Silly Stagflation?

A reporter messaged me the other day. With inflation rising, there was apparently concern in "some quarters" that we could see deflation in 2022. My rather flippant reply was that this was silly, which of course, the next day he reported verbatim. While I regret the flippancy, I'll stand by the analysis.

Stagflation is an environment when you have simultaneously high inflation and high unemployment (implying an economy in recession), which makes a policy response a matter of damned if you do and damned if you don't. Bringing down inflation would slow the economy further, raising unemployment; trying to reduce unemployment would fuel faster inflation. This supposed relationship between inflation and unemployment is embodied by the Phillips curve, named after its inventor, AW Phillips. I won't get into the history of that right now, but suffice to say that its not quite that straightforward.

Note: AW Phillips lived a life straight out of a storybook, and worth reading about.

Rather than get into the debate on the nature of the inflation being faced today (cost-push? demand-pull?), I'll make two observations.

The first is that, given that the downturn of the past two years has largely been driven by the response to Covid, Malaysia is highly unlikely to see an equivalent recession in 2022. We've largely vaccinated most of the adult population and have already started on the children. Even with Omicron, the load on the healthcare system is unlikely to be as acute, which removes the necessity of wide scale lockdowns. That alone is probably enough to ensure that we'll continue to see a growth recovery this year, and thus avoid the policy dilemma imposed by stagflation. Even in the worst case scenario where we do see a nationwide MCO again, this will bring us back to last year's level of output at worst, which means no recession on an annual basis. This obviously applies from a global perspective as well.

Second, the stagflation of the 1970s was seen largely through a Western lense. One country's cost-push inflation (and the ineffectiveness of policy to address it) is another country's demand-pull inflation (where "normal" policy rules apply). As a commodity producer, Malaysia is more likely to fall into the second category. Latin America has been ahead of the curve last year in tightening both monetary and fiscal policy, because they saw inflation rising first, as higher global commodity prices led to higher domestic incomes. I'd also add that mobility restrictions in LatAm were far less restrictive than what we saw in this region. We're not quite seeing the same dynamic in Malaysia yet, because Malaysia and South East Asia generally were hit by the Delta wave much later than everyone else. But employment and incomes are recovering fast, which makes a stagflation scenario a fairly remote possibility.

So yeah, silly.