Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

   

It used to be that recessions were accompanied by falling prices. Because of this few people realised that though prices in general fell consumer prices rose relative to producer prices. In other words, capital goods suffered the greatest price declines. Now that central banks inflate to prevent price declines we can find ourselves in a situation where consumer prices are rising faster than producer prices even as a large pool of unemployed emerges. This is stagflation—Gerard Jackson 

In this issue:

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

I. Colliding Policies in an Emerging Stagflation Environment

II. The Triangle of Intervention

III. The Return of War-Time Economics

IV. Energy Bailouts and Socialized Losses

V. BSP’s Hawkish Rhetoric, Shadow Monetary Easing

VI. Ratchet Effect: The Pandemic Rescue Framework That Never Ended

VII. Oil Shock Meets Banking System Stress Beneath the Surface

VIII. External Risks: Oil and the Strait of Hormuz

IX. A System Moving Toward Structural Stagflation

X. Conclusion: The Institutionalization of Crisis Policy 

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook 

How fiscal dependence on inflation, regulatory interventions, and shadow monetary easing are locking the Philippine economy into a structural stagflation regime.

I. Colliding Policies in an Emerging Stagflation Environment 

Recent policy developments across the Philippine economy reveal a system increasingly defined by conflicting interventions. 

Authorities have attempted to cushion consumers from rising costs by suspending excise taxes on Liquefied Petroleum Gas (LPG) and Kerosene, while refusing similar relief for gasoline and diesel. The explanation offered by policymakers was not economic but fiscal: the government argued that suspending excise taxes on gasoline and diesel would result in roughly Php 43 billion in lost revenue, compared with about Php 4.1 billion for LPG and kerosene. 

This framing reveals the real constraint—fiscal dependence on inflation-driven tax revenues. 

At the same time, authorities are pushing in the opposite direction elsewhere in the economy.

The National Food Authority has raised rice buying prices in an attempt to support farmers, while wage pressures are intensifying following minimum wage hikes in Central Luzon and renewed calls for increases in Baguio City. 

Authorities are also expanding a new round of credit and income support programs across multiple sectors of the economy. Emergency loan facilities have been announced for micro, small, and medium enterprises (MSMEs), while the Department of Agriculture has introduced loan moratoriums for farmers and fisherfolk facing rising production costs. 

The Social Security System has also proposed allocating roughly Php 60 billion for expanded lending programs while accelerating pension increases, alongside discussions of targeted cash assistance for middle-income households and minimum-wage earners. 

These measures inject liquidity and sustain household demand while simultaneously raising production costs upstream. The result is a dual pressure dynamic: stronger consumption collides with weakened supply conditions, compressing producer margins, discouraging output, and increasing reliance on imports. 

Margin compression weakens domestic supply responses, forcing greater reliance on imports. For a country already structurally dependent on imported food, fuel, and intermediate goods, this dynamic worsens trade deficits and exposes the economy further to external shocks. 

Such policy contradictions lie at the core of what economists describe as stagflationary dynamics—a situation where policies designed to alleviate inflation instead weaken production and reinforce price pressures elsewhere.

II. The Triangle of Intervention 

Many of the policies now unfolding can be understood through the concept of triangular intervention—a term used by Austrian economist Murray Rothbard to describe government actions that compel or prohibit exchanges between two private parties. 

Unlike taxation or subsidies, which transfer resources directly between the state and citizens, triangular interventions reshape the conditions under which individuals and firms are allowed to transact. Price controls, regulatory mandates, credit allocation programs, and production quotas are classic examples because they force market participants to exchange under state-imposed terms—or prevent them from exchanging altogether. 

Once such interventions are introduced, additional policies often follow in order to manage the distortions they create.

In practice, the Philippine policy response increasingly resembles a triangular structure of intervention linking fiscal transfers, monetary accommodation, and regulatory relief. 

These policy actions are not isolated. They form a self-reinforcing intervention triangle. 

• Price relief measures reduce immediate political pressure from rising costs. 
• Subsidies and fiscal transfers sustain demand and prevent short-term economic adjustment. 
• Inflation-driven tax revenues, particularly through value-added taxes and excise collections, provide the fiscal space to finance those subsidies. 

Each corner of the triangle reinforces the others. 

A. Price relief

→ reduces political pressure

→ allows inflation to persist elsewhere

B. Subsidies

→ sustain demand

→ delay supply adjustment

C. VAT windfalls

→ finance interventions

→ encourage further policy expansion. 

Because value-added taxes are collected as a percentage of nominal prices, inflation automatically boosts government revenue even without legislative tax increases. This dynamic effectively transforms inflation into an implicit tax mechanism that helps finance fiscal deficits 

The result is a system characterized by persistent inflation, expanding fiscal intervention, and weakening supply responses—a structure that gradually locks the economy into a stagflationary trajectory. 

This dynamic also reflects a broader pattern identified by several strands of economic theory. 

Murray Rothbard described how successive government interventions often generate distortions that then justify further intervention in a cumulative process. 

János Kornai later characterized similar systems as operating under “soft budget constraints,” where firms and institutions come to expect rescue when financial pressures emerge. 

In financial markets, Hyman Minsky observed that prolonged stabilization policies can encourage rising leverage and risk-taking, gradually transforming stability itself into a source of fragility. 

The Philippine policy mix increasingly exhibits elements of all three dynamics simultaneously.

III. The Return of War-Time Economics 

Many of these policies also resemble the economic management frameworks historically used during wartime mobilization or the "war economy." 

Price controls, directed credit programs, industrial coordination, and regulatory mandates were originally designed to manage supply shortages and stabilize critical sectors during periods of national emergency. 

In the Philippine case, however, similar instruments are now being deployed outside wartime conditions—reflecting an economy increasingly governed through administrative intervention rather than decentralized market coordination. 

IV. Energy Bailouts and Socialized Losses 

Recent developments in the power sector illustrate how these dynamics operate in practice. 

Regulators recently approved a mechanism allowing Meralco to recover more than Php 4 billion from consumers through tariff adjustments tied to disruptions in gas supply from an affiliate-linked generation facility, effective September. 

This episode demonstrates how upstream contractual disruptions are transformed into regulated cost pass-throughs, effectively socializing losses across captive electricity consumers. 

Such arrangements stabilize corporate balance sheets while transferring the burden of adjustment to households and businesses. 

Additionally, this confirms our November 2025 analysis of the SMC–MER–AEV deal—an implicit bailout that magnifies the fragility loop. 

V. BSP’s Hawkish Rhetoric, Shadow Monetary Easing 

Against this backdrop, the Bangko Sentral ng Pilipinas (BSP) has sought to maintain a public posture of policy discipline, signaling that it has room to raise interest rates. 

However, the measures being deployed tell a different story. 

Recent announcements include: 

• loan grace periods for affected borrowers
• discretion for banks in restructuring distressed loans
• regulatory relief affecting nonperforming loan classification.

While presented as targeted assistance, these policies function as shadow monetary easing. They support bank balance sheets and credit expansion while allowing the central bank to maintain the appearance of a cautious monetary stance. 

Crucially, these actions coincide with successive interest rate cuts, aggressive reductions in reserve requirement ratios and the doubling of deposit insurance coverage, both of which expand liquidity within the financial system. 

Persistent liquidity expansion also increases pressure on the exchange rate, forcing the central bank to balance domestic financial stabilization against currency defense. 

The BSP’s demonstrated preference—judging by its policy actions—points clearly to an easing bias. 

Yet, not all bank rescues appear directly in fiscal budgets. 

During the 2023 United States banking crisis, for instance, large-scale stabilization measures were implemented primarily through central bank liquidity facilities rather than explicit fiscal bailouts. 

The Philippine approach appears to be moving along a similar path.

VI. Ratchet Effect: The Pandemic Rescue Framework That Never Ended 

Authorities deployed this stabilization framework during the pandemic recession as an emergency response. 

More than five years later, however, that emergency architecture has not been unwound. Instead of normalization, deficit spending has become structurally embedded in the system.

Figure 1

Public debt continues to reach new highs. Universal and commercial bank lending relative to GDP is at record levels, while public debt-to-GDP has climbed back to levels last seen in 2005.  (Figure 1, upper and lower graphs)

Figure 2

At the same time, both banking system net claims on the national/central government (NCoCG) and central bank exposures have expanded significantly, drifting near or exceeding historical peaks. (Figure 2, upper window) 

Fiscal outcomes reinforce this pattern. The 2025 deficit ranks among the largest in the country’s history, while combined public and formal financial sector leverage has risen to approximately 113 percent of GDP. 

Liquidity conditions tell the same story. Although M2 broad money has declined from its pandemic peak of roughly 76 percent of GDP in 2021, it remained near 70 percent in 2025—well above historical norms. (Figure 2, lower diagram) 

All told, these trends suggest that pandemic-era interventions did not merely stabilize the economy temporarily; they fundamentally reshaped its structure. 

The system now operates with a deepening reliance on elevated leverage, abundant liquidity, and recurring policy support. 

This dynamic closely reflects the Robert Higgs concept of the "ratchet effect," where government expansion during crises is rarely reversed. Instead, emergency measures leave behind institutional and political legacies that permanently raise the baseline of state intervention, making each subsequent intervention easier to justify and more difficult to unwind. 

VII. Oil Shock Meets Banking System Stress Beneath the Surface 

Pre-Iran war banking data indicates that pressures may already be building beneath the surface.

Figure 3

The ratio of cash to deposits fell in February 2026 to its lowest level in at least a decade. (Figure 3, upper pane) 

Meanwhile, liquid assets relative to deposits, although rebounding slightly in February, remain near levels last seen during the early months of the pandemic in 2020. 

At the same time, banks have been rapidly increasing their holdings of available-for-sale (AFS) securities, which surged over the past three months to one of the highest nominal levels on record. This expansion may be temporarily boosting reported liquidity metrics. (Figure 3, lower image) 

Credit quality indicators show similar dynamics.

Figure 4

Allowances for credit losses have reached record levels, reflecting suppressed loan provisions as total loan portfolios continued expanding. Gross nonperforming loans also jumped in February to a new high. (Figure 4, upper and lower charts) 

For much of the past year, rapid credit growth masked a deterioration in loan quality. The recent surge suggests that this buffer may now be fading—which may help explain the latest regulatory relief measures affecting NPL classification.

Figure 5

Interbank lending has also reached record levels, while repos with other banks remain near historic highs. (Figure 5, upper visual) 

Meanwhile, banks increasingly rely on bond and bill borrowings as funding sources rather than traditional deposit growth. (Figure 5, lower image) 

Conjointly, these trends resemble a classic “Wile E. Coyote” dynamic from the denominator effect—where balance sheet stresses remain temporarily suspended by rapid credit expansion until underlying conditions eventually reassert themselves. 

An oil shock may ultimately expose the fragilities embedded in this dynamic.

VIII. External Risks: Oil and the Strait of Hormuz 

These domestic vulnerabilities are unfolding at a time when external risks are rising. 

Despite earlier statements about reopening the Strait of Hormuz, Iranian officials appear to have reversed course and announced its continued suspension, raising the risk of disruptions to global shipping along one of the world’s most critical oil transit routes. 

For energy-importing economies such as the Philippines, any disruption in Gulf oil flows would amplify domestic inflation pressures and widen trade deficits—further complicating monetary policy decisions.

IX. A System Moving Toward Structural Stagflation 

All told, these developments reveal an economy increasingly shaped by persistent and deepening intervention, expanding leverage, and fragile financial balances. 

Fiscal authorities attempt to suppress consumer price pressures while raising upstream costs. The central bank maintains hawkish rhetoric while quietly deploying liquidity support measures. Banks rely increasingly on credit expansion and market funding to sustain balance sheets. 

The policy framework introduced during the pandemic—once described as temporary emergency stabilization—now appears to have become the operating regime. 

Current developments are unfolding broadly in line with the expectations we articulated in June 2025 regarding the government’s response to rising economic pressures. 

Without a doubt, the BSP will likely rescue the banks and the government, perhaps using the pandemic template of forcing down rates, implementing reserve requirement ratio (RRR) cuts, massive injections (directly and through bank credit expansion), and expanding relief measures—though likely with limits this time.  

If the central bank ultimately resorts to a full revival of its pandemic rescue playbook—aggressive rate cuts, further reserve requirement reductions, and large-scale liquidity injections—the consequences are unlikely to resemble the temporary stabilization achieved in 2020. 

Instead, the outcome could be a familiar combination:

• a weakening currency or the Philippine peso,
• renewed inflation pressures,
• rising risk of unemployment,
• slowing economic growth, and
• rising interest rates.

In other words, the economy may be drifting toward the very outcome policymakers are attempting to avoid—a structurally entrenched stagflationary cycle. 

X. Conclusion: The Institutionalization of Crisis Policy 

What is emerging in the Philippines is not merely a temporary economic slowdown triggered by external shocks. Instead, it reflects the gradual institutionalization of a policy framework built around continuous crisis management. 

Emergency transfers, directed credit programs, regulatory relief, and fiscal expansion have become the populist default responses to economic stress. While each intervention may appear justified in isolation, their cumulative effect is to embed an economic system increasingly dependent on state support. 

Over time, such policies weaken market discipline, distort investment decisions, and transfer growing economic risks onto public balance sheets. 

As economists Hyman Minsky and János Kornai observed in different contexts, systems sustained by repeated stabilization measures often appear stable until underlying imbalances become too large to contain. 

The danger is not simply that stagnation and inflation coexist. 

The deeper risk is that a policy regime designed to manage crises may itself become the mechanism through which crisis dynamics intensify.

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

 

No government or central bank will admit that rising inflation in essential goods is a direct consequence of financial and fiscal repression, and economic history always shows us that their reaction to rising discontent will be more financial repression and economic intervention—Daniel Lacalle

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

I. The Narrative Lag

II. Stagflation Is Not Just an Oil Story

III. The Deeper Mechanism: Policy-Driven Stagflation

IV. The Monetary Backdrop: Inflationary Pressure Pre-dated the Shock

V. The Philippine Parallel

VI. The Structure of Production: Why Disruptions Spread

VII. What a Binding Price Ceiling Looks Like in Real Time

VIII. The Transmission Phase: Downstream Sectors Feel the Strain

IX. The February Labor “Improvement” That May Not Last

X. Policy Responses Are Expanding

XI. Energy Supply Chains: Why the Shock Is Larger Than Oil

XII. Financial Markets Are Beginning to Reflect the Stress

XIII. Geopolitical Reordering and the Return of the War Economy

XIV. The Stages of Stagflation: A Historical Pattern

XV. The Political Economy of Entrenched Stagflation

XVI. Conclusion: The Adjustment That Has Been Delayed

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It 

Rising costs, suppressed prices, and supply withdrawal are spreading distortions across the Philippine economy’s production structure. 

I. The Narrative Lag 

Public discourse continues to frame stagflation as a future risk—typically linked to external shocks such as oil price spikes—or, at times, dismisses it altogether. 

Yet across the Philippines, emerging patterns suggest something more immediate: stagflation is not impending; it is already taking shape and diffusing across sectors. 

Rising fuel costs are the visible catalyst, now transmitting through transport, agriculture, fisheries, tourism, retail and so forth. However, the deeper issue is not energy prices per se. 

It lies in the interaction between supply shocks and policies that suppress the price signals necessary for adjustment—policies increasingly institutionalized under Executive Order No. 110. 

When input costs rise but output prices are constrained, markets cannot equilibrate. Instead of correcting imbalances, the system propagates and amplifies them. Apparent stability becomes artificial and temporary. 

Eventually, these suppressed pressures re-emerge. And when supply simultaneously contracts across multiple sectors, the outcome is no longer simple inflation. 

It is stagflation. 

Recent geopolitical developments further complicate this outlook. The number of armed conflicts worldwide has risen sharply over the past two decades, accompanied by increasing geopolitical tensions and a renewed expansion of defense spending across many economies. This environment increasingly resembles the early stages of past periods in which geopolitical rivalry, fiscal expansion, and supply disruptions interacted with monetary accommodation to generate sustained inflationary pressures. For economies deeply integrated into global trade, energy, and security networks, these dynamics form part of the broader backdrop against which domestic stagflationary risks must be evaluated. 

II. Stagflation Is Not Just an Oil Story 

The dominant narrative equates stagflation with energy crises. This is analytically incomplete. 

There are well-documented cases of stagflation occurring even in the absence of major oil shocks. As economist Frank Shostak argues, stagflation typically arises from the interaction of monetary expansion and supply disruptions, not from relative price changes alone. 

An increase in oil prices, by itself, reallocates spending rather than increasing it in aggregate. If the money supply remains unchanged, higher expenditure on energy necessarily reduces expenditure elsewhere. Under such conditions, relative prices shift, but generalized inflation does not automatically follow. 

Broad-based and sustained inflation requires monetary accommodation. Without it, price increases in one sector are offset by contractions in others. 

This distinction is critical. 

III. The Deeper Mechanism: Policy-Driven Stagflation 

International experience reinforces this point. Economies such as Argentina, Turkey, and Brazil have repeatedly exhibited a common pattern: 

• Fiscal dominance constraining monetary policy
• Liquidity expansion creating a fiscal–monetary trap
• Supply-side rigidities limiting output response
• Price suppression and exchange-rate management delaying adjustment 

These mechanisms do not merely coincide with stagflation—they produce it. 

They allow inflationary pressures to build while simultaneously weakening productive capacity. Growth slows, yet prices continue to rise. 

IV. The Monetary Backdrop: Inflationary Pressure Pre-dated the Shock 

The current energy shock did not arrive in a monetary vacuum.

Figure 1

Even before geopolitical tensions escalated, liquidity conditions in the Philippines were already accommodative. Data from the Bangko Sentral ng Pilipinas (BSP) indicated that domestic liquidity and credit growth remained elevated as of February, despite signs of slowing economic momentum. 

Inflation dynamics reinforce this point. Headline CPI spiraled from 2.4% in February to 4.1% in March, but the uptrend had already been in motion—prices had been increasing for three consecutive months following the November 2025 trough of 1.5%. More tellingly, broad money (M3) growth had reaccelerated from roughly 5% in May 2025 doubling to 10.3% by February 2026. The U.S. WTI crude benchmark reinforced the upward trend. (Figure 1, upper and lower graphs) 

In other words, the economy entered the energy shock with inflationary pressure already embedded in the system. 

The March CPI spike reinforces our projection that a THIRD wave of inflation is now underway. 

At the same time, financial conditions reflected a policy environment leaning more on liquidity support than on productive expansion. Credit growth persisted, but its distribution remained uneven—tilted toward consumption, real estate, and sovereign-linked financing rather than broad-based investment in productive sectors. 

Under such conditions, supply disruptions do not result in simple relative price adjustments. Instead, they interact with existing liquidity and fiscal support, amplifying imbalances. 

The result is the classic stagflationary configuration: rising costs alongside weakening supply response. 

The war did not create these pressures. 

It exposed and accelerated them. 

V. The Philippine Parallel 

The Philippines is beginning to exhibit early signs of a similar dynamic. 

Fuel subsidies and price interventions may cushion short-term volatility, but they also dampen the transmission of price signals, delaying necessary adjustments in both consumption and production. In a system already characterized by elevated liquidity, such interventions do not merely stabilize—they compound existing distortions. 

When cost pressures are absorbed administratively while liquidity conditions remain accommodative, the adjustment process is deferred rather than resolved. 

The trajectory that follows is familiar:

• Distortions accumulate beneath the surface
• Supply responses weaken as incentives are misaligned
• Inflationary pressures persist, even as real activity softens 

In this context, rising fuel costs are not the root cause but the trigger—interacting with a policy environment that suppresses signals, sustains liquidity, and ultimately amplifies underlying imbalances. 

VI. The Structure of Production: Why Disruptions Spread 

To understand how these pressures propagate, it is useful to revisit the structure-of-production framework developed by Carl Menger. 

Menger emphasized that production is not a collection of isolated activities, but a layered structure of interdependent stages. He distinguished between: 

• Higher-order goods — inputs such as fuel, logistics, machinery, and intermediate materials
• Lower-order goods — final goods and services consumed directly, including food, transport, and tourism 

Disruptions at the level of higher-order goods do not remain contained. They cascade through the production chain, with effects transmitted gradually depending on inventory buffers, contractual rigidities, and the willingness of firms to absorb rising costs. 

That lag, however, is finite. 

When input costs rise while downstream prices are suppressed, producers face a narrowing set of options:

• absorb sustained losses
• scale back production
• or exit the market altogether 

Over time, the first becomes unsustainable and the second insufficient. The third becomes increasingly rational. 

What follows is not an immediate price spike, but a progressive weakening of supply capacity—a contraction that eventually surfaces as both rising prices and reduced output. 

This is precisely the dynamic now beginning to emerge in the Philippines. 

VII. What a Binding Price Ceiling Looks Like in Real Time 

The clearest evidence of distortion appears where regulated prices collide with rising costs.

These are the sectors where supply withdrawal begins—not as theory, but as observable behavior. 

a. Transport 

In Region I, nearly half of public utility vehicles reportedly halted operations as fuel costs surged while fares remained constrained. When operating costs exceed regulated fares, continued operation implies sustained losses. The predictable outcome is reduced service availability, alongside higher logistics costs that transmit directly into the price of goods and basic services. 

b. Fishing 

Fuel costs have similarly forced about half of the fishers across Luzon to suspend voyages. Comparable dynamics have been observed in other economies, including Thailand and Mumbai India, where fuel shocks—when not accompanied by price adjustment—have temporarily reduced or halted fishing activity. 

c. Agriculture

In several regions, farmers are beginning to scale back or abandon harvests as fertilizer, fuel, and transport costs rise faster than farm-gate prices. When input costs outpace realizable output prices, production becomes economically unviable. 

This does not only translate into higher food prices. It signals the early formation of a food stress dynamic, where supply contraction and forced consumption substitution reinforce each other across staple goods—raising the risk of an emerging food crisis. 

These developments are not isolated disruptions.

Figure 2

They represent the real-time manifestation of a binding price ceiling interacting with supply shocks. (Figure 2, upper window) 

Entrenchment begins not when prices rise, but when producers cease to respond to them. 

VIII. The Transmission Phase: Downstream Sectors Feel the Strain 

Once upstream production weakens, downstream sectors inevitably absorb the impact. 

Tourism—highly sensitive to both transport costs and discretionary income—is already being materially affected in key destinations such as Baguio (-50%), Boracay (-31%), Eastern Visayas (-15%), and Hundred Islands National Park (-24%). These declines reflect both rising travel costs and tightening household budgets under persistent price pressure. 

Baguio just declared a state of calamity. (Figure 2, lower image) 

Rising transport and input costs are compressing demand even as operating expenses continue to increase, producing simultaneous pressure on both revenue and margins. 

Cracks in the retail market are becoming increasingly pronounced. Chains such as Marks & Spencer and No Brand have begun scaling back/closing operations in the country. While these decisions predate the current shock, they remain indicative of underlying demand fragility and structural margin compression already present in the system.

Figure 3

This fragility is rooted in developing macroeconomic conditions: slowing real GDP growth, declining per capita income momentum, and an investment structure shaped by prolonged low interest rates and sustained credit expansion. Capital formation has been unevenly directed—toward consumption, real estate, and yield-seeking activities—rather than productivity-enhancing sectors. (Figure 3, topmost and middle visuals) 

The crowding-out effects from pandemic-era deficit spending further reinforced these distortions. Sovereign borrowing absorbed a significant portion of available financial resources, reducing the space for private sector investment. This did not only displace capital allocation but also raised the relative cost of funding for productive enterprises, shifting incentives away from long-gestation, productivity-enhancing investment toward short-term consumption and asset-based positioning. 

Pandemic-era deficits also contributed to a more centralized allocation of economic resources, increasing the degree of political discretion over investment direction and effectively shifting capital allocation decisions away from decentralized market signals toward administrative and fiscal channels. (Figure 3, lowest chart) 

All of these reflect not merely contemporary crowding-out and low-rate-driven misallocation, but a record savings–investment gap/imbalance that has been decades in the making. 

The recent corruption scandal highlights how such misallocation, diversion, and capital consumption processes have become structurally embedded 

In brief, these concurrent developments magnify the repercussions of existing imbalances. 

The result is an economy with limited buffer to cost shocks. 

What matters is not any single development in isolation, but their synchronization under a common pressure: rising input costs moving through a system already constrained by policy distortions, uneven capital allocation, and weakened supply responsiveness. 

In this phase, the effects of earlier imbalances are no longer latent. 

They become visible—simultaneously—in output, prices, and market participation. 

IX. The February Labor “Improvement” That May Not Last 

These sectoral weaknesses are now beginning to transmit into labor market conditions, albeit with a lag. 

At first glance, the February labor report appeared reassuring. Headline employment “improved” and the unemployment rate edged lower (jobless rates eased from 5.8% in January to 5.1% in March.  On the surface, the data suggested that the labor market remained resilient despite (pre-war) rising cost pressures.

Figure 4 

But a closer look raises questions about whether this improvement represents a durable trend—or merely a statistical pause before broader economic strains surface. 

In stagflationary environments, firms initially attempt to absorb rising costs through reduced margins, shorter operating hours, and productivity adjustments in order to preserve employment levels. However, as cost pressures persist alongside weakening demand conditions, adjustment inevitably shifts into the labor market: hiring slows, job quality deteriorates, and informalization increases. Losses spur retrenchment. 

Retail and tourism fragility reinforce this transmission channel.  

Forthcoming increases in minimum wages should also serve as hindrance to the labor market growth. 

External labor dynamics add another layer of vulnerability. Reports of rising overseas worker repatriation suggest that global labor demand conditions may also be softening. For an economy such as the Philippines, which is heavily reliant on overseas employment and remittance inflows, even marginal shifts in external labor absorption can propagate quickly into domestic consumption, liquidity conditions, and household financial stability. 

Taken together, these developments indicate that February’s earlier employment “improvement” may represent a temporary statistical noise rather than a structural recovery. 

In such environments, labor markets typically lag real economic deterioration: employment initially appears stable even as underlying business conditions weaken beneath the surface. Over time, however, this lag resolves through reduced hiring, declining hours, and weakening job security. 

The result is a familiar stagflationary configuration: rising living costs alongside weakening labor conditions and employment quality. 

X. Policy Responses Are Expanding 

Rather than addressing underlying supply constraints, policy responses have increasingly focused on suppressing visible price adjustments. 

Recent measures illustrate this pattern. 

The Department of Trade and Industry reached an agreement with meat producers to delay price increases until the end of April. 

The Department of Health likewise reached arrangements with pharmaceutical firms to avoid medicine price increases—functioning effectively as negotiated price restraint mechanisms rather than pure market outcomes. 

Energy authorities, meanwhile, have warned oil firms against alleged “anti-competitive behavior,” at times framing price movements through cartel narratives. However, such cartel interpretations are better understood as policy-conditioned outcomes rather than purely market-generated coordination, particularly given the limited number of players in the industry and the regulatory structure governing pass-through pricing. 

More broadly, the policy stance has shifted in sequence rather than consistency. Authorities initially denied the presence of a systemic crisis, but subsequently imposed a ‘state of emergency’ once pressures became more visible. 

In parallel, emergency measures have been floated in public discourse—including fuel rationing and even temporary energy lockdown-type measures—despite public denials of such scenarios. 

As Bismarck’s oft-cited dictum suggests, policy signals are sometimes inferred more from what is denied publicly than what is formally declared. In this sense, the sequencing may reflect a form of preparatory signaling or conditioning toward prospective policy tools in the event that conditions deteriorate further. 

Fiscal responses have also expanded significantly. Free-lunch populism has prompted the government to allocate approximately Php 238 billion in subsidies and related support measures to cushion households and affected sectors. Within this framework, fuel subsidies for public utility vehicles have recently been extended. 

At the same time, structural intervention in the transport sector has intensified through the jeepney servicing and consolidation program, under which operators and drivers are mandated to continue providing services while receiving subsidized compensation. 

The state is increasingly assuming coordinating functions in route allocation, dispatch systems, and operational restructuring of jeepney services, effectively centralizing what was previously a decentralized operator-driven system—officially framed as temporary, but carrying the risk of extending state coordination capacity over time, and potentially creating a policy window through which long-desired transport modernization programs could be advanced. 

The temporary suspension of WESM operations also raises the possibility of broader shifts in market structure, including partial re-nationalization dynamics in parts of the energy and transport-linked system. 

Such episodes align with what economic historians describe as a ‘ratchet effect,’ as theorized by Robert Higgs: temporary expansions of state control and intervention during periods of perceived crisis often persist in modified form even after the shock subsides, gradually shifting baseline institutional arrangements. 

While these measures aim to contain visible inflation, price suppression mechanisms rarely eliminate underlying inflationary pressure. Instead, they displace it toward producers, inventories, and fiscal balance sheets, transforming visible price adjustment into structural inflation accumulation across the production system. 

XI. Energy Supply Chains: Why the Shock Is Larger Than Oil 

Even if geopolitical tensions ease, the structural vulnerability remains. 

First, recent diplomatic developments in the Middle East may prove temporary. Historical precedent suggests that ceasefire arrangements in the region have often been fragile, particularly when major powers remain indirectly engaged in the conflict environment. The United States and Israel struck Iran at the end of February, even while negotiations were ongoing. 

Second, as former U.S. budget director David Stockman has argued, modern energy systems are not defined solely by crude oil prices but by interconnected refining, logistics, and distribution networks. Liquefied petroleum gas (LPG) and petrochemical supply chains, in particular, rely on tightly coupled processing infrastructure. 

Disruptions in these networks propagate far beyond fuel markets, affecting agriculture (fertilizer production), logistics (transport cost structures), manufacturing (input pricing), and services (operating costs). 

Energy shocks, therefore, do not remain confined to headline fuel prices.

They transmit through the entire structure of production, amplifying cost pressures across the economy—even in sectors not directly linked to energy consumption. 

XII. Financial Markets Are Beginning to Reflect the Stress 

Financial indicators are now starting to mirror these real-economy strains. 

The Bangko Sentral ng Pilipinas recently reported a decline in gross international reserves (GIR) last March amid lower gold prices, foreign investment outflows and pressure on the peso. 

Figure 5

Although the BSP’s headline reserve buffer still appears comfortable, a closer look at composition tells a different story. Non-gold reserves—essentially the liquid foreign-currency assets used to stabilize the peso and finance imports—have declined markedly since late 2024. Rising gold valuations have helped cushion the headline GIR figure, but valuation gains are not equivalent to fresh external inflows. This compositional shift suggests that reserve resilience may be weaker than the aggregate figure implies. (Figure 5, topmost diagram) 

Meanwhile, S&P Global Ratings lowered the Philippines’ outlook from positive to stable, citing risks to fiscal and external positions linked to persistent energy-related pressures. 

Credit ratings rarely lead markets; more often, they echo or confirm stresses already developing beneath the surface. While not explicitly stated, recent movements in Philippine credit default swaps (CDS), along with a bearish flattening of the yield curve and rising yields across maturities, may have contributed to the revised outlook, reflecting increasing market sensitivity to external and fiscal pressures. (Figure 5, middle and lowest charts) 

This evolving bond market dynamic suggests investors are recalibrating their expectations—demanding higher risk premia while simultaneously pricing in weaker forward growth. 

Historically, such curve behavior often reflects a policy environment in which monetary conditions remain accommodative while structural growth prospects deteriorate. In this sense, the yield curve may be signaling the same tension visible in the real economy: rising inflation pressures interacting with slowing productive momentum. 

XIII. Geopolitical Reordering and the Return of the War Economy 

In examining the broader stagflationary risks facing the global economy, it is difficult to ignore a parallel structural shift: the gradual return of what economists historically describe as a war economy. 

The stagflationary episode of the 1970s did not arise solely from the oil embargo. It emerged from a broader combination of fiscal expansion, geopolitical conflict, and monetary transformation following the collapse of the Bretton Woods system. The suspension of dollar convertibility during the Nixon Shock effectively loosened the monetary constraints that had previously anchored the international financial system. This shift coincided with large-scale fiscal expenditures associated with the Vietnam War and domestic “guns and butter” policies in the United States. 

The subsequent 1973 Oil Crisis then transmitted these underlying monetary and fiscal pressures into global energy markets, transforming what might otherwise have been a relative price shock into a generalized inflationary episode.

Figure 6 

Recent developments suggest that elements of this broader geopolitical environment may be re-emerging. Data compiled by the International Monetary Fund indicate that the number of armed conflicts worldwide has risen sharply since the mid-2000s, reaching levels not observed in decades. (Figure 6) 

Measures of geopolitical risk have increased in tandem, while the share of countries allocating more than 2 percent of GDP to military spending has begun to climb again after declining during the post–Cold War period. 

Such developments do not automatically produce stagflation. However, they signal a structural shift in the global policy environment. Rising defense expenditures, strategic supply chain realignments, and heightened geopolitical rivalry all tend to increase fiscal demands while simultaneously disrupting trade, energy, and commodity flows. 

For economies integrated into global security networks, these pressures can have direct domestic implications. The Philippines, as a longstanding client state of the United States and host to several defense cooperation facilities, is not insulated from these dynamics. 

Increased defense commitments, strategic realignments in trade and energy flows, and the potential weaponization of financial and technological networks could all influence fiscal policy, investment allocation, and external financial conditions. 

While these developments alone do not determine the trajectory of Philippine inflation or growth, they form part of the broader global environment within which domestic stagflationary pressures may evolve. 

XIV. The Stages of Stagflation: A Historical Pattern 

Stagflation rarely emerges as a fully formed crisis overnight. Historical episodes—from the 1970s United States to more recent cases in Latin America and emerging markets—suggest that the process tends to unfold in stages. 

In the initial phase, inflation begins to rise while economic growth slows, typically following a combination of monetary accommodation and supply disruptions. Policymakers often interpret this period as temporary, responding with targeted subsidies, negotiated price restraint, or administrative coordination designed to cushion consumers from visible price increases. 

In the second phase, pressures begin to propagate more visibly through the production structure. Producers facing sustained input cost increases and constrained output prices start adjusting operations. Margins compress, inventories decline, and investment slows. Supply responses weaken as firms scale back production or exit markets entirely. Labor markets frequently appear stable during this stage, but job quality deteriorates, hiring slows, and working hours are reduced as businesses attempt to manage rising costs without immediate layoffs. 

Only in the later phase does the full stagflationary configuration emerge: persistent inflation combined with visibly weakening economic activity, deteriorating labor conditions, and widening fiscal intervention as governments attempt to stabilize prices and incomes simultaneously. 

The developments now visible in the Philippines—sectoral supply withdrawals in transport, fisheries, and agriculture, increasing reliance on subsidies and administrative coordination, and early financial stress signals—suggest that the economy may already be moving through the earlier stages of this historical pattern. 

XV. The Political Economy of Entrenched Stagflation 

Economic distortions rarely persist because policymakers misunderstand them. More often, they persist because they become politically useful. 

Once subsidies, price controls, and administrative coordination mechanisms are introduced, they generate new constituencies whose interests become tied to their continuation. Temporary interventions gradually evolve into institutional arrangements that are difficult to reverse. 

As political economist Mancur Olson argued, concentrated interest groups tend to organize effectively to protect benefits, while the broader public—bearing the dispersed costs—faces weaker incentives to mobilize. Policies that begin as crisis responses therefore often survive long after the original shock has passed. 

Fiscal incentives reinforce this tendency. Governments facing rising costs and slowing growth frequently prefer policies that postpone adjustment rather than those that impose immediate economic pain. As James Buchanan observed, democratic fiscal systems possess a structural bias toward deficit spending and monetary accommodation, particularly when the costs of such policies are distributed through inflation rather than explicit taxation. 

Under such conditions, stagflation can become not merely a cyclical outcome but an institutional equilibrium. Policies intended to suppress inflation in the short run—subsidies, administrative pricing agreements, and coordinated market interventions—gradually weaken the supply responses necessary to stabilize the economy. 

The result is a policy environment in which inflation persists, growth weakens, and intervention expands—reinforcing the very dynamics policymakers initially sought to prevent.

XVI. Conclusion: The Adjustment That Has Been Delayed 

While the developments described above do not yet constitute a full stagflationary crisis, they reveal the early stages of a process that historically unfolds in recognizable sequence. 

Inflationary pressures typically emerge first under conditions of monetary accommodation and fiscal expansion. When supply disruptions occur in such an environment, rising input costs begin to propagate through the production structure. If policy responses attempt to suppress the resulting price signals—through subsidies, negotiated price restraint, or administrative coordination—the adjustment process does not disappear. It simply shifts location. 

Instead of being resolved through market pricing, the pressure accumulates within the production system. Producers absorb losses, inventories are drawn down, and investment slows. Over time, supply responsiveness weakens as firms scale back operations or exit markets altogether. 

The resulting configuration reflects the interaction of liquidity expansion, fiscal subsidies, and supply disruptions within a system where price signals are increasingly constrained. Demand is sustained through transfers and credit support even as rising costs erode productive capacity. Under such conditions, inflationary pressure does not dissipate; it is displaced—reappearing later through shortages, reduced output, or both. 

Many of the mechanisms that historically generate stagflation are therefore already visible in the Philippine economy: rising input costs, sustained liquidity expansion, widening fiscal intervention, weakening supply responses, and increasing reliance on administrative price management. 

What appears today as temporary stability may instead represent the delayed adjustment of an economic system whose imbalances are already surfacing. 

This adjustment may also unfold within a broader global environment that increasingly resembles earlier stagflationary eras. Rising geopolitical tensions, expanding defense expenditures, and the gradual re-emergence of war-economy dynamics suggest that inflationary pressures may not be purely cyclical. 

Rather, they may reflect deeper structural shifts in the international system—shifts that interact with domestic policy distortions and amplify the economic stresses already visible across sectors.