Tuesday, May 27, 2008

Inflation and Stagflation


Ask anyone who's grumbling about rising food and living costs and they'll tell you it's because of inflation. So what is inflation really? Some kind of phenomena burdened on the shoulders of nations and people? Actually no. Inflation is usually associated with a robust and booming economy as well as a low unemployment rate (4% or less). This means that everyone has jobs, their total income and purchasing power would increase, prices of goods would then be pushed upwards so that suppliers can reap bigger profits and that's how inflation typically occurs.

But nope again. This isn't happening in Malaysia and in other parts of the world. There's a recession going on in the United States and oil prices are spiralling out of control, this mix of recession and inflation results in a situation called stagflation. This happened once before in the 1970's when oil-producing Arab countries imposed an oil embargo on Western countries for their involvement in the Yom Kippur War and stagflation is happening again.

In theory, stagflation in this instance can be solved by placing restrictions on oil companies as well as stimulating (with government assistance) industries badly affected by stagflation. Unfortunately this theory has no practical use. Its practical application is flawed since the government is unable to provide that much assistance. And especially in Malaysia, macroeconomics just isn't designed to deal with human factors such as corruption and the unpredictability of human behaviour.

We can solve the food crisis when nations increase their harvest for the year, but oil supplies is finite and will run out eventually. So I can't see any point in the future where oil prices can decline unless the world weans off its oil addiction. I know it's a pacifist strategy, but for now we have to sit out this rocky moment and hope that stagflation goes away by itself. There's no real solution yet, deficit spending to help end recession isn't popular because of the perception that our government's spending will only amount to wastage. If we can't fight recession, then all's that left to fight is inflation, and that's what you're seeing right now.

Related article: The Star - Oil hike reaches "tipping point"

Btw, I'm just a hack economist with pre-university education. Form Six's syllabus for Economics is a total pain in the arse since it's entirely in Malay. If any real economists can speak out on stagflation here, I'd appreciate it. :)

1 comment:

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