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
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
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).
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.
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.
