Is the Philippines headed toward stagflation?

For much of modern economic history, few developments have carried consequences as far-reaching as disruptions in global oil supply. The recent escalation of the United States–Israel conflict with Iran has once again placed oil markets at the center of global economic attention.

What began only weeks ago as military strikes has quickly expanded into a wider regional conflict with potentially significant economic consequences.

As tensions rise and uncertainty over key shipping routes grows, economists now worry about sustained increases in oil prices. For the Philippines, a net importer of energy, higher oil prices could quickly spread through transport, electricity, logistics and food costs.

Economists have long studied how external shocks such as oil supply disruptions can affect the broader economy. In a landmark study, “Oil and the Macroeconomy since World War II,” economist James Hamilton of the University of California, San Diego showed that sharp increases in oil prices preceded nearly every major recession in the US.

In effect, an energy shock acts like a tax on the economy. When fuel prices surge, production and transportation costs rise while household purchasing power declines. Businesses face higher operating expenses and consumers have less income available for other spending. Inflation can therefore increase even as economic growth slows.

Economists refer to this unusual combination of rising prices and slowing economic growth as stagflation. Normally, inflation tends to rise when demand is strong and the economy is expanding. But in this case, prices continue to increase even as demand weakens.

Research by the International Monetary Fund reinforces this mechanism. Energy shocks typically push inflation higher through direct fuel costs at first. But as higher transport, electricity and production expenses spread across the economy, inflation can become more persistent even as growth slows. Economists refer to this process as second-round effects, where the initial cost shock spreads into wages, prices and corporate margins.

History has shown how powerful stagflationary shocks can be. During the oil crisis of the 1970s, global crude prices surged following the Arab oil embargo. Inflation in the United States climbed above 12 percent while economic growth weakened significantly.

Japan also experienced an even sharper adjustment when inflation rose more than 20 percent in 1974. The surge forced policymakers to restructure industrial production and accelerate the country’s transition toward energy efficiency.

While the Philippine economy today is far removed from the industrial structures of the 1970s, its dependence on imported energy means that movements in oil prices still carry broad macroeconomic consequences. When oil prices rise sharply, those pressures inevitably find their way into consumer prices and corporate balance sheets.

If oil prices remain in the range of $100 to $120 per barrel while supply routes remain stable, the economy would likely face higher inflation but still maintain moderate growth. Rising fuel costs would pass through transportation and electricity prices, which could push inflation toward 5 percent to 6 percent. Growth may slow as households reduce discretionary spending and businesses absorb higher operating costs.

The situation becomes more complicated if oil prices move significantly higher and remain elevated for an extended period. Should crude prices rise into the range of $130 to $150 per barrel, the effects would likely spread more widely across the economy.

Higher energy costs would begin to affect construction materials, manufacturing inputs and logistics expenses. Inflation could move toward 6 percent to 8 percent while economic growth slows further as households tighten spending and companies postpone investment decisions.

In such an environment, the economy could begin to show early signs of stagflation, where rising prices coincide with weakening economic momentum.

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A more severe disruption to global oil supply would produce far more severe consequences. If geopolitical tensions interfere with production or shipping routes in the Middle East and push oil prices toward $150 to $200 per barrel, the shock would likely spread across nearly every sector of the economy.

Inflation could rise toward 8 percent to 10 percent as higher energy costs spread through transportation, electricity, food prices and corporate pricing decisions. Once these pressures affect wages and broader business costs, the risk of second-round effects increases and inflation may become more persistent even as economic growth slows.

Such scenarios would not affect only inflation and economic growth. Financial markets often react quickly when energy shocks raise the risk of stagflation. Higher inflation tends to push interest rates upward while slower growth weakens earnings expectations, which can put pressure on stock valuations and increase volatility in equity markets.

In the later stages of long financial cycles, such conditions can coincide with rising financial fragility. Amid deteriorating social mood and the winter phase of the Kondratieff cycle, the risk of financial stress increases as economic growth slows.

For the Philippine economy, the central issue is not merely the level of oil prices but the timing of the shock. When an external oil shock strikes an economy whose growth momentum has begun to slow, the risk of stagflation tends to increase.

(Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 116th batch of RFP Program this May 2026. To register, e-mail at info@rfp.ph.)