STAGFLATION: Causes and Possible Remedies - Dealmakers Bureau De Change

STAGFLATION: Causes and Possible Remedies

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STAGFLATION: Causes and Possible Remedies

Stagflation is defined as inflation plus stagnant growth. It is described as a time in which there is both inflation and a decrease in the gross domestic product (GDP). Stagflation last occurred in the United States in the 1970s.

Inflation has been at a record high in a number of countries this year, and the threat of stagflation has dominated most discussions thus far, even the World Bank has weighed in on the stagflation discussion by allocating a whole chapter to the topic in its Global Economic Development report for June 2022. However, we must not forget that the rise in prices have been worsened by the Russia-Ukraine war.

Let us take a quick look at some stats to further buttress stagflation and why we must not completely fall back into it.  In April 2022, the global media headline CPI inflation rate was 7.8%, the highest since 2008. While aggregate inflation in emerging and developing nations like Nigeria was 9.4%, it was 6.9% in advanced economies, which was the highest level since 1982. Due to the higher risks at this time, the World Bank study has substantially altered global growth.

Global growth is expected to decline from 5.7% in 2021 to 2.9% in 2022, with an average of approximately 3% in 2023. Development institutions are waving the red flag for stagflation risk as the world faces a period of high inflation and decreased GDP.

Back here in Nigeria, in a recent Monetary Policy Council meeting, Edward Lametek Adamu, the CBN’s Deputy Governor, spoke on how stagflation was affecting the Nigeria economy with reference to oil earnings, he cautioned that oil earnings will be offset by fuel subsidies and higher production costs despite a rising oil price which is thought to be beneficial to a large oil exporter like Nigeria,

“Under this condition, the cost of subsidy on PMS will increase, further limiting the fiscal space for supporting growth. Other downside risks to growth emanating from the war in Ukraine include rising gas prices as well as the cost of some intermediate goods. Manufacturing and agriculture could take a hit from this development,” he said.

Causes;

– Stagflation, according to oil shock theory, occurs when the potential of an economy to produce is reduced due to a sudden spike in the cost of oil.

– Another view holds that the combination of stagnation and inflation is the outcome of a weak economic policy. In this case, stagflation is thought to be caused by strict regulation of markets, goods, and labour in an otherwise inflationary environment.

– Other theories suggest that monetary variables may also contribute to stagflation.

Possible Remedies;

– Improvement in productivity could lead to better growth without further inflation. A remedy most African countries are yearning for from their governments at a time like this. (for example, a country like Egypt has been able to build over seven production industries in the last ten years thereby managing to keep their economy from sinking).

– The World Bank has recommended that all governments reach an agreement on how to deal with rising prices.

– Central banks must be on the lookout for signs of stagflation. They should be prepared to ease up on their monetary tightening if necessary.

In conclusion, will the world be falling completely into stagflation? It depends on how every country implements the remedies recommended by world bank and other experts to stabilize their economy, and the sooner this begins the better.

 

cc: Nairametrics.

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