We see dreaded stagflation come back to haunt us

Rising inflation and falling economic growth are warning signs that shouldn't be ignored

- Annette Sampson

WORST OF BOTH WORLDS

Australia has enjoyed several decades of low inflation, but this has not always been the norm. The resurgence of inflation over the past few months has raised the possibility of wider economic problems if it is not brought under control.

While higher inflation is usually linked with a booming economy, there are instances where we see the worst of both possible worlds: high inflation and slow or falling economic growth.

This is stagflation, and unfortunately it tends to come hand in hand with high unemployment. Businesses shed jobs because growth is slow, but consumers are faced with job losses and soaring prices at the same time.

Inflation normally goes up when the economy is growing, businesses are enjoying good profits and consumers are spending. So long as it doesn't rise so fast that it erodes the value of money, that's generally regarded as okay.

But with stagflation, inflation runs so hot that wages, business profits and the economy don't keep up, leading to bad economic outcomes.

Because it's not part of the normal cycle, stagflation is more commonly associated with events outside the norm. The last time Western economies saw problems with stagflation was in the 1970s when the global oil shock sent prices spiralling and exacerbated the downturn in an already slowing US economy.

Many economists and commentators are concerned we're heading down the same path again with inflation rising due to Covid-related supply problems and the economic fallout from the conflict between Russia and Ukraine and the economic sanctions imposed on Russia.