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The Big Read: Stagflation nightmare - will prices keep rising even as a European war puts damper on economy?

Amid rising inflation and the possibility of a protracted war in Ukraine, experts are warning that the global economy could go into stagflation, where a stagnant economy meets high inflation.

SINGAPORE:  About two to three weeks ago, Mr Kevin Soh noticed that milk powder for his two young children had become S$4 more expensive per tin.

A 1.6kg tin for his three-year-old daughter, who consumes two tins a month, now costs S$66, up from S$62. His seven-month-baby son, meanwhile, uses three to four 850g tins a month, and the price for these has hiked from S$46 to S$50 each.

“It’s actually quite taxing on us,” said Mr Soh, 35, who works in marketing. “And I’d clarify that these prices are from a neighbourhood market provision shop in Jurong West, not the standard retail price in supermarkets, which can be even more costly."

Mr Kevin Soh buys four to five tins of milk powder a month for his two young children. The price of each tin has gone up by S$4. (Photo: Lim Li Ting/TODAY)

Beyond milk powder, Mr Soh has also been spending more on other household expenses. A packet of boneless cod fish chunks for his children, for example, now costs S$45, up from S$38 last year. 

He has also been paying S$40 more per month for electricity for both his place and his mother’s home, after he was quoted a nearly 20 per cent higher rate when he recontracted his electricity plan last September. 

Thankfully, Mr Soh and his family have been able to cope with the higher household expenses for now, as the test and measuring equipment manufacturing industry that he works in has been largely spared from the COVID-19-induced economic downturn and his company has been able to continue giving out pay increments to its staff. 

However, those working in industries directly affected by inflationary pressures are feeling the pinch. 

Taxi driver Andy Guan, 40, has been bearing the brunt of fuel prices that have soared after Russia invaded Ukraine in February.

Before the fuel hikes at the start of the year, he was paying about S$70 on average for a full tank of fuel after discounts. That same amount now costs him around S$100.

Mr Guan said this has caused his earnings to drop by at least 40 per cent. He now intends to stop driving a taxi and start doing food delivery. 

“For the man in the street, they don't need an economist to tell them that their standard of living has been significantly affected in the last few months," said economist Walter Theseira, an associate professor at the Singapore University of Social Sciences (SUSS). 

“What matters to them has gone up in price — their utility bills, their food, their petrol — and if their wages don't respond soon, their real standard of living will be at risk of declining this year.”

Taxi driver Andy Guan’s earnings dropped by at least 40 per cent. He now intends to stop driving a taxi and start doing food delivery. (Photo: Aaron Low/TODAY)

Inflation has become one of 2022's biggest economic stories, not only in Singapore, but also in many countries as a confluence of global events is placing upward pressure on prices. 

In January, Singapore’s core inflation — which excludes private transport and accommodation costs —  rose 2.4 per cent from a year ago, the highest since September 2012, driven by higher prices of food, electricity and gas. Meanwhile in the United States, inflation rate is at its highest in four decades, with its Consumer Price Index reaching 7.9 per cent year-on-year in February.  

Inflationary pressures have been building up as economies around the world try to recover from COVID-19, with demand for goods and services returning even as the world’s supply chains have yet to fully recover from pandemic-related disruptions. 

The war between Russia and Ukraine could not have come at a worse time: Energy prices in particular have risen sharply over the past year and the conflict has pushed prices up even higher, with Singapore fuel pump prices reaching their highest level on record in recent weeks.

The spike comes as some Western countries such as the US and Canada have decided to halt imports from Russia, the world’s third-largest oil exporter, in response to its military actions. This means they have to buy their oil from other producers, leading to higher prices.

Even as prices rise, the Russia-Ukraine war — along with its economic and political ramifications — looks set to impede or even derail economic recoveries as countries emerge from downturns brought about by COVID-19. 

All these are setting the stage for a perfect storm threatening to blow the world economy off course, according to economists and policymakers. 

They are even talking about the return of stagflation, which the world has not seen since the 1970s’ oil shock. Combining economic stagnation and inflation, it is a situation where an economy faces the twin challenges of slow economic growth and joblessness amid rising inflation.

At an investment conference last week in Singapore, Senior Minister Tharman Shanmugaratnam warned that the risk of stagflation is very real in many parts of the advanced and developing world. 

“Higher-for-longer inflation is now very likely, and so is slower growth,” he said. “It complicates what was already an extremely difficult task for central banks, particularly in the advanced world — the task of balancing growth and inflation considerations.”

But beyond central banks’ actions on interest rates, countries also have to address “a broader set of shocks”, he warned. 

“This time it's not just oil prices, it's food, it's a range of industrial metals, it's fertilisers and other commodities. The war and sanctions are also further disrupting supply chains that were beginning to recover after the last two years,” said Mr Tharman.

Calling this an “unprecedented situation”, he added: “We have to plan for a range of scenarios, but tilted very much towards the downside”. 


There was a time when many economists thought it would be impossible to have a situation where a country faced a high inflation rate while grappling with stagnant economic growth and high unemployment.

But stagflation became a bitter reality when the oil embargoes in the 1970s stalled economic growth and sent prices north.

For policymakers, dealing with stagflation is particularly difficult because the tools they use to counter one of the twin problems — high inflation or low growth — usually ends up making the other worse.

Stimulating demand and consumption, for example, would only make inflation worse. But raising interest rates to reduce inflation could hurt growth because it puts the brakes on borrowing and investment.

While the causes of stagflation remain a subject of much debate, one common theory is that it happens when an economy faces a supply shock: An unexpected event causes an important commodity, such as oil, to be in short supply or becomes more expensive. 

In such a scenario, prices surge and make production more costly and less profitable, thus slowing economic growth.

“Stagflation is really a problem of a sustained reduction in the standard of living," said Singapore University of Social Sciences economist Walter Theseira. “(This) is worse than a standard recession because you not only have poor or negative growth, but rising prices, so the standard of living drops much faster than in a 'normal' recession.”

The last bout of stagflation is largely believed to be set off by an oil embargo in October 1973 that caused severe gas shortages around the world. 

Members of the Organisation of Petroleum Exporting Countries (OPEC) temporarily ceased oil shipments from the Middle East to the US and other countries in retaliation for their support of Israel during the 1973 Arab-Israel war.

Crude oil prices surged from US$3 a barrel in 1970 to US$12 by 1974. The soaring price of fuel choked economic output while pushing up the cost of goods and services, causing high wage demands and spiralling inflation.

The US fell into a recession, recording five straight quarters of negative growth between 1973 and 1974, and unemployment peaked at 9 per cent in May 1975. Inflation, meanwhile, hit double-digit levels in the country in 1974.

In Singapore, higher oil prices drove headline inflation to almost 20 per cent in 1973 and around 30 per cent year-on-year in the first half of 1974. The Republic's gross domestic product growth rate fell from 10.6 per cent in 1973 to 6.1 per cent in 1974.

Faced with the prospect of stagflation, the Monetary Authority of Singapore (MAS) implemented several monetary policy measures aimed at curbing inflation, including raising banks’ statutory reserve requirement from 5 per cent to 9 per cent, imposing credit ceilings on banks and finance companies as well as hiking interest rates by 2 percentage points. 

By the second half of 1974, inflation started moderating and MAS gradually eased monetary policy to support growth. Singapore's economy avoided a recession and managed to grow 4 per cent in 1975, while headline inflation for the year was 2.6 per cent.



With the Russia-Ukraine conflict threatening to reshape the international economic landscape, professional investors around the world are growing increasingly worried about the outlook for global growth.

In the Bank of America’s latest Global Fund Manager Survey, which canvasses the views of fund managers managing about US$1 trillion (S$1.36 trillion) in assets every month, 62 per cent of respondents said they forecast stagflation, more than double from February’s reading of 30 per cent.

While Singapore-based economists were not expecting stagflation based on the current economic situation, some of them noted the increased risk of such a situation playing out.

Mr Hartmut Issel, UBS Wealth Management’s head of Asia Pacific equities and credit, said that the bank’s base case is that there will not be stagflation in the US. 

And given Singapore’s economic links to the global economy, the bank also does not think it will happen here, he said.

“The (US Federal Reserve) made it very clear now… that they are determined to tackle the potential predicament early on while the US economy is still growing above trend rates,” said Mr Issel, adding that some drivers of inflation in the US are showing early signs of abating. 

Earlier this week, the US Federal Reserve raised its benchmark interest rate for the first time since 2018 and signalled additional rate hikes that would bring the rate to a range between 1.75 per cent and 2 per cent at the end of the year.

Before this, interest rates had been pinned to zero since the start of the COVID-19 pandemic in a bid to cushion the blow of a deep recession. 

When interest rates are cut, borrowing becomes cheaper. Households become more willing to borrow money to make big purchases and boost spending in the economy. Businesses also benefit as it encourages them to make large equipment purchases which can boost output.

To keep inflation manageable, however, the US Federal Reserve raises the interest rate to reduce the demand for spending, and the opposite happens.

Mr Issel said: “If one assumes the Fed gets the trade-off right where both inflation and GDP growth speed are moderating in the second half of this year, it is natural to extend this trend to Singapore.” 

For Singapore, the bank is forecasting a 5 per cent GDP growth for 2022 and 2.8 per cent growth for 2023, along with an inflation peak of around 3.6 per cent this year and 2.3 per cent next year. 

Mr Issel noted that while high oil prices will have a dampening impact on global growth, the energy intensity of developed market economies has come down dramatically since the 1970s.

Back then, three times the amount of oil was needed to produce one unit of GDP compared to today, he said. 

CIMB Private Banking economist Song Seng Wun believes it is too early to tell if growth in Singapore’s economy will slow or unemployment will rise in the coming months, though it is a situation his bank is watching out for. 

“So far, we have rising inflation — that’s one of the three (conditions for stagflation). The labour market… is still supportive of wage growth, that’s still good. And depending on the sector, some workers will see a contracting in real wages while others may not,” said Mr Song.  

He noted that in the latest Ministry of Manpower (MOM) labour market report, the ratio of job vacancy to unemployed persons rose to 2.11 in December last year, compared with 1.95 in September.

“There are clearly more jobs available than can be filled from a local labour force, which is why for now, while businesses are worried about what’s happening in Europe and the impact of the supply chain on costs, they’re still essentially keeping their fingers crossed,” he said. 

He added: “Though inflation has gone up, motorists complain but they still fill up the tank. You and I still carry on living life as per normal, whether that’s (spending on) food and beverages or, say, travel. So it’s a slight moderation (in confidence) rather than a complete pullback in activities.”

The Russia-Ukraine war — along with its economic and political ramifications — looks set to impede or even derail economic recoveries as countries emerge from downturns brought about by COVID-19. (Photo: Aaron Low/TODAY)

Still, during a media briefing on the MOM report, officials voiced concern that higher inflation and further supply chain disruptions could have knock-on impacts on the labour market.

DBS Bank senior economist Irvin Seah said that even if there is a slowdown in growth from last year and a pick-up in inflation in Singapore, it may not mean that the country is in stagflation.

Rather, he sees it as a transient normalisation process as the economy reopens from the pandemic. 

This is especially as Singapore’s economy grew 6.1 per cent year on year in the fourth quarter of last year, which Mr Seah said is roughly twice the country’s potential growth rate — a calculation which economists use to estimate the rate of growth an economy can sustain under normal economic circumstances. 

He puts Singapore’s potential growth rate at between 2.5 and 3.5 per cent. 

“That should be used as a reference point,” he said. So long as Singapore’s economic growth stays within or above that range, then it can be safely assumed that any slowdown is part of the normalisation process.

But if inflation stays high and economic growth dips below potential, then Singapore would be in a stagflationary scenario, he said.

“I am not discounting the possibility,” Mr Seah said. “There are some pre-conditions that are gradually emerging and we are not at that stage yet.”

The Ministry of Trade and Industry forecasts Singapore’s GDP to grow 3 to 5 per cent in 2022.

Economist Selena Ling, head of treasury research and strategy at OCBC Bank, said that stagflation is becoming more likely with growth prospects facing greater risks from the Russia-Ukraine war and other geopolitical uncertainties, such as the US potentially delisting some Chinese tech companies.

“The probability of stagflation has risen from very ballpark numbers of 10 per cent to around 25 to 30 per cent,” she said, according to her own estimates.

With the US Federal Reserve raising interest rates and similar hikes expected by many other central banks including in the United Kingdom and Australia, Ms Ling noted that central banks are treading a fine line between combating inflation and inadvertently hurting business and consumer confidence.

But while the economy may be facing risks ahead, growth prospects have not completely derailed, she said. For now, she does not see any outright recession risks outside of the directly impacted economies of Russia and Ukraine.

Major economies such as the Eurozone will take a hit from higher prices, especially energy-related, and face greater supply chain disruptions for a whole slew of commodities including food, metals and neon, she said.

“But the labour markets of the US and also Singapore are actually in healthy shape," she added. 


If global inflation remains high over the next few months and workers around the world start to realise that their cost of living has outpaced their wage growth, then they may start to pare back on their spending. 

Economic activities all over would then start to slow as more people feel the impact of higher costs. Consequentially, hiring would begin to slow. 

This is where stagflation starts making its presence felt.

If global inflation remains high over the next few months and workers around the world start to realise that their cost of living has outpaced their wage growth, then they may start to pare back on their spending. (Photo: TODAY/Ili Nadhirah Mansor)

SUSS’ Assoc Prof Theseira said that the sustained reduction of living standards would put hundreds of millions of people globally into or almost into poverty, and harm the ability of developing economies to join the ranks of the middle-income nations.

“It would likely precipitate political crises globally and even regionally," he said. 

In Singapore, people have the benefit of being in a rich country that can better afford global price increases, he noted. Petrol prices here may be higher than in other countries but Singaporeans also earn much more than citizens in many countries where petrol is cheap.

“I'm not sure they would want to switch places with, say, someone in Malaysia who has much cheaper petrol and food, but who gets paid much less as well,” he said.

“The only way out for a country like Singapore is really to ensure that our citizens' purchasing power, in global terms, is high enough to be able to afford price increases.”

Beyond this, what are the other tools available to Singapore policymakers? 

Mr Song said that when inflation is brought about by domestic factors, such as high rental prices or labour costs, policymakers in Singapore have more tools to bring it down —  such as by tightening down on speculation or tweaking foreign worker policies.

But when prices are high due to supply factors outside of Singapore’s control, as is the present case, then it becomes harder to clamp down on inflation.

Nevertheless, Mr Song said that if wage demands by workers to cope with the higher standard of living becomes too high for businesses, the Government could also cut employers’ Central Provident Fund contributions, which was what happened during the recession in 1986. 

When an economy falls into stagflation, Assoc Prof Theseira said that it often forces policymakers to consider policy options that may be highly damaging to the economy and people’s lives, and yet these may still be better than risking prices spiralling upwards without growth.

Stagflation, if it occurs, would also put the MAS in a fix — should it tighten or ease monetary policy? (Photo: Aaron Low/TODAY)

At the end of the 1970s, for example, the US Federal Reserve used extremely high interest rates to tame inflation. In Singapore, responses to historic recessions such as the early 1980s recession — widely attributed to wage increases being too sharp and out of sync with growth — have also involved radical policies such as sharply cutting or freezing wages.

“The policies to correct a severe economic crisis are invariably painful, but may be necessary medicine. Let's hope it doesn't come to that,” said Assoc Prof Theseira.

Stagflation, if it occurs, would also put the MAS in a fix — should it tighten or ease monetary policy? 

In such a scenario, DBS' Mr Seah said he sees a strong role for fiscal policy through the use of government spending. For example, Singapore could introduce a supplementary Budget to support growth, while the central bank eases monetary policy a little, but maintains a gradual currency appreciation to tame inflation.


Stagflation would also be a huge blow to the global and domestic economies, coming so close on the heels of the pandemic. 

“There has been little breathing room between the pandemic and this new challenge, so many industries and firms have been struggling to get back on their feet," OCBC's Ms Ling said. "This could potentially be a knockout blow for some that have not been able to recover to pre-COVID levels yet." 

Indeed, the rising cost of living has already taken a toll on some workers in sectors hit hard by the pandemic over the past two years. 

Since the onset of the pandemic, taxi driver Kirsty Foo, 62, said her earnings have not been enough to cover her car’s daily rental of S$120 with ComfortDelGro. 

Ms Foo lives with her 64-year-old cousin, who is also working, in a three-room public housing flat in Queenstown.

For the whole of last year, she has been forking out between S$20 and S$90 a day from her own pocket.

To cope with her expenses and to pay for her father’s nursing home costs, which have gone up from S$500 to S$600 last year, she has been dipping into her retirement fund.

With prices continuing to rise further this year, she has had to make adjustments to her quality of living. She can now afford to visit a restaurant only once or twice a month, instead of once every week.

Ms Foo said she is due to visit a doctor to discuss having surgery on her leg some time soon, after which she would not be able to drive for three months.

“If I take up the operation then I will completely give up taxi driving. But I’ll continue working, whatever I can do I’ll do.”

For others, like hawkers Elayne Ang, 41, and her husband Samuel Tan, 37, the inflation is hitting them hard even as their business has yet to recover from the pandemic.

The stallholders of Tian Kee Carrot Cake at Block 84 Marine Parade Central Market and Food Centre had increased the price of their carrot cake on Jan 1 from S$3.50 to S$4 to keep pace with rising costs of ingredients. 

But since Russia invaded Ukraine three weeks ago, the costs have soared even further.

Ms Ang said that the price of a tin of vegetable oil had been going up by about S$1 every month last year, then S$1 every two weeks at the start of this year. After the Ukraine conflict broke out, prices have been shooting up every week. 

According to the hawker couple, a tin of vegetable oil that used to cost S$22 last year is now about S$50. A tray of eggs used to cost S$3 to S$4 last year but is now almost S$7. Electricity prices, too, have risen from about S$700 a month last year to S$1,000 now.

Meanwhile, their business continues to be affected by the safe distancing measures in place at eateries: The capacity of the hawker centre they are operating at has been capped at 250, instead of its full capacity of 800.  

“On our end, we already increased prices on Jan 1. We can’t possibly increase by another 50 cents, that’s not fair to the consumer," said Ms Ang.

For hawkers Elayne Ang and her husband Samuel Tan, inflation is hitting them hard even as their business has yet to recover from the pandemic. (Photo: Lim Li Ting/TODAY)

For Mr Soh, the father of two, he considers himself lucky that his household finances —  which his wife also contributes to — have been holding up well amid the rising cost of household expenses.

But he said that a big reason his family has not had to cut their spending so far this year is that he has been working almost seven days a week including emceeing at weddings on weekends. 

He started the side business with his wife five years ago for extra income. When their children were born, the money he got from his wedding gigs were put into an emergency fund for the family.

“All these economic uncertainties over the past years made me feel that I have to continuously earn money in order to make sure life is sustainable,” he said. 

“At the same time, it’s very hard to juggle because we want to find a balance between work and family. Sometimes on weekends when I run my show, I miss out on the opportunity to have time with my kids.” 

Mr Soh said that he has been monitoring the war in Ukraine to see if it will start to affect the supply of semiconductors, which his industry is closely related to.

“If the war continues and the (shortage) of semiconductors kicks in, then will it affect my industry and job stability? All this adds up and snowballs to the fear that we are facing,” he said.

This story was originally published in TODAY.

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