Mon, Mar 14, 2022 page8

• EDITORIAL: Avoiding stagflation of the 1970s

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  Rising price pressures lead some people to worry about inflation, while others focus on whether inflation might lead to stagflation, which would hit the economy much harder. As Russia’s invasion of Ukraine escalates, with more sanctions against Russia and more supply chain disruptions, the prices of energy products, agricultural goods and raw materials have soared, and concern over the risk of stagflation at home and abroad is growing.

  Today’s oil price volatility is reminiscent of the 1970s, when global inflation shot up after Arab members of OPEC imposed an oil embargo against the US in 1973 and the US imposed an oil embargo against Iran in 1979, resulting in stagflation: a situation of high inflation, high unemployment and slow economic growth.

  These major oil shocks were not the decade’s only challenges, but they were a big part of the problem. Surging oil prices triggered inflation rates not seen since World War II in many countries, as their economic growth rates dropped substantially.

  Coface, an international credit insurance and management services group, last week said that Russia’s invasion of Ukraine has triggered turmoil in the financial markets and drastically increased uncertainty regarding a global economic recovery. The group added that higher commodity prices have intensified the threat of long-term high inflation, which would increase the risk of stagflation and social unrest. Amid this macroeconomic crisis, industries such as the automotive, transport and chemical sectors appear to be the most vulnerable, it said.

  Although energy prices last week surged sharply — with Brent oil, the global benchmark, surpassing US$130 per barrel to reach the highest price since 2008 — and consumer price data released by the US and European countries indicating that inflationary pressure is building faster than expected, today’s rising inflation is different from the stagflation of the 1970s.

  At that time, there was a shortage of daily necessities, as well as rising energy costs, and some governments were inexperienced and made wrong policy decisions — such as price and wage controls and rationing — which only made the problem worse once the controls had been lifted.

  Today, there are shortages of some goods and rising energy costs, but those are mostly the result of increasing demand as economies reopen, and disruptions in supply chains and logistics due to the COVID-19 pandemic, not the direct effects of embargoes or boycotts.

  Since 1990, there has been no global inflation or stagflation, thanks to free trade and global production, trends that helped to stabilize global supply and cap rising prices.

  There is so far no sign that stagflation is taking hold. A mild increase in consumer prices is not necessarily a bad thing, as it is simply a result of current economic activity and is beneficial for economic growth.

  As the state of things since 1990 has shown, as long as free trade continues and global production remains the model, stagflation would seem to be an unlikely scenario, although price fluctuations are occurring due to the Russia-Ukraine conflict.

  As Taiwan’s consumer price index last month rose 2.36 percent year-on-year — remaining for the seventh consecutive month above the 2 percent alert level set by the central bank — and inflation risks are skewed to the upside, as the Russia invasion has caused commodity prices to surge and increased the risk of wider supply disruptions, policymakers must carefully balance inflation controls and economic growth measures, implement measures to look after society’s most vulnerable, and closely monitor the economic climate abroad.
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