Stagflation a ‘real threat’ to Australia

AUSTRALIA’S slowing economy and rising inflation rate makes the return of stagflation a very real threat.

Stagflation was the scourge of the 1970s, exacerbating the woes of an economy already reeling from the oil crisis.

It occurs when inflation and unemployment are both rising at the same time. Normally as one is going up, the other is falling.

Chamber of Commerce senior economist Dan Engles said stagflation was a real threat if the Reserve Bank of Australia kept rising interest rates.

He believes the RBA is using interest rates unnecessarily and could cause the economy to slow even further.

“This could pose a real policy problem for Australia,” Mr Engles said.

“We look likely to have rising unemployment and rising inflation at a time when the economy is slowing.

“After the Olympic Games there will be a significant economic slowdown.

“Dwelling commencements dropped 36 per cent in the June quarter.

“This was partly expected due to the GST but is still a concern.”

BankWest senior economist Alan Langford said stagflation had to be considered.

Mr Langford said the high oil price would make it hard to limit the GST’s inflationary effects to the first round.

“I wouldn’t want to overestimate the risk of stagflation though,” he said.

Curtin Graduate School of Business director Margaret Nowak said the flexibility of Australia’s workforce should help the economy stave off the affliction.

“The inflation rate is rising largely due to the one-off effect of the GST,” Professor Nowak said.

“Provided it doesn’t flow on to wages, it should remain a one-off.”