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Is Australia about to experience 'stagflation'?
Australia may be at risk of experiencing inflation's sluggish cousin. Again.
Economists are suddenly worried about stagflation, after the head of the World Bank warned the shift was a real possibility for low and middle-income countries.
Stagflation
Unemployment paired with high inflation rates (and rising interest rates), which leads to a downturn in the overall economy.
noun
/staɡˈfleɪʃ(ə)n/
It's a concept that hasn't seen the light of day since the 1970s, an era defined by a sudden rise in oil prices, really high inflation and low economic growth.
HOW WILL IT HAPPEN?
For stagflation to occur in Australia, real wages and unemployment would have to rise.
And the Central Bank would have to "do nothing" when it saw unemployment starting to increase.
USyd Associate Professor David Kim said unemployment would need to rise to 6 to 10%.
Wage rises are driven by inflation and a shortage of skilled labour as employers pay more to keep staff.  Assoc Professor Kim said stagflation could happen if we had a "wage price spiral".
What about wages?
What happens if there is stagflation?
Economist Richard Holden said the RBA would raise interest rates "to get things back under control". He said the country was far from a repeat of the ‘70s but with high inflation, employment and economic growth would face pressure.
"Unemployment would go up a lot, like 10% unemployment, inflation would be really high, interest rates would go up... It would be really ugly and that's why policy makers want to avoid it."
Richard Holden
Economist
Stagflation was followed by a recession in the past. That isn't a concern right now apparently.
What are the experts saying about it?
"That's not on my list of fears for our domestic economy. I genuinely believe we have, certainly in the medium term, more opportunities than challenges."
Jim Chalmers
Treasurer
"We have got to get out of this sense of 'that's what will push wages up'. It might in some sectors but in the short term only, and ultimately that starts to cannibalise our capacity to grow our way out of this."
Business Council of Australia boss Jennifer Westacott agreed.
WORDS: Joanna PanagopoulosPRODUCER: Bianca Farmakis
																		

Original URL: https://www.theaustralian.com.au/web-stories/free/the-australian/what-is-stagflation-economic-risk-to-australia