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‘Stagflation’: What it is and what it means for you

·Personal Finance Editor
·3-min read
Stagflation: People walk the streets of Sydney and a person removing $50 notes from a wallet.
'Stagflation' concerns are growing around the world. (Source: Getty)

‘Stagflation’ has made its way back into the mouths of economists as many countries around the world suffer from the same unfortunate set of economic circumstances.

Put simply, stagflation describes a situation in which there is stagnated growth, or slow economic growth, at the same time as rising inflation (or prices).

Stagflation has become a hot topic in Australia as we face rising cost-of-living pressures at the same time as stagnant wages and slow economic growth.

Here’s a quick look at what has caused this and what it means for you.

How did we get here?

Well, numerous reasons.

The combination of COVID-19 lockdowns, super-low interest rates and then the war in Ukraine all led to the problem.

Lockdowns meant supply chains were put under pressure across the globe, making it hard to get certain goods. The war in Ukraine sent commodity prices higher.

This meant things like food and energy all got a lot more expensive.

This came at a time when growth had slowed down, thanks to the impact of rolling COVID-19 lockdowns.

How would stagflation affect me?

Essentially, stagflation often leads to high unemployment at a time when prices are also getting higher.

Everything costs more at a time when people are finding it hard to get a job. On top of that, those who have a job aren’t getting paid more so, everyone suffers.

But it is important to note that many economists agree we are not at risk of falling into stagflation just yet.

Australia has extremely low unemployment and it would take a lot for all those people to lose their jobs.

How do we fix stagflation?

It is an odd predicament to be in.

On the one hand, central banks will combat rising inflation by lifting the cash rate.

But, in an environment where people are suffering from low wages and slow growth, rising interest rates put more pressure on them.

Hence the freakout about stagflation.

“Slower growth and high inflation put central banks in a difficult position, but most have clearly signalled a need for significantly tighter monetary policy,” Aviva Investors chief economist Michael Grady said.

So, higher interest rates are coming - the Reserve Bank has made that clear.

Central banks are limited by the tools at their disposal. Hiking or cutting rates is basically their only option.

So, the other solutions would have to come from the Government.

Prime Minister Anthony Albanese has backed a boost to the minimum wage to match inflation, which should help Aussies to keep up with the rising cost of living.

Other means of help could come from lifts in government support and stimulus, like those that were used during the COVID-19 lockdowns to avoid a surge in unemployment.

Of course, as we saw from the pandemic, stimulus does lead to higher government debt, which can take many years to fix.

With so many moving parts, the economy can be a tricky beast to tame, and it’s hard to know exactly what the future holds.

So, for now, all we can do is wait and see.

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