Stagflation: be alert, not alarmed

Last week, on 7 June 2022, the World Bank downgraded its global economic growth forecast for 2022 from 4.1% to 2.9%. Moreover, they warned of the rising risk of stagflation, the uncommon combination of high inflation and high unemployment, or falling GDP growth (see Stagflation Risk Rises Amid Sharp Slowdown in Growth). Stagflation is a portmanteau word, combining stagnation with inflation. Economists first noticed stagflation in the 1970s USA and other advanced economies, triggered by the 1973 oil price shock, which pushed up prices and reduced industrial output as input costs soared. In Australia, 1970s stagflation saw double-digit inflation rates and a surge in unemployment to 5% and above, after decades of 1-2% unemployment rates in the post-war period (see the chart below).

In Australia, we’ve had a very strong economic rebound from the COVID recession and, while inflation is accelerating and currently at 5.1% yearly, unemployment remains low at 3.9%, and job vacancies have been at record high levels. We appear to be a long way from stagflation in Australia, but there are risks. As the RBA increases the cash rate and interest rates increase across the economy, there is the risk that many highly indebted households may struggle with mortgage repayments and cut back spending on discretionary items, reducing aggregate demand and GDP relative to baselines. Hopefully, the RBA can manage to bring inflation down without crashing the economy, and we’re reasonably confident it can, but we acknowledge there’s always a chance of a policy mistake.  As always, we will wait and see how the economy responds to unfolding events.

In episode 143 of his Economics Explored podcast, Stagflation: be alert, not alarmed, Adept Economics Director and Research Economist Arturo Espinoza discuss the World Bank’s report and explore the concept of stagflation and the related concept of a wage-price spiral.  You can listen to Gene and Arturo’s conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps.

Regarding the risk of a wage-price spiral in Australia, please consider also checking out Gene’s commentary at Queensland Economy Watch.

This article was posted on 14 June 2022 and was prepared by Adept Economics Director Gene Tunny. Please send any questions, comments, or suggestions to contact@adepteconomics.com.au or call us on 07 3085 7417.

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