Australia markets open in 7 hours 17 minutes
  • ALL ORDS

    7,557.80
    -29.60 (-0.39%)
     
  • AUD/USD

    0.7155
    +0.0022 (+0.31%)
     
  • ASX 200

    7,235.90
    -20.10 (-0.28%)
     
  • OIL

    68.11
    +1.93 (+2.92%)
     
  • GOLD

    1,790.00
    +13.50 (+0.76%)
     
  • BTC-AUD

    81,756.34
    -932.52 (-1.13%)
     
  • CMC Crypto 200

    1,491.57
    +22.49 (+1.53%)
     

People haven’t Googled this word this much since the GFC. Now it’s happening again

·3-min read
Chart with red line, global currency notes.
Stagflation has some worried. Here's what you need to know. (Images: Getty).

In 2008, the collapse of the Lehman Brothers financial services group triggered a snowballing global financial crisis.

Around the world, people were furiously Googling ‘subprime mortgage crisis’, ‘negative equity’ and ‘stagflation’.

Also read:

Now, 13 years later, Google has seen a sharp resurgence in the number of people wanting to understand more about stagflation.

This is why.

First up, what is stagflation?

Stagflation is an economic situation characterised by a stagnating economy with relatively high unemployment and slow economic growth, coupled with rising prices or inflation.

Inflation is simply the increase in the price of the goods and services that people buy. In Australia, the main inflation indicator is the Consumer Price Index (CPI), which tracks the price of a set basket of goods and services over time.

CPI is reported every three months, and essentially tracks how much more expensive life is becoming.

For example, in Australia the price of a year 1 textbook in 2016 was $20. By 2017, it had increased to $20.50.

The term “stagflation” was coined by UK Tory minister Iain Macleod in 1965.

“We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together,” he told the UK Parliament. “We have a sort of ‘stagflation’ situation.”

The word entered widespread use eight years later when members of OPEC, the global intergovernmental oil supply body, introduced oil sanctions on countries perceived to be supporting Israel in 1973. Inflation skyrocketed, as did wage demands and unemployment.

As AMP Capital chief economist Shane Oliver put it, stagflation is “the worst possible combination”.

The 2007-08 GFC was characterised by the collapse of the US housing market, but the following recession was marked by low inflation and as such didn’t fit the stagflation criteria.

How would stagflation change my life?

For average Australians, stagflation would look like a period where their purchasing power was severely diminished, Oliver told Yahoo Finance.

This would play out in the supermarket and also with car prices, furniture, clothing and other goods.

It would also play out as a sustained rise in the price of building materials. This is already occurring as Australians spend more on their homes during lockdown, while supply chain issues limit access to critical materials like timber.

“The other thing ordinary Australians would notice is less jobs. The 1970s were characterised by a very weak jobs market,” Oliver said.

“For Australian households, interest rates would also go up.”

The 1970s saw interest rates steadily increase before peaking in the 1980s at 17 per cent.

That’s grim. Is it happening again?

Economists are split.

Oliver doesn’t believe the world is entering a stagflationary period. That’s mainly because the vast majority of economic woes can be traced back to the COVID-19 pandemic, and as such will be largely alleviated as the world reopens.

“The central flaw is this concept of supply constraint. This time around, the distortion is being caused by the pandemic, which has seen the labour supply go down as people couldn’t work due to lockdowns,” he said.

“At the same time, there’s been a massive demand for goods over services. People haven’t been able to go on holiday or get a haircut, and so … personal consumption of goods is running above the long-term trend.”

The surge in demand for goods like cars, boats and furnishings has coincided with the supply chain disruption.

“It’s not surprising that we’re seeing higher inflation,” Oliver said.

J.P. Morgan Asset Management global market strategist Kerry Craig agrees.

“Investors are trying to judge just how long several ‘temporary’ supply side factors will persist in elevating inflation and curbing growth,” he said in a briefing note last week.

“However, we don't see stagflation gaining traction as supply chains are blocked, not broken, and economic activity will start to increase into the year end.”

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.

Sign up to get Fully Briefed every business day and Rich Thinking every fortnight, straight to your inbox.
Sign up today!
Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting