How does cost-push inflation lead to stagflation, and what was a real-world example of this happening in the past?
Answer (1)
Cost-push inflation happens when the cost of production—like raw materials, energy, or labor—goes up, making it more expensive for businesses to produce goods and services. When this happens across many industries at the same time, prices rise even if consumer demand stays the same. This leads to stagflation, a situation where prices go up (inflation) and economic growth slows down (stagnation), often causing high unemployment at the same time.One of the most famous examples of stagflation happened in the 1970s during the oil crisis. The Organization of the Petroleum Exporting Countries (OPEC) cut oil production, which made global oil prices rise sharply. Because oil is used in transportation, electricity, and manufacturing, this increased the cost of almost everything. As prices rose, companies couldn’t afford to keep operating normally. Many cut costs by reducing production or laying off workers. The result was high inflation, high unemployment, and slow economic growth—a combination that shocked many economists who had previously believed inflation and unemployment couldn’t rise together.In the Philippines, a local version of this occurred during the global oil price spikes in 2008 and again in 2022. When fuel prices went up, transportation and electricity bills increased. Jeepney drivers had to ask for fare hikes, farmers spent more on fuel for their tractors and irrigation, and food prices went up too. But at the same time, businesses slowed down hiring and reduced work hours. For ordinary Filipinos, this meant more expensive daily living while finding and keeping a job became harder.Stagflation is dangerous because it gives policymakers a tough challenge. Fighting inflation might slow the economy more, while trying to stimulate growth might increase inflation. That’s why avoiding cost-push inflation—by securing energy supply, reducing dependence on imports, and improving local productivity—is important for a country like the Philippines.
