What is stagflation, and why are we talking about it again?

From platform boots to flared jeans, there’s a lot we wish could be left in the 1970s, but as Donald Trump continues to wage a tariff-fuelled trade war, talk of another spectre of the disco era – stagflation – has begun.

Yesterday, chairman of the US Federal Reserve Jerome Powell – the American equivalent of the Reserve Bank of Australia governor – spoke about concerns of weak growth and rising inflation in his market, the core ingredients of stagflation. So, what is stagflation, and should Australians be concerned about our economic futures?

Federal Reserve chair Jerome Powell has flagged a potential period of stagflation in the American economy. Credit: AP

What is stagflation?

Like all the most unsettling concepts in life (bromances, brunches, the feeling of being hangry) stagflation is a portmanteau – combining the concepts of stagnation and inflation into a single Frankenstein’s monster of economic despair.

Stagnation refers to a period of weak growth and rising unemployment. Inflation, a concept we have become all too familiar with in recent years, describes an increase in consumer prices. The combination of the two creates a miserable environment in which fewer people have jobs, while the cost of goods and services skyrockets.

The term was coined in 1965 by a former British chancellor of the exchequer, Iain Macleod, and rose to prominence in the 1970s and 1980s as its effects were felt across the globe, taking economists by surprise. The last time fear spread about stagflation hitting the Australian economy was during the early months of the war in Ukraine, when oil and wheat prices were driven up.

Is stagflation a recession?

While there is no single definition of a recession, the Reserve Bank says that “different descriptions of recession have common features involving economic output and labour market outcomes”, and usually see a prolonged period of weak or negative growth and a rise in unemployment. Household spending, business investment, loan repayments and business operations are all negatively affected as well.

Stagflation can manifest as a more painful version of a recession, where the economy is suffering with the addition of increased costs through inflation.

Is it a risk now? Should we be worried?

The short answer is no. According to AMP chief economist and head of investment strategy Shane Oliver, the chance of stagflation in Australia is low. The bigger risk is in the United States, which is facing a “messy outlook” after imposing tariffs on trading partners.

“A tariff is basically a tax on consumers whenever they buy an imported product. It effectively raises the price of that imported product and that will show up as a measured inflation,” said Oliver.

Those same tariffs raising prices in the US are likely to knock consumer confidence, which could weaken economic growth.

While Oliver said that stagflation was not contagious, consumer confidence has dipped in Australia since Trump’s “Liberation Day” tariffs (according to ANZ-Roy Morgan), with the possibility that continued economic uncertainty could make Australians “feel poorer”, and weaken the economy.

“Less trade as a result of uncertainty and disruption caused by Trump’s tariffs leads to less economic activity in Australia, slower economic growth, potentially higher unemployment, but it’s hard to see it causing higher inflation,” said Oliver.

The upside for Australia in the trade war is that Chinese goods may be less competitive in America, and when they are sent en masse to Australia, domestic consumers could be paying less for the same products.

This all comes together as a picture of a potentially more stagnant economy, but not necessarily a more inflationary one.

What can you do about it as an investor?

In tense economic times, some investors turn to defensive assets such as consumer staples or gold – the latter experienced its best quarter since the 1980s last month. According to Cameron Judd, gold fund manager at Victor Smorgon Partners, the asset’s boon is the product of “mounting investor anxiety over stagflation”.

“Gold remains the one global asset that has a low correlation to risk assets, no third-party or geopolitical risks, relatively low volatility, and a deep and liquid market. Given this, and where valuations currently sit across gold equities, we continue to see strong prospects for the Resources Gold Fund,” said Judd.

With Clancy Yeates

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