and steering their economies onto a green, resilient, and inclusive development path.”

The writer is the Treasurer and a Professor at the School of Business and Economics, United International University.