Beware of Stagflation 2022: How To Take Care of Business

Understanding Stagflation

Stagflation is an economic condition that results from weak economic growth and high unemployment rates. What follows this financial condition is inflation in prices. Another definition of stagflation is the decline of GDP during inflation. The risk of stagflation in 2022 haunts the world economy.

The term stagflation was first coined by Macleod in the 1960s when England was experiencing an economic condition with high pressure. Macleod continued to talk about inflation during a time of stagnation which he said was stagflation. The word was used again during the recession period in the 1970s.

The fuel crisis in the United States caused the negative GDP growth experienced for five consecutive quarters. In 1973, the inflation rate doubled and even reached double digits the following year. While on the other hand, the US unemployment rate reached 9% the year after.

The situation shows how bad the condition in society is when stagflation occurs in certain countries. It is said that stagflation causes the misery index to rise. The misery index is a measure derived from the combined levels of inflation and unemployment. The stagflation of an economy is the most feared condition by a country since it destroys two sides of a market economy: the supply and demand side.

What Happens in Business and Investments

In October 2021, the United States saw inflation rates reaching a high of 6.2%, spiking goods and services prices. This was a new high in the last 30 years. The fuel price rose about 12%, and so did food prices and basic housing costs. Workers’ welfare during this time was at a new low.

The CIO of BlackRock said that the increase in employment would continue to drive demand for goods and services and higher wages. With the stimulus check given by the government as a way to support communities affected by the pandemic, the problem only becomes bigger.

Joe Biden and the US central bank are persistent that these price hikes are only temporary. Inflation is still hurting everyone. Therefore, President Biden’s main priority is to reverse the trend. Energy costs and natural gas prices have fallen.

Despite these dire conditions, Finance Minister Janet Yellen said the conditions were not as bad as in the 1970s. China is experiencing the same thing, with oil prices reaching USD 80 per barrel.

The World Economic Forum writes that rising energy prices and supply chain bottlenecks have revived conversations about stagflation. Google searches for the term “stagflation” have spiked amid signs of a global energy crisis.

Then, Bank of America’s Head of Global G10 FX Strategy Athanasios Vamvakidis said stagflation had taken root worldwide. “The rise in energy prices is a warning to the market, and the more likely scenario now is for the US to have higher inflation and weaker output,” Vamvakidis said.

Possibility of Stagflation in Indonesia

Minister of Finance, Sri Mulyani Indrawati, said that the government needs to be alert to the possibility of stagflation in Indonesia.

“Of course, the position of the economic slowdown in China will certainly have an impact on various world economies, from commodity prices to world economic growth as a whole,” she said last October.

Indonesia experienced stagflation in 1998. The high price of goods and the amount of money circulating in the community caused the value of money to decline. Globally, the exchange rate of the rupiah against the US dollar also fell at that time.

Indonesia To Tackle Stagflation 2022

Plans to Mitigate Stagflation 2022

Sri Mulyani shared her predictions regarding the global economy. According to her, the increase in the United States Central Bank’s benchmark interest rate will impact the country’s economic growth.

Sri Mulyani assessed that based on experiences that occurred in the history of the United States, this situation would trigger negative economic growth, even a recession. She even went on to say that stagflation in 2022 haunts many countries in the world, including Indonesia.

It is necessary to respond to the stagflation threats with the right policies so that Indonesia does not get caught up in it. She explained that stagflation in 2022 shows the condition of a country where inflation is high but economic growth is slow. Therefore, when inflation is high, monetary policy must be adjusted and not also fly up.

According to her, inflation in Indonesia is still safe despite the high price increases due to geopolitical conditions in Russia and Ukraine. Indonesia’s economic growth is also safe because it remains high amidst the many global risks.

However, fiscal policy must respond to such high price spikes, especially for energy, to survive stagflation. One of them is increasing the energy subsidy budget, which is no longer in line with the current oil price reaching US$ 100 per barrel.

The energy subsidy budget is intended so that the government does not need to take steps to increase the prices of fuel and electricity consumed by the wider community. So that inflation can be more controlled. However, Sri Mulyani estimates that inflation could approach 4% by the end of the year.

Foreign investors can use economic conditions like this for business opportunities in Indonesia, which could reduce imports. Setting up a business in Indonesia will require a business license that can be acquired with the help of professional market entry consulting firms like Cekindo.