What is stagflation?
As we read this article, there is no single or conclusive economic definitions, which is the same as to legal terms or any definitions in any fields or discipline.
According to Friedman (1976) stagflation is an economic phenomenon whereby both inflation and unemployment rates increases congruently and simultaneously. There are many factors which contribute to this. We will further divide inflation and unemployment into their respective definitions.
However, many commentators and academicians state that both inflation and unemployment do not increase together and it is actually an inverse. This is because, when the government attempts to curb unemployment which reduces, inflation then increases.
The Phillip curve also supports the theory that both inflation and unemployment occur negatively. When there is full employment, the wages of workers increase, labour market depletes, thus the price of goods and services would also increase. Some suggest that stagflation is influenced by oil prices and monetary policies too.
The starting point of stagflation was between 1973-74 and 1978-79, whereby stagflation was initially linked to the oil supply shocks, which prompted the rise of inflation, recession and unemployment happening simultaneously. This is worsened when central banks increase interests rates.
For Meltzer (1979) he provides a very unique view. While inflation and unemployment increases positively, however if we were to reduce inflation, then unemployment increases. Therefore, his view of stagflation is the combination of both theories of positive and negative.
Inflation is where the prices of goods and services increase, which then causes the cost of living to also increase. Inflation is caused when there are too many money printed or supplied. The Phillip curve also explains that the value of money would also fall.
This economic theory is supported in the Quantity Theory of Money, when there is more money produced, it would affect the price levels to increase. Inflation would also result in recession.
Unemployment is defined as groups of labour who are willing to work for a particular job, with a certain wage, but are hindered due to economic situations.
Is Malaysian experiencing stagflation?
Due to the Covid-19 pandemic with the emergence of an omicron variant, waning tourism and the increase of high oil prices are encouraging stagflation, according to Hunter (2022). Therefore, countries experiencing stagflation would have to revitalise their economies.
Malaysia as theorised by Hunter. Our GDP has declined by 4.5% in the third quarter of 2021 and unemployment was at 4.7% in the second quarter of 2021. Added the rising oil prices from US$20 per barrel in the middle of 2020 to US$70 by the end of 2021.
The costs of imported inputs for food production mixed in this equation, this leaves Malaysia with an inflation rate of 3.3% in 2021.
In order to curb this, economic activity should be magnified and that interests rates should be reviewed. Previously in the 1980s, the issue of stagflation was dealt through privatisation of supplies and deregulation. The labour market is also suggested to be deregulated, at least partially.
With the Budget 2022 and RMke-12, hopefully these new financial allocations and plans for the country would assist in soothing the burden of the Rakyat. It is advised that more businesses, especially SMEs and educating the people on how to conduct their businesses, especially the ones that involve online are to be promoted.
Therefore, the issue of unemployment decreases and if we were to accept the notion of stagflation, then inflation and recession would follow suit to decrease. However, there may be the danger that if we were to decrease unemployment, then inflation increases.
Covid-19 restrictions have been laxed with daily cases reduced to 3000-5000 and with the introduction of booster shots, the country should continue to invigorate efforts for faster vaccinations and to review SOPs as progressions are made.
References;
Hunter, M. (2022) Malaysia, Thailand face prospect of stagflation. Free Malaysia Today. Retreieved from, https://www.freemalaysiatoday.com/category/opinion/2022/01/27/malaysia-thailand-face-prospect-of-stagflation/
Rabiul Islam, Ahmad Bashawir Abdul Ghani, Emil Mahyudin, Narmatha Manickam. (2017) Determinants of Factors that Affecting Inflation in Malaysia. International Journal of Economics and Financial Issues. 7(2), Pp 355-364. Retrieved from, https://www.econjournals.com/index.php/ijefi/article/download/3817/pdf
Kilian, L. (n.d) Oil Price Shocks, Monetary Policy and Stagflation. Retrieved from, https://www.rba.gov.au/publications/confs/2009/pdf/kilian.pdf
Meltzer, A. (1979) Testimony prepared for the Special Study on Economic Change Hearings before the Joint Economic Committee. Retrieved from, https://kilthub.cmu.edu/articles/journal_contribution/The_Problem_of_Stagflation/6708698/1
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