The Tribune

ACTIVTRADES WEEKLY

By CHRIS ILLING

www.activtrades.bs

FIRST came the military, then the energy shock. In 1973, it was the Yom Kippur War between Israel and the Arab states that caused oil prices to quadruple within weeks. Now it is Russia’s attack on Ukraine. And this time, in addition to oil, it is drastically more expensive gas, whose wholesale prices have soared to seven times the level of mid-2021 since the Russian army invaded. There is a risk of unbelievable cost shocks. More and more medium-sized industrial companies can no longer afford to produce at these prices.

The chemical industry referred to its large consumption of oil and gas. About 95 percent of all industrial products require chemical products, ranging from cars, computer chips and insulating materials to televisions, medicines and detergents.

With each day of war, it is becoming more and more likely that a toxic mix which tormented people for years in the 1970s will become reality again after such a long time. This is the coincidence of rising prices and a stagnating economy with increasing unemployment. The scary word for it? Stagflation.

Stagflation happens when the economy is experiencing both economic stagnation – stalling or falling output – and high inflation. Additionally, a struggling economy will drive up unemployment. In other words, all three macroeconomic indicators are going in the wrong direction at the same time.

The question is whether the correct answer that helped stop inflation in the 1970s and early 1980s is the same one today, whether it was rising central bank interest rates that dampened people’s consumption tendencies, and higher wage demands, towards rising prices.

One monetary authority (the European Central Bank) decided against higher interest rates on Thursday. There is some evidence that this stagflation can be counteracted much better than false 1970s romanticism, and that the central banks stay out of it completely.

The banks’ fear is that higher interest rates would further weaken the already weakened economy, and that both wage and price leeway disappear.

Even the most recent gas and oil markets shocks could be enough to cause worldwide inflation to rise to 6 percent this year. At the same time, high costs, war-related supply bottlenecks and a state of shock are likely to result in the economy producing less in the coming weeks - which would be exacerbated by the recently-discussed import ban on Russian gas and oil.

Oil prices spiked to their highest levels since 2008 last Monday after US secretary of state, Antony Blinken, said Washington and its European allies were considering banning Russian oil imports. If prices are rising during stagflation, while economic output is shrinking, measures are needed to slow down this development - and ideally help to support the economy.

Examples of anti-Stagflation methods are:

• Decrease Value-Added- Tax (VAT) with special consideration to the energy industry and consumer.

• Price controls for energy and gas rate hikes.

• Price and trading limits for certain commodities (wheat, oil, gas) where markets are being closed to prevent hoarding and panic buys.

But when, if not now, would be the moment to think about the next pandemic, crises and wars, and prepare ourselves even better?