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One of Australia’s leading economists has sounded an alarm about an unusual economic condition that the nation hasn’t faced since the 1970s.
During a recent address in New York, Andrew Hauser, the Deputy Governor of the Reserve Bank of Australia (RBA), highlighted the threat of stagflation—a term he referred to as a “central banker’s nightmare.”
Here’s a breakdown of what stagflation entails and its implications for Australians.
Stagflation is a term that merges two economic issues: stagnant growth and rising inflation. It occurs when the economy stalls, yet living costs continue to climb.
The term was first introduced in 1965 by British politician Iain Macleod during a parliamentary speech, where he described the UK’s economic state as “the worst of both worlds.”
Today, global energy shock, typified by the fuel crisis, coupled with creeping inflation in a number of developed countries including Australia has thrust stagflation back into the spotlight.
Has Australia experienced stagflation before?
Australians experienced a stagflation crisis for the first time on record in the late 1970s.
Across the decade, twin oil embargoes in the Middle East triggered soaring fuel prices across the globe, which contributed to skyrocketing inflation and a collapse in economic growth.
Jobs were slashed as a result, and recession eventually followed in 1982.
It’s important to note that stagflation does not have a quick fix – it was almost a decade before the initial energy shock in 1973 actually eventuated in recession in Australia.
Is Australia at risk of stagflation again?
The Australian economy is experiencing some of the factors that lead to stagflation.
Since the start of the conflict between the US, Israel and Iran, the global oil benchmark Brent crude price has risen more than 50 per cent, sending fuel prices and supply costs at home through the roof.
At the same time, Australia’s annual inflation rate remains above the RBA’s target band of 2 to 3 per cent.
The unemployment rate also rose to 4.3 per cent in February, up from 4.1 per cent in seasonally adjusted terms.
The International Monetary Fund (IMF) released modelling on the potential impact of an ongoing oil shock on the global economy.
The IMF warns the war could spark an energy crisis on an “unprecedented scale” that may trigger a global recession.
Neither a recession nor a stagflation crisis is guaranteed, but senior economists are clearly planning for the worst.
In simple terms, stagflation can decrease purchasing powers and chips away at household savings, diminishing consumer spending.
It’s also difficult for economists to correct, meaning economic impacts such as falling employment and even recession can drag on for years, as seen during the 1970s stagflation episode.
Can the RBA stop stagflation?
Hauser referred to stagflation as a “central banker’s nightmare” because it is difficult to control, mainly because fighting inflation can further weaken the economy.
Essentially, the RBA is trapped between lifting interest rates to combat inflation and cutting interest rates to protect jobs.
That means next month’s federal budget and the RBA’s next interest rates meeting will be pivotal.
The Reserve Bank is tipped to hike the cash rate for a third consecutive time when it meets in the first week of May, so efforts to combat rising inflation are under way.
But the RBA’s best hope is that the war ends soon and oil prices retreat.
If a peace agreement is reached by the end of June, economic growth in Australia would still be slashed by more than half to 0.7 per cent, pushing unemployment to more than 5 per cent for the first time since 2021, according to Deloitte modelling conducted for the Australian Financial Review.
But, Hauser noted, navigating economic challenges is how central bankers make a living.
“You know, the stagflationary shock: inflation up, activity down. Judging the balance between those two is, I guess, how we earn our money,” he said.