But conscience asks the question, is it right? And there comes a time when one must take a position that is neither safe, nor politic, nor popular, but one must take it because it is right—Rev. Dr. Martin Luther King, Jr.
In this issue:
Stagflation Part 7: The Return of Constraint—Oil Shock,
Treasury Revolt, and the Politics of Inflation Suppression
I. Stagflation Is Experienced Before It Is Officially
Measured
II. Stagflation: Stagnation, Inflation and the Erosion of
Living Standard
III. Growth Illusion: Nominal Stability, Real Deterioration
IV. The Electricity Stagflationary Signal
V. The External Constraint: BoP Stress Extends in April
VI. USDPHP at 63.5: BSP’s Next Maginot Line?
VII. Shrinking GIR and Weakening OFW Remittances
VIII. Constraint Logic: Intertemporal FX Management Adjustment
Pathways
IX. ASEAN’s Oil Shock Politics: Singapore-Indonesia’s
Divergence
X. When Bond Markets Revolt: The BSP’s Off-Cycle
Contradiction—a Panicked Response
XI. Inflation Did Not Disappear: Huge Expansion in Pork
Import Quotas, DTI’s Some Prices May Rise
XII. Conclusion: Stagflation as Process, Not Event
Stagflation Part 7: The Return of Constraint—Oil Shock, Treasury Revolt, and the Politics of Inflation Suppression
As oil shocks collide with weakening growth, rising yields, peso pressure, and emergency price management, policymakers increasingly appear trapped between inflation, financial fragility, and political optics.
I. Stagflation Is Experienced Before It Is Officially Measured
For months, the dominant refrain from mainstream commentary has remained familiar: the Philippines is supposedly still “far from stagflation.” GDP remains positive. Employment statistics have yet to collapse. Inflation, though elevated, is repeatedly framed as temporary, externally driven, or merely supply-side “noise.” Even the country’s economic manager continues to insist that conditions hardly resemble stagflation at all: “I don't see it that way”.
By this framework, stagflation exists only once
statistical agencies formally certify its arrival.
Until then, everything is supposedly manageable.
But this increasingly mistakes statistical abstraction for lived economic reality.
II. Stagflation: Stagnation, Inflation and the Erosion of Living Standard
Stagflation, in its original political meaning, was never merely an econometric threshold waiting for quarterly confirmation. British politician Iain Macleod coined the term during the 1960s to describe a condition where rising prices coincided with weakening economic conditions and deteriorating living standards.
Only later did technocrats reduce the phenomenon into measurable variables involving GDP, inflation, and unemployment.
Yet historically, stagflation was experienced socially long before it became fully visible statistically.
That distinction matters.
Figure 1
By the same GDP-centric standards repeatedly invoked today, much of the Philippines during the 1970s oil shocks should not immediately have qualified as stagflationary either.
Annual GDP growth was positive throughout the 70s despite severe inflationary waves in 1973 and 1979. (Figure 1)
Yet hardly any Filipinos who lived through that period remember it through national income accounting tables.
They remember collapsing purchasing power, shortages, rationing, long queues, rising household stress, and increasingly constrained choices. They remember wages failing to keep pace with necessities. They remember nominal incomes rising while real conditions deteriorated underneath.
The full statistical expression of stagflation only became undeniable during the 1983 debt crisis, when recession, inflationary pressures, financial instability, and likely surging unemployment converged simultaneously.
But the underlying deterioration had already been building for years. Today’s Iran war oil shock is barely three months old—and still unfolding.
That is precisely the point frequently missed in today’s discussions.
The relevant comparison is not endpoint versus endpoint.
It is trajectory versus trajectory.
And the trajectory increasingly looks familiar.
III. Growth Illusion: Nominal Stability, Real Deterioration
To be clear, today’s Philippines is not a carbon copy of the 1970s.
As previously discussed, the structure of the economy has changed substantially. Industry once occupied a more dominant role, whereas today’s system leans far more heavily on consumption, services, credit expansion, remittance inflows, and financial intermediation.
The political environment has also shifted from outright authoritarianism under Marcos Sr. to the far softer managerial framework of social-(ochlocratic) democratic technocracy under Marcos Jr.
Furthermore, the integrity of GDP data under such a regime could itself be a factor.
But these differences do not eliminate stagflationary dynamics.
In many respects, they may amplify them.
A consumption-led economy does not make the system more resilient. An economy heavily dependent on household spending, leverage, remittances, and fiscal support becomes highly vulnerable to energy, import-cost, inflation and duration shocks—particularly when underlying growth conditions are already weakening and fiscal balances remain increasingly strained.
Rising fuel and transport costs compress discretionary spending directly while simultaneously pressuring operating margins, debt servicing capacity, and government finances.
Higher interest rates further amplify these pressures. In a consumption-heavy economy increasingly reliant on household leverage, inflation shocks do not merely erode purchasing power directly—they also tighten financial conditions precisely when consumers are least capable of absorbing additional strain.
As borrowing costs rise, debt servicing increasingly competes with discretionary spending, weakening consumption even further. Property markets, installment-driven purchases, SME financing, and broader credit-dependent activity all become more vulnerable to deceleration simultaneously.
In this sense, the same credit structures that previously amplified consumption growth can rapidly become transmission channels for economic contraction once inflation and financing pressures intensify.
Unlike advanced economies, such as Singapore (see below) that can partially offset external shocks through productivity gains or export competitiveness, highly consumption-driven systems often absorb the adjustment through household balance sheets and declining real purchasing power.
This is especially important because the present slowdown predates the recent Iran war-related oil shock. GDP growth had already been weakening materially well before the latest geopolitical escalation.
The external shock therefore did not create the underlying fragility. It merely accelerated and exposed conditions already deteriorating beneath the surface.
In such an environment, nominal spending can temporarily persist through subsidies, credit expansion, remittance support, transfers, or dissaving, creating the superficial appearance of resilience even as underlying household conditions weaken materially.
Statistical aggregates therefore remain deceptively stable while households quietly absorb the adjustment through reduced consumption quality, rising indebtedness, deferred maintenance, shrinking discretionary capacity, and growing dependence on political or financial support mechanisms.
If the 1970s featured queues for rationed goods, today’s version increasingly manifests through queues for subsidies, emergency relief, transfers, refinancing windows, and politically mediated ayuda systems.
The form changes.
The mechanism does not.
Again, this is a 3‑month‑old crisis (and counting), compared to the years‑long oil shock of the 1970s—so referencing stagflation in that context is a false equivalence (apples to oranges narrative).
Yet, inflation erodes purchasing power. Households compensate through leverage, reduced discretionary spending, informal coping mechanisms, or dependence on state support. What once appeared as gasoline lines and ration coupons now emerges through subsidy politics and debt-dependent consumption maintenance.
And unlike the abrupt statistical collapse many now seem
conditioned to expect, stagflation often develops gradually beneath nominal
stability.
IV. The Electricity Stagflationary Signal
Indeed, much of the present deterioration increasingly appears beneath the headline aggregates.
Q1 2026 GDP slowed sharply to 2.8%, continuing a deceleration trend that has persisted since the post-pandemic rebound peak in Q1 2022. Growth had already weakened materially throughout 2025 even before corruption scandals, geopolitical instability, and oil transmission effects intensified.
More importantly, the quality of growth itself continues to deteriorate beneath the surface.
Recent data increasingly confirms this divergence.
Figure 2
Real electricity GDP from Q2 2025 through Q1 2026 registered 0.0%, -1.1%, +0.1%, and +0.5%, respectively—hardly consistent with narratives of expansion. (Figure 2, topmost image)
Was the economy weaker than the 2.8% Q1 2026 GDP headline implies?
Meralco electricity sales volume in gigawatt-hours (gwh) likewise weakened persistently over the same period at -0.33%, -2.08%, -1.3%, and -1.76%. Yet peso-denominated electricity sales surged sharply, especially during Q4 2025 when revenues rose nearly 44%. (Figure 2, middle pane)
Consumers were effectively paying substantially more while consuming less.
This increasingly resembles a classic case of monetary illusion: nominal expenditures rise while real consumption weakens beneath the surface.
Regulatory pass-through mechanisms—including FIT-ALL, GEA-ALL, and other embedded system charges—inflate peso-denominated spending even as underlying electricity demand continues to soften.
What appears statistically as nominal growth is, in effect, a redistribution mechanism embedded within regulated pricing structures rather than a reflection of expanding real activity.
Meanwhile, power producers continue to expand leverage-intensive capital structures, while households absorb the resulting burden through higher system charges. The result increasingly resembles an Averch–Johnson type incentive environment, where regulated capital expansion is implicitly rewarded regardless of weakening underlying consumption conditions.
Listed renewable energy firms—beneficiaries of the GEA-ALL framework—illustrates this dynamic. Aggregate debt increased by 30.15% in Q1 2026, rising by Php 182.41 billion to Php 787.51 billion. (Figure 2, lowest table)
In effect, regulated pass-through charges function as a de facto financing channel for capital expansion in the sector—socializing costs across the consumer base while concentrating investment benefits within a relatively narrow set of utility and renewable energy entities.
In the framework of Frédéric Bastiat, this would be interpreted as a form of “legal plunder”: a system in which redistribution is not carried out through overt taxation alone, but through regulatory and pricing mechanisms that embed transfers within the structure of essential services themselves.
This is the context within which the current stagflation debate should be understood.
The issue is not whether the Philippines has already reached a 1979 or 1983-style endpoint.
The issue is whether the underlying political and institutional mechanisms that generate stagflationary pressure are increasingly active beneath the surface.
These are not merely outcomes such as slowing growth or weakening purchasing power, but the policy-driven structures that shape them: for instance, in the utility sector, regulatory regimes that embed cost pass-through into essential services, capital-biased incentives in regulated utilities consistent with an Averch–Johnson type distortion, and fiscal interventions that increasingly reallocate rather than resolve structural imbalances.
In such a configuration, external shocks act primarily as accelerants rather than root causes. The deeper transmission mechanism lies structurally embedded in domestically accumulated policy distortions, which determine how those shocks propagate through prices, credit conditions, and household consumption. The electricity sector is a clear illustration of this dynamic, but it is not unique in doing so.
Increasingly, the answer appears yes.
Stagflation rarely announces itself all at once.
As a process, it usually emerges quietly beneath nominal stability—until eventually the statistics catch up to what households have already been experiencing for quite some time.
Rising self-reported poverty and hunger rates affecting a substantial share of the population are parallel symptoms.
Moreover, in contrast to mainstream views and even his
own economic adviser, President Marcos has recently acknowledged
concerns over stagflation risk.
V. The External Constraint: BoP Stress Extends in April
The Philippines’ external imbalance is no longer merely deteriorating.
It appears to be accelerating.
Figure 3
Following the historic Q1 2026 Balance of Payments (BoP) deficit discussed in Part 3, April delivered another significant deterioration: a reported $2.124 billion monthly shortfall, bringing the year-to-date deficit to approximately $7.4 billion by April alone. (Figure 3, topmost window)
In just four months, the Philippines had already exceeded the full-year 2022 BoP deficit of $7.263 billion, while rapidly approaching the BSP’s revised 2026 projection of roughly $7.8 billion.
Put differently, the economy appears to have nearly exhausted its annual external financing buffer before the midpoint of the year.
This matters because the BoP is not an abstract accounting construct.
It is the economy’s external balance sheet constraint: the system through which dollar inflows finance imports, debt servicing, portfolio outflows, and exchange-rate stability.
Persistent deficits therefore imply rising dependence on external financing at precisely the moment when global liquidity conditions are tightening and domestic growth is decelerating.
At its core, the structural issue remains unchanged.
The Philippines continues to operate under a widening (record) savings–investment gap, where domestic investment requirements increasingly exceed domestic savings capacity. The resulting imbalance must be financed externally, making the economy structurally sensitive to shifts in oil prices, global interest rates, and capital flow conditions.
The Middle East oil shock did not originate this vulnerability.
It exposed and accelerated it.
VI. USDPHP at 63.5: BSP’s Next Maginot Line?
Foreign exchange markets have increasingly reflected this pressure.
USDPHP has repeatedly carved record levels, signaling rising demand for dollar liquidity amid widening external financing gaps.
In this context, statements from monetary authorities are interpreted less for their literal content than for their implied reaction function.
When BSP Governor Eli Remolona noted that a peso around Php 63.50 to the dollar “might be okay, as long as the decline is measured and not inflationary,” the statement aligned with the BSP’s long‑standing policy of allowing exchange‑rate flexibility while smoothing volatility rather than defending fixed levels. (Figure 3, middle image)
Yet has the BSP effectively signaled 63.5 as its next “Maginot Line” — a tacit FX target as widening BoP deficits from the savings gap, oil shock, and slowing growth deepen the country’s dollar shortfall?
Markets respond not only to stated policy frameworks; revealed preference matters. For instance, the 59‑level was defended seven times between 2022 and 2025, giving rise to what we described as a “soft peg” regime—effectively a subsidy on the peso that rendered it overvalued. (Figure 3, lowest graph)
The BSP never explicitly declared this as a threshold,
but markets recognized it and eventually forced a breakthrough — a reminder
that when exchange‑rate weakness nears politically sensitive levels without
strong defense, participants quickly adjust their expectations of the true
intervention point.
VII. Shrinking GIR and Weakening OFW Remittances
And here’s where things get uncomfortable.
Because the BSP is not merely managing inflation expectations—it is also managing a gradually shrinking external buffer.
Gross International Reserves (GIR) came under visible pressure following a record $6.63 billion drawdown in March and another roughly $2.3 billion decline in April, bringing reserves down to around $104.3 billion.
Figure 4
More importantly, deterioration appears concentrated in the most liquid foreign exchange components, which have fallen toward levels last seen around mid-2015, while foreign investment components weakened toward levels not seen since roughly Q3 2022. (Figure 4, upper window)
Headline GIR therefore risks overstating resilience.
Should the gold‑averse BSP be thanking its residual gold reserves for propping up GIR despite the drawdowns? Would they be offloading more gold to defend the PHP?
The issue is not simply reserve size, but reserve composition and deployability. Sustained intervention to smooth volatility can gradually shift reserves away from immediately deployable foreign assets even when aggregate levels remain superficially stable.
At the same time, external inflows are showing early signs of moderation. OFW remittance growth slowed to 2.3% in March—its weakest pace since mid-2023—bringing year-to-date growth to roughly 2.8%. (Figure 4, lower chart)
That matters disproportionately in an economy where remittances remain a major contributor of dollar liquidity. To the extent that Middle East disruptions contribute to slower inflows—or eventual repatriation risks—the external constraint becomes more complicated than oil alone. It could diffuse to the economy in the form of unemployment and social tensions.
VIII. Constraint Logic: Intertemporal FX Management Adjustment Pathways
At this stage, the adjustment problem increasingly looks structural rather than cyclical.
If dollar inflows weaken while import costs, debt service, and external financing requirements remain elevated, the economy must adjust through some combination of reserve use, higher borrowing, slower domestic demand, or peso depreciation.
Structural improvements—stronger exports, higher productivity, tourism gains, or investment reforms—remain possible but operate over much longer horizons and depend on institutional capacity that rarely adjusts quickly during external stress.
In practice, short-term adjustment increasingly defaults to financial channels: peso weakness, reserve use, and borrowing.
Structural rebalancing, where it occurs, tends to arrive later—politically slower, institutionally harder, and far less responsive to immediate shocks.
Nonetheless, the government face a choice: let markets resolve imbalances, or intervene and pay a heavier price—crisis.
IX. ASEAN’s Oil Shock Politics: Singapore-Indonesia’s
Divergence
Figure 5
Singapore’s stock market benchmark, the STI, recently overtook Indonesia’s Jakarta Stock Exchange as the largest in ASEAN. (Figure 5, upper diagram)
Why this is important?
The Singapore–Indonesia divergence offers a regional case study in oil-shock politics. Both faced imported inflation, energy pressures, and tighter global liquidity. Yet markets rewarded institutional credibility and financial absorption while penalizing administrative intervention.
Despite the oil shock, the USD has barely risen against the Singapore dollar. That’s because Singapore absorbed stress through liquidity, strong banks, and institutional inflows, allowing relative SGD stability and rising equity valuations. (Figure 5 lower image)
Meanwhile the rupiah (IDR) is at record lows. Indonesian authorities increasingly relied on political interventions: FX restrictions, export controls, and administrative management as the rupiah weakened, with markets eventually forcing the discussion toward rate hikes via rising sovereign yields.
So no, the sufferings from the oil shock are not equal.
X. When Bond Markets Revolt: The BSP’s Off-Cycle Contradiction—a Panicked Response
If the
Philippines’ external imbalance explains the pressure on the peso, Treasury
markets increasingly explain the pressure on the BSP.
Figure 6
The continuing rout in government securities may be revealing something policymakers hesitate to acknowledge publicly: inflation is no longer behaving like a temporary supply disturbance.
Treasury yields have surged across key segments of the curve, particularly the belly, increasingly signaling that markets are repricing inflation persistence, peso vulnerability, sovereign financing needs, and policy credibility risks simultaneously. Belly yields continue to soar past 2022 highs. (Figure 6, topmost and middle charts)
In effect, financial markets have already been tightening conditions ahead of the BSP.
That creates an uncomfortable contradiction.
The BSP continues emphasizing supply-side inflation: oil, food, logistics disruptions, and geopolitical shocks from the Middle East conflict.
Suddenly, policymakers signaled a willingness to consider an off‑cycle rate hike, prompted by the Treasury market rout. The BSP chief, ironically, admitted they were “behind the curve” and telegraphed a possible “surprise” move to cool inflation, according to one headline.
If inflation is merely exogenous and supply-driven, why tighten?
Interest rates
do not produce oil.
They do not
reduce shipping costs.
They do not rebuild disrupted supply chains.
The BSP itself previously argued that monetary policy has limited effectiveness against supply-side inflation.
So why the shift?
The answer
increasingly lies beneath the official narrative.
Figure 7
Persistent supply shocks become generalized inflation when transmitted primarily through liquidity (credit expansion), then exchange rates and fiscal spillovers—all of which are entwined. M2 has recently been rising ahead of the oil shock (Figure 7, topmost visual)
The Philippines has deepened its dependence on inflationary liquidity expansion to drive GDP performance, which ironically has coincided with its slowdown. (Figure 7, middle diagram)
A weakening peso magnifies imported inflation. Rising Treasury yields tighten financing conditions. Elevated leverage makes the system increasingly sensitive to refinancing costs and credit risk.
This no longer appears to be merely an oil story. It increasingly resembles a balance‑sheet story. And markets may already be forcing the BSP to acknowledge it.
Central banks rarely operate independently of bond markets. Credibility is not only partly outsourced to pricing but also reflects the credit health of government bonds and monetary policies.
Once investors begin demanding higher yields to compensate for inflation, currency weakness, and fiscal risk, policymakers grow even more reliant on markets for guidance. Of course, they never admit to this.
The dilemma becomes severe in a leveraged economy.
Banks remain large holders of government securities.
Corporates entered 2026 heavily financed.
Government borrowing requirements remain elevated.
Tightening risks exposing duration mismatches, refinancing pressures, and weaker cash flows precisely as growth slows.
Delay, however, risks a more destabilizing outcome: markets concluding the BSP has fallen behind the curve.
This is the trap.
The BSP now faces a “devil and the deep blue sea” dilemma — tighten into fragility, or allow fragility to spill into inflation expectations, peso weakness, and Treasury pricing.
Neither path
appears painless.
XI. Inflation Did Not Disappear: Huge Expansion in Pork Import Quotas, DTI’s Some Prices May Rise
If the BSP increasingly tolerates peso weakness near the 63.5 zone, policymakers face an immediate political problem:
How do you contain inflation without confronting the underlying external imbalance?
The answer increasingly appears skewed toward administrative interventions and short‑term political populist fixes.
- Imports.
- Price assurances.
- Emergency interventions.
- And selective suppression.
The administration’s dramatic increase in pork Minimum Access Volume (MAV)—from 54,210 metric tons to 204,210 metric tons, an additional 150,000 metric tons—offers a revealing case study.
Officially, the move aims to stabilize pork prices amid lingering disruptions from African Swine Fever (ASF). Yet the scale of the increase suggests something larger than routine agricultural management. Authorities had already attempted pork MSRP controls (March 2025), only to retreat after poor compliance and market resistance (May 2025). Direct price suppression failed. The fallback increasingly appears imported disinflation.
The timing matters.
Despite lingering deflation in meat CPI in the first four months of 2026, policymakers still opted for a massive quota increase. (Figure 7, lower image)
The magnitude suggests authorities are preparing for a material domestic supply shortfall—or are increasingly concerned one is emerging amid ASF disruptions, rising feed and fuel costs, weather pressures, and second-round oil shock effects.
But imported disinflation is not free.
Every additional ton of pork requires dollars.
And dollars increasingly appear scarce.
In an economy already confronting widening BoP deficits, rising oil import costs, slowing growth, and peso pressure, suppressing food inflation through imports risks simply relocating inflation pressure from supermarket shelves to the foreign exchange market.
Today’s relatively ‘cheaper’ pork may become tomorrow’s weaker peso.
And a weaker peso eventually feeds back into domestic prices through imported fuel, fertilizer, feed, logistics, and food inputs. The risk increasingly resembles a vicious cycle:
Import to suppress inflation → widen FX demand → weaken peso → import inflation returns → import even more to suppress prices.
The next question is: who benefits from such an outsized, politically determined import allocation and its related activities? One thing is clear: we can expect protests from local swine producers.
The same contradiction increasingly appears in the DTI’s repeated assurance of “no price hikes” for basic goods.
Manufacturers temporarily pledged restraint despite rising fuel and logistics costs from the Middle East oil shock. Yet headline CPI accelerated sharply from 4.1% in March to 7.2% in April.
The disconnect matters.
If inflation accelerated despite a proclaimed freeze in necessities, then costs likely adjusted elsewhere: transport, utilities, shrinkflation, skimpflation, supply-chain pass-through, informal markets, and unmonitored essentials.
Inflation did not disappear.
It rerouted.
This is the deeper problem with administrative inflation management.
Temporary freezes may delay pass-through, but they cannot repeal the economic imbalance between supply pressures (via rising input costs) and demand.
When governments suppress price signals while cost structures worsen, inflation becomes compressed rather than solved or shortages surface.
Regulated low prices may occur, but long lines via rationing is the alternative.
That said, eventually, repricing returns or the law of economics prevail.
Often more abruptly.
The DTI’s subsequent admission that some prices may rise suggests the deferred adjustment phase may already be arriving.
Meanwhile, Treasury yields may be offering the more honest signal.
Bond markets increasingly appear to be pricing not temporary inflation noise, but the persistence of stagflationary pressures and the revelation of imbalances from years of policy distortions.
XII. Conclusion: Stagflation as Process, Not Event
The central mistake in today’s debate is treating stagflation as an event waiting for official confirmation.
Historically, it rarely arrives all at once.
It emerges as a process.
First through weakening purchasing power.
Then through slower real activity hidden beneath nominal resilience.
Then through external imbalances, rising financing stress, currency pressure, and increasingly interventionist policy responses designed to suppress visible symptoms rather than address underlying causes.
The Philippines
increasingly appears to be moving along precisely such a trajectory. Yet, these
are symptoms.
The recent oil shock did not create these conditions.
It accelerated them.
The underlying fragility had already been accumulating through widening savings-investment imbalances, leverage dependence, external deficits, weakening productive signals, and policy structures increasingly oriented toward politically managing outcomes rather than confronting constraints through market forces.
The irony is increasingly difficult to ignore.
The more authorities suppress price signals, smooth volatility, and delay adjustment, the more hidden pressures appear to migrate elsewhere—into Treasury yields, the peso, reserve buffers, household balance sheets, and eventually social conditions themselves.
Stagflation rarely
announces itself in a single statistic.
Usually,
households experience it first.
Markets recognize
it second.
The data arrives later.
Increasingly, that sequencing no longer appears theoretical.
It appears observable.
___
References (our stagflation series)
Stagflation Is Already Here—Emergency
Policies Are Now Entrenching It
Stagflation by Design: Policy
Contradictions and the Return of the Pandemic Rescue Playbook
Stagflation Then and Now: Why Philippine
Markets Are Repricing Like the 1970s (Part 4)
Seed Article
