What are the risks of using the wrong type of economic policy to fight inflation?
Answer (1)
Using the wrong economic policy to fight inflation can make the situation worse, cause economic slowdown, or even create more problems like unemployment or higher debt. That’s why it is crucial for policymakers to first identify what kind of inflation is happening—demand-pull or cost-push—and respond accordingly.Let’s say inflation is happening because of cost-push factors, like when global oil prices rise, causing fuel and transportation costs in the Philippines to go up. If the Bangko Sentral ng Pilipinas (BSP) or the government responds by raising interest rates or cutting spending, they are treating it as if demand is too high (demand-pull). But in this case, the inflation isn’t due to consumers spending too much; it’s because production costs are rising. The result? Businesses face higher costs and weaker demand. This can lead to stagflation, where inflation and unemployment both increase—a painful situation.On the other hand, if inflation is due to too much demand (e.g., after large government spending, rising income, or increased consumer confidence), and the government responds by subsidizing goods or freezing prices, it can make the problem worse. People will keep spending, and shortages might happen because producers don’t want to sell at low prices. For example, if rice prices are frozen but the cost of growing and transporting rice is still high, farmers and traders may stop selling. This causes supply shortages, and eventually black markets may emerge.In short, using the wrong policy can either weaken the economy (by reducing investment and jobs) or make inflation worse (by encouraging more spending or creating shortages). That’s why economists study the causes of inflation carefully and adjust policies based on the real source of the problem, not just the symptom.
