The whole world is struggling with Stagflation which is derived from the combination of two words, stagnation (of the output) and (the price) inflation. This is also called the bad price inflation by all the economic theoretical perspectives regardless of their controversiality of defining the inflation effect on economy. The lacking aggregate supply repressing economy causes both the cost push for the suppliers and the real income depreciation of consumers and investors. This is the macroeconomic phenomenon nobody welcomes.
The last major Stagflation in the past took place in 1970s when the oil price shot up while the dependency of the major economies on the oil was already substantially high. At that time, many economists especially from the self-proclaimed liberal side or the left-leaning side supported to increase the aggregate demand. Their assumption supported the Philips curve theory assuming that the price inflation rate and the unemployment rate are negatively correlated to each other. Their main reasons are the inflations lowers the real wage of employees (i.e., the cost of employers to hire), and also stimulates the entire market economic activities. Then, they suggested that the perpetuation of the inflation was more tolerate-able than the perpetuation of the declining output.
These pro-inflationary economists expect that the inflation of both the demand push (good) and the supply short (bad) stimulates the market economy with a high incentive of consumption, investment, and production supply. Then, this stimulated market multiplier is anticipated to increase the output growth which offsets all the negative effects of the inflation. Therefore, instead of controlling the inflation, they tolerated the ongoingly rising inflation by overestimating the positive effects while underestimating the negative effects of leaving the high inflation at the contemporary time period. This is why they advised the contemporary government to inject more money instead of tightening it.
Nevertheless, in reality, the negative effects of the price inflation such as increasing suppliers' costs and depreciating the real income of citizens were more significant than their assumed positive effects. The inflation has rather discouraged the production motivation of suppliers because of the surging cost prices. The incentive of consumers' consumption expenditure and asset investment was hardly stimulated. These citizens rather suffered from the lack of reasonable employment opportunity and the depreciation of their real income taking account of their living cost. The excess money backed up by the government expenditure flowing into the contemporary economy did not seem to have improved the quality of the contemporary socioeconomic environments.
This is the time that the anti-inflationary conservative economic theorists, most notably Monetarists, emerged as the counter-revolutionary against these self-proclaimed liberals and the left leaning economists. They claimed for the extermination of the price inflation even by incurring the negative output gap (slowing or penalising an economic production level) in the short run. Their conservative measure against the inflation was detested by many contemporary citizens whereas it succeeded in stimulating the macroeconomic performance deserving these citizens in consequence later.
First of all, the interest rate must rise for suppressing the excess flow of money even as well as preventing the real interest rate from being substantially low. Secondly, they are highly sceptical about the positive effects of the price inflation such as the incentive for suppliers supplying more and the motivation of investors and consumers purchasing more. Instead, they insist on the bad side effects of the perpetuated inflation rather than the temporary shrinking output level.
Nowadays, the US government and the Federal Reserve Bank (FRB) as well as the European central banks are aware of this lesson in the past so that they decided to raise the interest rate and tighten the money supply even by slowing the economy down further with still hunting socioeconomic sufferings from the pandemic. What the current US government under the Democratic party administration is imposing some unnecessary regulations on business activities in spite of the still stagnant world economy, which seems to be rather irrelevant to suppressing the inflation. Therefore, the current US policy of the interest rate as well as the quantitative tightening are something not to blame for the current stagnant performance of the US economic policy.
On the other hand, the current Japanese government performance under this currently ongoing Stagflation is notably poor. They are reluctant to raise the interest rate even with both the surging price inflation and the Japanese Yen (JPY) value depreciation in the foreign exchange. The reason of both the current government and the Bank of Japan (BoJ) rejecting the interest rate rise has been explained in another article so please kindly find it to read. In addition, they still keep their loose money supply as favouring their peer corporations while the majority Japanese citizens are suffering from the income shortage in their daily life.
The other suspicious phenomenon is that the opposition parties present no effective policy against the current stagnation. In Japan, no party promises to raise the interest rate at all whereas their manifesting policies are only the temporary countermeasure against this ongoing Stagflation such as tax cut. Even if tax cut may offsets the real income depreciation by sparing the disposable income, the steadily increasing price level caused by the surging costs of both domestic suppliers and imports will depreciate their income furthermore in the middle run. Moreover, investors are less likely to split their extra income gained from tax cut to invest it into their domestic capital market because the currently ongoing currency depreciation is steadily reducing the assets value in the domestic market.
In the meantime, Japanese politicians should be concentrated on tackling Stagflation at first for the time being. The interest rate rise as well as the quantitative tightening are supposed to be implemented. In particular, the money supply to those corporations of the government peer group must be tightened because it seems to be excess and unnecessary under the current macroeconomic environment. Otherwise, the damage which Japan and its majority citizens will suffer will be even more severe soon. Their real income depreciation will keep steadily impoverishing the majority Japanese citizens.
In conclusion, the pragmatic policy implementation is the key to solve the suddenly emerging problem by referring to the past example of solving it. At the time of Stagflation in particular, the conservative measure is worth implementing even through not supporting the conservative policies in general.
